ICLG The International Comparative Legal Guide to: Corporate 2019 15th Edition A practical cross-border insight into work

Published by Global Legal Group, with contributions from:

Blackwood & Stone LP Puri Bracco Lenzi e Associati Boga & Associates Rui Bai Law Firm Braekhus Advokatfirm DA Sameta Carey Schindler Attorneys Eric Silwamba, Jalasi and Linyama Legal Practitioners Sele Frommelt & Partners Attorneys at Law Ltd. Gibson, Dunn & Crutcher LLP Slaughter and May Greenwoods & Herbert Smith Freehills SMPS Legal GSK Stockmann Stavropoulos & Partners Law Office Houthoff T. P. Ostwal & Associates LLP, Chartered Accountants Lenz & Staehelin Tirard, Naudin LEX Law Offices Totalserve Management Limited Maples and Calder Utumi Advogados Marval, O’Farrell & Mairal Vivien Teu & Co LLP Mul & Co Wachtell, Lipton, Rosen & Katz Nagashima Ohno & Tsunematsu Waselius & Wist Nithya Partners WH Partners Noerr LLP Wong & Partners The International Comparative Legal Guide to: Corporate Tax 2019

General Chapters:

1 Fiscal State Aid – Some Limits Emerging at Last? – William Watson, Slaughter and May 1 2 Taxing the Digital Economy – Sandy Bhogal & Panayiota Burquier, Gibson, Dunn & Crutcher LLP 9

Country Question and Answer Chapters: Contributing Editor William Watson, 3 Albania Boga & Associates: Genc Boga & Alketa Uruçi 15 Slaughter and May 4 Argentina Marval, O’Farrell & Mairal: Walter C. Keiniger & María Inés Brandt 21 Sales Director 5 Australia Greenwoods & Herbert Smith Freehills: Richard Hendriks Florjan Osmani & Cameron Blackwood 28 Account Director 6 Austria Schindler Attorneys: Clemens Philipp Schindler & Martina Gatterer 37 Oliver Smith 7 Brazil Utumi Advogados: Ana Claudia Akie Utumi 46 Sales Support Manager Toni Hayward 8 Chile Carey: Jessica Power & Ximena Silberman 52 Sub Editor 9 China Rui Bai Law Firm: Wen Qin 58 Jenna Feasey 10 Cyprus Totalserve Management Limited: Petros Rialas & Marios Yenagrites 64 Senior Editors Suzie Levy 11 Finland Waselius & Wist: Niklas Thibblin & Mona Numminen 71 Caroline Collingwood 12 France Tirard, Naudin: Maryse Naudin 77 CEO 13 Germany Noerr LLP: Dr. Martin Haisch & Dr. Carsten Heinz 86 Dror Levy 14 Greece Stavropoulos & Partners Law Office: Ioannis Stavropoulos Group Consulting Editor & Aimilia Stavropoulou 92 Alan Falach 15 Kong Vivien Teu & Co LLP : Vivien Teu & Kenneth Yim 99 Publisher Rory Smith 16 Iceland LEX Law Offices: Garðar Víðir Gunnarsson & Guðrún Lilja Sigurðardóttir 106 Published by 17 India T. P. Ostwal & Associates LLP, Chartered Accountants: T. P. Ostwal Global Legal Group Ltd. & Siddharth Banwat 112 59 Tanner Street London SE1 3PL, UK 18 Indonesia Mul & Co: Mulyono 120 Tel: +44 20 7367 0720 19 Ireland Maples and Calder: Andrew Quinn & David Burke 128 Fax: +44 20 7407 5255 Email: [email protected] 20 Italy Puri Bracco Lenzi e Associati: Guido Lenzi & Pietro Bracco, Ph.D. 135 URL: www.glgroup.co.uk 21 Japan Nagashima Ohno & Tsunematsu: Shigeki Minami 142 GLG Cover Design 22 Kosovo Boga & Associates: Genc Boga & Alketa Uruçi 151 F&F Studio Design GLG Cover Image Source 23 Liechtenstein Sele Frommelt & Partners Attorneys at Law Ltd.: Heinz Frommelt 156 iStockphoto 24 Luxembourg GSK Stockmann: Mathilde Ostertag & Katarzyna Chmiel 163 Printed by 25 Malaysia Wong & Partners: Yvonne Beh 171 Ashford Colour Press Ltd November 2018 26 Malta WH Partners: Ramona Azzopardi & Sonia Brahmi 177 Copyright © 2018 27 Mexico SMPS Legal: Ana Paula Pardo Lelo de Larrea & Alexis Michel 183 Global Legal Group Ltd. 28 Netherlands Houthoff: Paulus Merks & Wieger Kop 190 All rights reserved No photocopying 29 Nigeria Blackwood & Stone LP: Kelechi Ugbeva 196 ISBN 978-1-912509-43-0 30 Norway Braekhus Advokatfirm DA: Toralv Follestad ISSN 1743-3371 & Charlotte Holmedal Gjelstad 201 Strategic Partners 31 Russia Sameta: Sofia Kriulina 207 32 Sri Lanka Nithya Partners: Naomal Goonewardena & Savini Tissera 213 33 Switzerland Lenz & Staehelin: Pascal Hinny & Jean-Blaise Eckert 219 34 United Kingdom Slaughter and May: Zoe Andrews & William Watson 229 35 USA Wachtell, Lipton, Rosen & Katz: Jodi J. Schwartz & Swift S.O. Edgar 238 36 Zambia Eric Silwamba, Jalasi and Linyama Legal Practitioners: Joseph Alexander Jalasi & Mailesi Undi 247

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WWW.ICLG.COM EDITORIAL

Welcome to the fifteenth edition of The International Comparative Legal Guide to: Corporate Tax. This guide provides corporate counsel and international practitioners with a comprehensive worldwide legal analysis of the laws and regulations of corporate tax It is divided into two main sections: Two general chapters, offering an insight into tax and state aid, and tax in relation to the digital economy. Country question and answer chapters. These provide a broad overview of common issues in corporate tax laws and regulations in 34 jurisdictions. All chapters are written by leading corporate tax lawyers and industry specialists and we are extremely grateful for their excellent contributions. Special thanks are reserved for the contributing editor William Watson of Slaughter and May for his invaluable assistance. Global Legal Group hopes that you find this guide practical and interesting. The International Comparative Legal Guide series is also available online at www.iclg.com.

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

Fiscal State Aid – Some Limits Emerging at Last?

Slaughter and May William Watson

In my introductory chapter last year (“Fiscal State Aid: the Kraken For those impatient to know what form the incipient resistance is Wakes?”), I wrote about a slumbering monster whose existence had taking, I have three developments in mind. They are all discussed barely been detected for many years but was now threatening to in detail below but could be summarised as follows: (i) a reversal wreak havoc on well-established tax practices and principles. The by the CJEU of the General Court’s decision in the Heitkamp case, threat is becoming ever more apparent, especially in Germany which concerns a perfectly inoffensive German rule intended to help and the UK, but the monster is also beginning to encounter real companies in financial distress; (ii) an acknowledgment from the resistance. Here, then, is “Fiscal State Aid: Part II”. Commission that a ruling given to McDonald’s by the Luxembourg Although the UK’s Brexiteers have shown no interest in the subject, fisc did not constitute State Aid merely because it produced a this is one imposition that can definitely be sourced to the EU, and surprisingly good result for the taxpayer; and (iii) in a case called specifically the European Commission. The prohibition on State A-Brauerei, trenchant criticism from an Advocate General of the Aid is contained in the main EU Treaty and is an understandable Commission’s whole approach when challenging tax legislation. adjunct to the single market, designed to prevent Member States The CJEU judgment came out at the end of June 2018 and the other favouring domestic (or inward/outward investment more two developments date to September 2018. Is it too much to hope generally). But in the past few years the Commission has shown that the tide is finally turning? that legislation and rulings in the tax sphere may be vulnerable in a way that would once have been unimaginable. Why is State Aid Relevant to Tax? Nor in fact can Brexit be relied upon to provide an answer, even for UK corporates. The UK government has said that it will The EU does not have competence with regards to matters; replicate the EU’s State Aid rules after Brexit − though it would be Member States are supposed to have full sovereignty over the a considerable constitutional novelty for any court or independent design of their direct taxation systems. However, it has long been body to have a specific remit to strike down legislation, given the recognised that the prohibition on State Aid could, in principle, catch sovereignty of Parliament. discriminatory tax measures and there were a few instances in past As I noted last year, the Commission’s activism has led to criticism years where particular legislative features fell foul of it. that its investigations have become a tool – part of a The prohibition was previously set out in Article 87 of the EC Treaty coordinated EU wide response to perceived corporate and now appears in Article 107(1) of the Treaty on the Functioning – and are straying a long way from the original purpose of the Treaty of the European Union (“TFEU”). This is worded as follows: prohibition. Moreover, there is a significant transatlantic dimension: where the Commission has targeted tax rulings, the taxpayers have “Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form more often than not been US multinationals. To American eyes the whatsoever which distorts or threatens to distort competition more aggressive approach can look very much like a tax grab by by favouring certain undertakings or the production of certain the EU and Margrethe Vestager, the energetic EU Commissioner in goods shall, in so far as it affects between Member charge of competition policy, was recently dubbed the “tax lady” by States, be incompatible with the internal market.” US President Trump. Cash subsidies are an obvious example, but aid can also involve the As I also noted, fiscal State Aid presents new challenges for advisers state foregoing to which it would otherwise be entitled, for too. They must have expertise in both big-ticket tax litigation and, example, through tax exemptions and reliefs. of course, in the principles of State Aid – usually the province of a A Member State’s tax practices can breach the State Aid regime in competition lawyer. By contrast, detailed knowledge of the relevant a number of ways, most commonly through (a) legislative measures domestic tax system is rather less important. Thus, while Slaughter that favour particular economic sectors, categories of undertakings and May has acted for a global financial services company on a or regions, or (b) discretionary tax rulings that favour individual State Aid dispute before the High Court in the UK and is advising undertakings. Recent decisions and trends relating to these two several UK groups on the Commission’s potential challenge to forms of fiscal aid are discussed separately below. the UK’s CFC rules (discussed below), we are also advising a multinational on a Commission investigation into alleged State Case law of the EU courts has broken down the Treaty rule into the Aid granted by the Luxembourg tax authority. following four elements:

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■ Is an economic advantage is provided to an undertaking? 2018, Apple paid €14.3bn into an escrow account established by ■ Is it provided by a Member State and financed through state Ireland even though conclusion of the appeal is doubtless some resources? way off. The Apple case is discussed briefly below. ■ Is it “selective” in favour of a particular undertaking or This example illustrates an unusual feature of State Aid challenges category of undertakings or in favour of a particular category more generally. The Member State in question will be the immediate of goods? target of the challenge and will in most cases lead the appeal. Yet ■ Does it distort or threaten to distort competition and affect if the appeal fails, the Member State will also be the immediate trade between Member States? beneficiary as it will receive any payment then required from the In cases of alleged State Aid concerning legislative measures or relevant taxpayer(s). rulings in the tax sphere, the second and fourth elements are usually uncontroversial. Legislative measures and tax rulings are, by definition, provided by the state and financed out of state resources Tax Legislation as a Form of State Aid (whether at national or local level); if they are selective, they will As noted, investigations which concern legislative measures invariably strengthen the position of one category over another with usually turn on whether the advantage granted by such legislation is the potential to distort competition. “selective” in favour of any sufficiently clear and definable category Thus the focus is on “economic advantage” and “selectivity”. More of undertakings. particularly, for cases involving discretionary rulings, the pertinent issue is often whether tax authorities have provided an individual undertaking with an advantage that diverges from the “normal” The Standard Approach practice of the Member State, thereby providing an “economic advantage”. In cases involving legislative measures such as tax In determining whether a particular legislative measure is reliefs, the measure clearly exists to convey some sort of economic “selective”, the Commission generally applies a three-step test: advantage and the case typically turns on whether that advantage is ■ First, it identifies the “system of reference”. This is the “selective” in favour of any sufficiently clear and definable category “normal” tax position in the relevant Member State. of undertakings. ■ Second, it determines whether the relevant measure “derogates” from the system of reference in favour of a certain category of undertakings or goods as compared to Investigations and Appeals Process other undertakings or goods that are in a similar factual and legal situation. If a derogation exists, the Commission will Member States are required to notify the Commission of any draw the conclusion that the measure is prima facie selective. proposal to grant aid that may be incompatible with EU State Aid ■ Third, it determines whether the derogation is nevertheless rules, and to wait for the Commission’s approval before putting justified by the nature or general scheme of the system of any such proposal into effect. Notification triggers a preliminary reference. Only objectives inherent to the tax system (such as investigation period during which the Commission has two months preventing fraud, or ) can be relied to determine whether the proposal constitutes State Aid, and if so, upon to justify a prima facie selective tax measure. Extrinsic whether the aid is nonetheless compatible with EU rules because objectives (such as maintaining employment) cannot form a basis for possible justification. its positive effects outweigh the distortion of competition. If serious doubts remain as to the compatibility of the measure, the Commission must open an in-depth investigation. Another perspective: AG’s opinion in A-Brauerei If the Commission becomes aware of aid having been granted without its prior approval, it will follow a similar investigation Pausing here for a moment, an Advocate General has very recently procedure and may issue a “negative decision” ordering the delivered an opinion which questions whether this is in fact the right Member State to recover the unpaid amount, plus interest, from the approach at all. In A-Brauerei (Case C-374/17), a German court has beneficiaries of the aid. State Aid can be recovered up to 10 years requested a ruling on an exemption from land transfer tax (RETT) after it has been given, and this clock can be “paused” by certain acts where the “transfer” occurs on the merger of the “transferor” into taken by the Commission, such as requests for information. the “transferee” and the two companies are part of the same group. A negative decision can be appealed by the Member State The Commission of course takes the view that the exemption to which it is addressed or any interested person (such as a constitutes unlawful State Aid. It argues that the “reference system” taxpayer in receipt of the aid) by application to the EU courts for is the German rule which, in principle, imposes a transfer tax on any “annulment”. An application can be made, for example, on grounds transaction which results in a transfer of ownership of German real of error of law or manifest error of facts, and will be considered by estate (including, it seems, on a straight intra-group transfer with no the General Court (the court of first instance) and/or the Court of merger). On that basis, the exemption is a derogation and, says the Justice (“CJEU”, the highest EU court). (Decisions of the General Commission, selectivity is established. Court are denoted with the prefix “T-” and decisions of the CJEU are This does seem an extreme position and the Danish Advocate denoted with the prefix “C-”, with the suffix “P” if they are appeals General (Saugmandsgaard Øe) clearly has no sympathy for it from the General Court.) whatsoever, even on the “reference system” approach. The specifics The financial consequences of a negative Commission decision are of the case are, however, less interesting than the wider observations potentially severe for the company said to have received the aid. made by the AG, expressed in notably forthright terms. Indeed, applying for annulment of a Commission decision does not “Reference framework” method or “general availability” test? automatically release the relevant Member State from its obligation Right at the start of his opinion, the AG makes the following claim: to implement the recovery order; thus following a challenge from “the case-law of the Court on the issue of material selectivity is the Commission to a tax ruling issued by Ireland, in September

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characterised by the co-existence of two methods of analysis, in particular in tax matters”. Those are, he says, the “reference UK CFC rules framework” method and what he calls “the traditional method of analysis … based on the general availability test”. The UK is another enthusiastic tax competitor. It too has amended its most obviously competitive offering – its version of the “patent The crucial distinction is that under the latter, there is no selectivity box” concept – in the face of a potential challenge. But it may not if any undertaking could avail itself of the relevant rule, subject to have anticipated the attack which is now causing consternation for satisfying some basic criteria; putting this another way, a measure many UK multinationals. is only selective if the criteria “irrevocably exclude certain undertakings or the production of certain goods from the benefit In October 2017, the Commission announced that it was launching of the advantage concerned”. By contrast, the AG believes that an in-depth investigation into certain aspects of the UK’s regime the reference framework method “tends to turn the rules on State for taxing controlled foreign companies (“CFCs”); a month later Aid into a general discrimination test, covering any criterion of it released its preliminary decision to the effect that the rules are discrimination” (his emphasis). defective. I will not attempt here to determine the correctness or otherwise Some context will be helpful here. Around 10 years ago, the of the AG’s assertions in A-Brauerei. There is definitely merit in UK moved from a system of taxing the worldwide profits of UK focusing on the nature of any conditions to the availability of the companies to a “territorial” regime which can, in principle, exclude relevant advantage, though one cannot simply target any condition non-UK profits. Then in 2012/13 the CFC rules were completely that is discriminatory on grounds of nationality, residence or overhauled, in a manner consistent with that fundamental switch; jurisdiction as that is of course policed by a quite different set of the general idea is that profits earned by offshore subsidiaries EU principles, viz the “four freedoms”. Nor am I convinced that the should be caught only if they have been artificially diverted from AG’s approach would solve the problems posed by the application the UK. of State Aid principles in the tax sphere. Non-trading (passive) income is of course a target for many CFC That said, his criticisms of the way in which these principles regimes because it can so easily be shifted from one jurisdiction to are being applied are certainly well made. He considers that the another. The UK’s rules catch non-trading profits for this Commission’s efforts should be “refocused on the measures which reason; the relevant legislation is in Chapter 5 of Part 9A of the are the most damaging to competition within the internal market, Taxation (International and Other Provisions) Act 2010 (“TIOPA”). namely individual aid and sectoral aid”; the Commission should not However, Chapter 5 is subject to a number of exemptions that are set have “the power to ‘smooth out’ the national tax systems by requiring out in Chapter 9 of Part 9A. the removal of those differentiations legitimately established for Exemptions for “non-trading finance profits” social, economic, environmental or other reasons”. He also detects First, Chapter 5 does not apply at all if the UK parent can show that unhappiness in the opinions of other Advocates General, citing the CFC is funded entirely from an external issue of equity capital Advocate General Wahl’s – clearly correct − observations in the by the group or from profits generated by members of the group Heitkamp case (discussed below) to the effect that the identification in the same jurisdiction as the CFC (the “qualifying resources” of the reference framework is a major source of legal uncertainty, exemption), or that the group does not have net interest expense as well as comments from Advocate General Kokott in ANGED in the UK (the “matched interest” exemption and together, the (2017). “full exemptions”). Second, in the event that neither of the full exemptions is available, 75% of the CFC’s non-trading finance Special Tax Regimes income is exempt so long as the group borrowers are themselves outside of the UK too (the “partial exemption”). Returning to the wider picture, one obvious target for challenges The UK’s justification for the partial exemption is that UK funding based on fiscal State Aid would be a tax regime which encourages for a CFC is likely to be provided wholly in the form of equity – corporate taxpayers to establish themselves, or to carry on some a phenomenon sometimes called “fat capitalisation”, as it is the specified activity, in a particular EU jurisdiction. Many Member reverse of the more familiar “thin capitalisation” – whereas for a States have introduced such regimes over the years in the name of UK multinational the typical mix of equity to debt would be in the . region of 3:1. To give a simple illustration: UK parentco raises Belgium is a notable example. It gave favourable treatment to funding of 100, comprising 75 of equity and 25 of debt; parentco “Belgian Coordination Centres” until a State Aid challenge forced puts the 100 into a CFC subsidiary as equity; and CFC then lends it to scrap the regime. It then brought in the “notional interest the 100 to a non-UK opco in the group. The idea is that there should deduction”, but that has been of limited value in an era of very low be a CFC charge to cancel out interest deductions on the 25 that is interest rates, and it also has an “excess profit” exemption. The last indirectly financing the opco’s non-UK activity. of these could be seen as favouring (and designed to favour) Belgian Are the exemptions selective? companies that are part of multinational groups. As usual where legislation is under attack, selectivity is the The Commission announced in January 2016 that it regarded the critical issue. Pursuing the three-step approach outlined above, exemption as providing a selective that amounted to the Commission has taken the view that (i) the relevant “reference unlawful State Aid. Belgium has therefore been told to recover the system” here is the CFC regime (or possibly just “the specific exempted tax from the groups concerned. In response, it introduced provisions within the CFC regime determining artificial diversion retrospective legislation aimed at doing just that and this is being for (deemed) non-trading finance profits” – a formulation that the challenged by the taxpayers affected. UK would be happy with if the Commission did not then exclude Chapter 9), (ii) the exemptions in Chapter 9 represent a derogation from them, and (iii) the derogation cannot be justified.

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It is true that Chapters 5 and 9 of Part 9A TIOPA protect only the UK tax base, leaving a UK-headed multinational free to use debt Heitkamp – an Important Defeat for the Commission? funding from subsidiaries in low-tax jurisdictions to finance non-UK members of the group. However, this is a natural concomitant of a Competitive tax regimes may be the obvious target but it has territorial tax system which aims to tax offshore profits only where become clear that the Commission believes the State Aid principle they have been artificially diverted from the parent jurisdiction. has an even broader remit in the tax sphere. Cases such as Heitkamp Indeed, the UK would say – with considerable justification – that (C 203/16 P, heard together with an appeal on similar facts by a the whole purpose of the two chapters taken together is to identify company called GFKL) suggest that, in the Commission’s view non-trading finance profits of this kind. So the reference system at least, it has the potential to catch legislative measures that are should be looked at more broadly, rather as the CJEU has done in commonplace in many Member States. the Heitkamp case considered below: in principle non-UK profits Heitkamp concerns a State Aid challenge to a provision of German are outside the UK tax net, Chapters 5 and 9 taken together set law that is designed to support companies in financial difficulty. certain limits on the principle (to catch profits which as a matter of Losses incurred in previous tax years can be carried forward to economic reality have been shifted out of the UK) but there is no future tax years (the “Carry Forward Rule”). To discourage loss- “derogation” and therefore no selectivity. buying (the purchasing of loss-making companies to access their The Commission’s preliminary decision makes much of the fact historic losses), German law also states that a lossmaking company that Chapters 5 and 9 do not identify with scientific precision which will automatically forfeit its ability to carry forward fiscal losses if it profits have or have not been artificially diverted out of the UK. But is subject to a significant change in control (the “Forfeiture Rule”). this seems an unreasonable demand, especially in an area (cross- However, there is an exception to the Forfeiture Rule to permit the border taxation) where it is notoriously difficult to produce the acquisition and rescue of companies in financial difficulty. Losses perfect system. There will inevitably be rough edges, partly (as the can be carried forward in spite of a significant change of control if UK has argued) for reasons of clarity and practicality for taxpayers the company in question is in financial distress (the “Restructuring and tax authority alike. To expect otherwise is, one might well say, Clause”). another form of the “smoothing out” decried by Advocate General In applying the three-stage test, the General Court identified the Saugmandsgaard Øe in A-Brauerei, discussed above. Forfeiture Rule as the correct system of reference to the exclusion Freedom of establishment of the Carry Forward Rule. It found that all companies which have undergone a change of control, whether in financial distress Another surprising feature of the Commission’s investigation is that or not, are in a comparable factual and legal situation, but that the it pays no heed whatsoever to the CJEU’s case law on freedom of Restructuring Clause derogated from the system of reference in establishment for CFCs, notably the seminal Cadbury Schweppes favour only of those companies in financial distress. The General judgment from 2006. The CJEU has been very clear that companies Court also confirmed that supporting companies in financial can be set up in particular European jurisdictions merely to take difficulty was not an objective intrinsic to the relevant tax system (it advantage of lower tax rates and in Cadbury Schweppes, it held that sought to achieve a different policy objective from that of merely CFC rules can only be justified to the extent that they target “wholly ensuring the implementation of the tax system itself) and therefore artificial arrangements” that do not reflect economic reality. By did not justify the derogation. that measure, far from being too liberal as the State Aid challenge might suggest, the UK’s regime is (still) too restrictive. (One might Another critical Advocate General say this encapsulates a basic difference between State Aid and the When Advocate General Wahl delivered his opinion in Heitkamp four freedoms: State Aid focuses on positive discrimination – the in December 2017, he agreed with much of what the General Court Commission is presumably saying that the specified non-trading had said. However, he disagreed with its identification of the system finance profits of CFCs are given favourable treatment and instead of reference. should always trigger a full CFC charge − whereas the freedoms The AG began his discussion of this crucial issue with some focus target negative discrimination, so UK multinationals would entertainingly direct remarks. He observed that in cases such say that even taxing just 25% of relevant profits is a restriction on as World Free (considered below), the CJEU had said the freedom of establishment.) This makes the State Aid/CFC issue reference system is the common or “normal” tax regime applicable unusually complex – and awkward for both taxpayers and HMRC. in the Member State concerned. However: “As a criterion of It is to be hoped that the Commission will row back when it releases assessment that statement is remarkably unhelpful”. its final decision late this year or early next, perhaps citing the Mindful perhaps of lèse-majesté, the AG then made it clear that CJEU’s reversal of the General Court in Heitkamp (see, again, he did not blame the CJEU for failing to give useful guidance. In the discussion below). It really does not seem appropriate to use the case of positive benefits of the sort primarily targeted by the the blunt tool of State Aid to undermine a set of rules which make State Aid regime (for example a straight subsidy), it is usually easy sense in the context of the UK’s wider regime for levying tax on enough to identify the “normal situation”. That is not so in the tax company profits. To the extent these could be said to favour one sphere and, according to the AG, even the Commission struggles set of undertakings over another, they do so by supporting the to produce a coherent rationale; apparently “the Commission was UK’s territorial system. One reason for adopting this system may unable to explain on what basis it determines the reference system”. indeed have been to encourage major corporate groups to establish The AG did however detect in the case law a principle of sorts: themselves (or, at least, to remain) in the UK. But that is a species “a broad approach is to be favoured in determining the reference of “tax competition” which is surely outside the ambit of State Aid. system”, indeed the approach should be one which “takes into account all relevant legislative provisions as a whole, or the

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broadest possible reference point”; and in support of this he cited The relevant measure was “selective” simply by virtue of again the CJEU’s judgment in World Duty Free, where “the relevant discriminating between undertakings which hold 5% of a foreign benchmark was not the rules governing investments abroad, but company and undertakings which hold 5% of a Spanish company, rather the Spanish corporate tax system as a whole”. when those undertakings are otherwise in a comparable factual and Pursuing this approach, the AG concluded that the Commission and legal situation. the General Court had been wrong to exclude the Carry Forward Then in July 2018, in the “Spanish tax lease system” case (C- Rule from the system of reference and once that error is rectified, 128/16 P, concerning a tax benefit available when buying ships the Restructuring Clause “becomes an intrinsic part of the reference constructed by Spanish shipyards), the CJEU again sided with the system itself” rather than “an obvious derogation from it” – it puts Commission and against the General Court, which it said had (inter the taxpayer back in the position of being able to carry forward alia) repeated its error from the earlier cases. losses, notwithstanding the change in its ownership. It has been observed that Santander and World Duty Free Confirmation from the CJEU essentially merged the three-step analysis into one question: does The CJEU endorsed the AG’s conclusion: the Commission and the measure place the recipient in a more favourable position than the General Court had erred in their analysis of selectivity by entities in a comparable factual and legal situation in light of the choosing the wrong system of reference. That system could not general goals of the reference system? This in turn raises another consist of “provisions that have been artificially taken from a important question: to what extent are different situations factually broader legislative framework”. In focusing solely on the Forfeiture and legally “comparable”? The question is not easily answered Rule as the reference system and excluding the Carry Forward but on one point the Commission and the CJEU leave little room Rule, “manifestly the General Court defined [the framework] too for doubt: this is always a matter for the EU rather than individual narrowly”. Member States. It would be wrong, though, to give the impression that Heitkamp contains nothing but good news. Thus the Advocate General seemed Regulatory Capital content that a strict approach should be taken to justification, the last step in the standard three-step method of determining selectivity; The Commission has now opened another front in its State Aid indeed he noted that “to my knowledge, the Court has yet to accept campaign. In January 2018, it sent a letter to the Netherlands the reasons relied upon by Member States under the third step of the querying the special tax treatment of “contingent convertibles” assessment of selectivity”. And it would have been more reassuring designed to constitute capital for regulatory purposes while if – in line with the “general availability” test favoured by the preserving the issuer’s ability to deduct the coupons. The argument Advocate General in A-Brauerei − the AG and the CJEU had been is that this provides State Aid to Dutch and insurers, because able to say simply that the Restructuring Clause was a “general” ordinary corporates cannot get the same treatment. measure, not a “selective” one, because any company could find The challenge was not made public at the time, but could be itself in financial distress. Many Member States have tax measures divined from the subsequent reaction of the Dutch government in place designed to assist companies facing insolvency; the UK, for when, in late June, it put forward a proposal to abolish deductibility example, gives preferential treatment under its “loan relationship” on these “AT1” and “RT1” instruments with effect from 1 January (corporate debt) rules to companies in distress. 2019. Publication of the 2019 Finance Bill three months later confirmed the proposal and made it quite clear that there would be Santander/World Duty Free no grandfathering for existing instruments. This development has caused dismay in other Member States, such Certainly, the CJEU does not like beneficial tax regimes which, as the UK, which have similar rules. Banks and insurers would while arguably open to any undertaking in the relevant jurisdiction, no doubt say that if it were not for regulatory capital requirements are available only if another party is or is not based in the same that do not apply to any other sector, they would issue normal debt jurisdiction. This is clear from a few cases involving Spanish and so be entitled to the deductions anyway. Are they then in a legislation. “comparable legal and factual situation”? At the end of 2016, the CJEU delivered judgment in Santander (C- Of course the Dutch response is not the only possible one for 20/15 P) and World Duty Free (C-21/15 P). These concerned a tax governments that do not want to litigate. Member States could take provision which gave Spanish companies acquiring a shareholding the view that – with interest deductibility now heavily constrained of at least 5% of a non-Spanish company a for by various BEPS-related rules anyway – the ability to issue hybrid amortisation of goodwill. No such tax relief was available for a instruments carrying deductible interest could be extended to all Spanish company acquiring a shareholding in a local company. The corporates. General Court had found that the tax relief was not selective, and not therefore, State Aid, because it was not restricted to a particular category of or the production of any particular category of Tax Rulings as a Form of State Aid goods, but was potentially available to all Spanish companies that wanted to acquire shareholdings of at least 5% in foreign companies. While these challenges to tax legislation are perhaps the most concerning, at least from a UK perspective, it is the Commission’s The CJEU overturned this decision and referred the cases back to pursuit of tax rulings given by Member State tax authorities that has the General Court. In demonstrating the selectivity of a legislative captured the headlines. measure, it was not necessary for the Commission to identify a particular category of undertakings that exclusively benefited from that measure.

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Tax rulings are common practice throughout the EU. They are effectively comfort letters which give the requesting companies Tax Mismatches clarity on how their tax liabilities will be calculated. Although not problematic in themselves, tax rulings can constitute unlawful State Two other noteworthy investigations concern rulings given by the Aid when they confer an economic advantage and are not approved Luxembourg fisc to McDonald’s and ENGIE (previously GDF by the Commission prior to being issued. Suez). Each of them could be seen as an attempt by the Commission to broaden its attack on tax rulings, though one has now been abandoned. The “Luxleaks” McDonald’s Tax rulings granted to major multinationals have been attracting The Commission opened a formal investigation in December considerable public and political attention in recent years, especially 2015 into two tax rulings given by Luxembourg to McDonald’s. It against the backdrop of tight public budgets. The controversy was considered that one of them constituted unlawful State Aid because amplified by the leaking, on 5 November 2014, of several hundred it exempted the US branch of McDonald’s Luxembourg subsidiary tax rulings issued by the Luxembourg tax authorities in respect of from local tax under the US/Luxembourg double , despite over 300 companies. Since then the Commission has concluded such profits also being exempt from US tax under US law. The several in-depth investigations, targeting inter alia tax rulings profits were derived from royalties paid by European franchisee issued by Ireland (to Apple), the Netherlands (to Starbucks) and restaurants to the Luxembourg subsidiary for the right to use the Luxembourg (to Fiat and Amazon), and it has recently opened a McDonald’s brand and associated services and were then transferred new investigation targeting another ruling given by the Netherlands internally to Luxco’s US branch. (to IKEA). However, on 19 September 2018 the Commission announced that The most eye-watering claim relates to Apple; in August 2016, it would end the investigation. It accepted that the double non- the Commission ordered Ireland to recover around €13bn, plus taxation resulted from a mismatch between the national laws of interest. In October 2017, the Commission referred Ireland to the Luxembourg and the US, as applied by the Luxembourg/US tax CJEU for failing to do so and Ireland has now collected €14.3bn treaty; Luxembourg was not giving McDonald’s special treatment from Apple which is to be held in an escrow account pending the – any company could have taken advantage of the tax treaty in the outcome of the appeal. same way − and therefore there was no State Aid. A week later, in a wide-ranging speech on competition policy at Georgetown Law School in Washington DC, Commissioner Vestager Rulings on confirmed the thinking. The Commission did not like the tax result, but could not formally challenge it: “That doesn’t mean that nothing The main focus of these investigations has been the transfer pricing was wrong. But competition enforcers can’t intervene just because endorsed by the rulings. Thus the Commission contends that they something’s not right. We act if – and only if – it turns out that a allowed for intra-group pricing that departed from the conditions company or government has broken the rules.” And the pressure that would have prevailed between independent operators; in other has not been in vain: Luxembourg has said it will change underlying words, the pricing does not comply with the arm’s-length principle. domestic law in a way that prevents a similar arrangement in future. One of Apple’s arguments is that, in its case at least, this is not ENGIE a relevant question; it says that the arm’s-length principle as developed by the OECD was not part of Irish law and therefore Meanwhile, the ENGIE dispute rumbles on. The Commission Ireland’s ruling could not have provided a selective advantage. In launched its investigation in September 2016, targeting tax rulings response, the Commission claims that the arm’s-length principle is given by Luxembourg to ENGIE in respect of certain intercompany inherently part of Article 107(1) of the Treaty. The Commission’s zero-interest convertible loans. It claimed that the rulings treated approach to this principle also features in the Fiat and Starbucks the convertible loans inconsistently, as both debt and equity, which cases and since these were heard by the CJEU in late June 2018, we gave rise to double non-taxation and hence an economic advantage could, before long, have substantive judicial guidance. that was not available to other groups subject to the same tax rules in Luxembourg. The rulings allowed the borrowers to make claim Of course, national tax administrations have for many years taken deductions for interest that accrued but was not paid, while the an interest in multinationals’ cross-border pricing arrangements, conversion feature meant the lenders treated the loans as equity and and in this respect there is an intriguing angle to the Amazon (as in many other jurisdictions) equity returns were exempt from case. The Commission has told Luxembourg to reclaim €250m taxation under Luxembourg law. relating to what it says was an unlawful tax ruling given in 2003 (then confirmed in 2011) which concerned a royalty payable by a The Commission has said that the Luxembourg fisc “failed to Luxembourg subsidiary; Amazon is appealing against this decision, invoke established accounting principles”, though there seems little seeking to have it annulled on the basis of flawed selectivity analysis doubt that the accounting used by debtor and creditor complied fully and citing the principles of legal certainty and sound administration. with the applicable principles; and it claimed that the fisc could be Meanwhile, the Internal launched a conventional providing State Aid merely by failing to challenge the relevant inquiry into the US end of the same arrangements; it lost at first transactions under its general anti-abuse rule – unabashed by the instance but in September 2017 it filed an appeal. The IRS is fact that, at the time, Luxembourg had only invoked its GAAR once claiming more than four times as much as the Commission has said in the 60 or more years since its introduction. should be repaid by Amazon to Luxembourg.

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Then, in June 2018, the Commission released its conclusion: the Moreover, it is not clear why the Commission should be intervening rulings artificially lowered ENGIE’s tax burden without valid in the allocation of multinationals’ profits between countries when justification, so Luxembourg must recover tax of €120m. the countries themselves are not. For example, neither Ireland nor The McDonald’s and ENGIE investigations are a reminder that the US welcomed the Apple investigation. The US government State Aid enquiries into tax rulings are not limited to transfer has made no secret of its opposition to the decision and, despite pricing. Affected areas could include, for example, rulings on the prospect of a €14bn windfall, Ireland has appealed the the qualification of hybrid entities (transparent or opaque), hybrid Commission’s recovery order. The Irish government recognises instruments (debt or equity, as in ENGIE) and other perceived that Ireland’s allure for foreign investors is based to a significant “mismatch” arrangements. Rulings are more likely to be challenged extent on a tax system that is both competitive and predictable and, if they involve some sort of factual determination by the tax to quote the then Irish Finance Minister, “to do anything else [but authorities and especially if they concern structures with potential appeal] would be like eating the seed potatoes”. for what the tax world now knows as base erosion and profit shifting. Challenges to tax legislation are bedevilled by another sort of uncertainty. They revolve around the question of “selectivity” and, within that, the determination of the appropriate “reference Conclusion system”. Yet in a tax context that determination can seem, at best, an exercise in arcane distinctions worthy of a scholastic philosopher The application of the EU State Aid regime to tax rulings and and at worst, little better than a lottery: the opinions given in the legislation is making waves as never before. Where these are Heitkamp case and, most recently, A-Brauerei make remarkable simply subsidies in disguise, they are a legitimate target. But the reading and it is striking how often the General Court has been European Commission appears to be on a crusade to introduce a reversed by the CJEU. degree of tax harmonisation that is at odds with the preservation It is also unsatisfactory that selectivity can never in practice be of direct tax as a matter within the competence of Member States. justified; we need a change in judicial approach comparable to There are obvious, and in my view well-founded, objections to the CJEU’s belated recognition of the “balanced allocation of the way in which State Aid principles are being applied in the tax taxing powers” as a justification for tax rules that restrict the four sphere. freedoms. Seeking retroactive recovery of unpaid strikes a serious blow As I noted at the start of this piece, the first signs of a rethink may to the principle of certainty in law. This is perhaps particularly be beginning to appear. It cannot come soon enough. acute in the case of the Commission’s investigations into tax rulings. All nine of these commenced in the last five years, so it is unlikely that the risk of a State Aid challenge was evaluated when relevant transactions were entered into.

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

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

William Watson joined Slaughter and May in 1994 and became a partner in the Tax Department in 2004. His practice covers all UK taxes relevant to corporate and financing transactions. Particular areas of interest include real estate and the oil & gas sector; however, William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, 2018 and Chambers Europe and Chambers Global, 2018. He is also listed in the International Tax Review’s Tax Controversy Leaders Guide, 2018 and in Who’s Who Legal, 2018 and is recommended for both Corporate Tax and Tax Litigation & Investigations in The Legal 500, 2018.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. Our highly experienced Tax group deals with the tax aspects of all corporate, commercial and financial transactions. We provide pan-European tax advice via the Best Friends Tax Network*. Alongside a wide range of tax-related services, we advise on: ■■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions; ■■ development of innovative and tax-efficient structures for the full range of financing transactions; ■■ documentation for the implementation of transactions, to ensure that it meets tax objectives; ■■ tax aspects of private equity transactions and investment funds from initial investment to exit; and ■■ tax investigations and disputes from initial queries to litigation or settlement. “They are absolutely excellent, they are very easy to work with and they are very pragmatic in their advice.” – Chambers UK, 2018 “Additionally, market sources are quick to note the quality of deals which the firm is involved in: ‘They have multinational companies in their clientele with complex cross-border issues’.” – Chambers Global, 2018 “Stellar UK practice utilising its broad European ‘best friends’ network of firms to provide cross-border tax advice. Provides sophisticated expertise on high-profile M&A and financing transactions. Growing presence in contentious tax issues. Also offers tax consultancy advice, with particular strength in transfer pricing matters, as well as tax litigation.” – Chambers Europe, 2017 *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal).

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Taxing the Digital Economy Sandy Bhogal

Gibson, Dunn & Crutcher LLP Panayiota Burquier

1. scale without mass; Introduction 2. heavy reliance on intangible assets; and As part of the OECD/G20 BEPS project, and in the context of Action 3. the role of data and user participation, including network 1, the Task Force on the Digital Economy (“TFDE”) considered the effects. tax challenges raised by the digital economy. The 2015 Action 1 See Box 1 below for details. BEPS final report (the “2015 report”) and the 2018 Action 1 BEPS interim report (the “2018 interim report”) (together, with the 2015 Box 1 report, the “reports”) note that the digital economy is characterised Cross-jurisdictional scale without mass by an unparalleled reliance on intangibles, the massive use of data Digitalisation has allowed businesses in many sectors to locate (notably personal data) and the widespread adoption of multi-sided various stages of their production processes across different business models. countries, and at the same time access a greater number of The reports also highlight ways in which digitalisation has customers around the globe. Digitalisation also allows some exacerbated BEPS issues and note that measures proposed under highly digitalised companies to be heavily involved in the the other BEPS Actions are likely to have a significant impact economic life of a jurisdiction without any, or any significant, in this regard. The most relevant BEPS direct tax measures for physical presence, thus achieving operational local scale highly digitalised businesses include amendments to the permanent without local mass (referred to as “scale without mass”). establishment definition in Article 5 of the OECD Model Tax Reliance on intangible assets, including IP Convention (Action 7), revisions to the OECD Transfer Pricing Guidelines related to Article 9 of the OECD Model Tax Convention The analysis also shows that digitalised companies are (Actions 8–10) and guidance based on best practices for jurisdictions characterised by the growing importance of investment in intending to limit BEPS through CFC rules (Action 3). intangibles, especially IP assets which could either be owned by the business or leased from a third party. For many digitalised These topics are explored in more detail below. companies, the intense use of IP assets such as software and The position described in this chapter is accurate as at 31 August 2018. algorithms supporting their platforms, websites and many other crucial functions are central to their business models. Digitalisation of the Economy, not the Data, user participation and their synergies with IP Digital Economy Data, user participation, network effects and the provision of user-generated content are commonly observed in the business One key message from both reports is that the digital economy is models of more highly digitalised businesses. The benefits becoming the economy itself. The 2015 report concluded that it from data analysis are also likely to increase with the amount is extremely difficult – if not impossible – to ring-fence the digital of collected information linked to a specific user or customer. economy from the rest of the economy for tax purposes. What is The important role that user participation can play is seen also clear from both reports is that a robust understanding of how in the case of social networks, where without data, network digitalisation is changing the way businesses operate and how they effects and user-generated content, the businesses would create value is fundamental to understanding the challenges of not exist as we know them today. In addition, the degree of taxing the digital economy. user participation can be broadly divided into two categories: It is clear that the structure of businesses and the process of value active and passive user participation. However, the degree creation have significantly changed and evolved, becoming of user participation does not necessarily correlate with the technically very complex. A detailed explanation of business models degree of digitalisation. For example, cloud computing can shaping the digital economy can be found in the 2015 report. The be considered a highly digitalised business that involves only 2018 report focuses on three characteristics that the TFDE identified limited user participation. as frequently being observed in certain highly digitalised business models. These are:

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conclusion of contracts in the name of the parent company (or Relevant Measures of the BEPS Package for the transfer of property or provision of services by the parent company), and these contracts are routinely concluded without Permanent Establishments (Action 7) material modification by the parent company. Action 7 also recommended an update of the specific activity The possibility to reach and interact with customers remotely exemptions found in Article 5(4) of the OECD Model, according through the Internet, together with the automation of some business to which a is deemed not to exist where functions, has significantly reduced the need for local infrastructure a place of business is used solely for activities that are listed in and personnel to perform sales activities in a specific jurisdiction that paragraph (e.g. the use of facilities solely for the purpose of (i.e. scale without mass). The same factors create an incentive storage, display or delivery of goods, or for collecting information). for multinationals to remotely serve customers in multiple market The proposed amendment prevents the automatic application of jurisdictions from a single, centralised hub. In certain cases, these exemptions by restricting their application to activities of a however, the multinational group will continue to maintain a “preparatory or auxiliary” character. This change is particularly degree of presence in countries that are significant markets for its relevant for some digitalised activities, such as those involved in products, for instance by establishing a local subsidiary responsible business-to-consumer online transactions and where certain local for supporting and facilitating sales (so-called “trade structures”). warehousing activities that were previously considered to be merely The latter is typically remunerated for the services it provides on a preparatory or auxiliary in nature may in fact be core business cost-plus basis. activities. Under the revised language of Article 5(4), these types of local warehousing activities carried out by a non-resident no These traditional structures can present some BEPS concerns. This longer benefit from the specific activity exemptions usually found is the case when the functions allocated to the staff of the local in the permanent establishment definition if they are not preparatory subsidiary under contractual arrangements (e.g. technical support, and auxiliary in nature. This would be the case, for example, for a marketing and promotion) do not correspond to the substantive large warehouse maintained by a non-resident company in a market functions performed. For example, the staff of the local subsidiary jurisdiction in which a significant number of employees work for the may carry out substantial negotiation with customers, effectively main purpose of storing and delivering goods owned and sold by the leading to the conclusion of sales. Provided the local subsidiary non-resident company and that a warehouse constitutes an essential is not formally involved in the sales of the particular products part of the non-resident company’s sales/distribution business. or services of the multinational group, these trade structures generally avoid the constitution of a dependent agent permanent establishment in the market jurisdiction. What are jurisdictions doing about Action 7? In response to these BEPS risks, Action 7 resulted in the amendment of key provisions of Article 5 of the OECD Model Tax Convention Italy has introduced legislation to replace the domestic definition and its Commentary. The changes aim to prevent the artificial of permanent establishment with the one provided by BEPS avoidance of permanent establishment status which is the main Action 7. Under the new permanent establishment definition, a treaty threshold below which the market jurisdiction is not entitled significant and continuous economic presence in Italy set up in a way that does not result in a substantial physical presence in Italy to tax the business income of a non-resident. In addition, the 2015 may constitute a permanent establishment. Other examples of report noted that these changes could help mitigate some aspects countries that have followed Action 7 recommendations and moved of the broader direct tax challenges regarding nexus, if widely forward with the adoption of the significant economic presence test implemented. These expectations were primarily relevant for are Israel, the Slovak Republic and India. Saudi Arabia has also situations where businesses have some degree of physical presence officially endorsed what is being called the “virtual service PE”. in a market (e.g. to ensure that core resources are placed as close Turkey has published legislation revealing an “electronic permanent as possible to customers) but would otherwise avoid the permanent establishment” and Japan has also said it will amend the definition establishment threshold. of permanent establishment in its domestic legislation in line with More specifically, Action 7 provided for the amendment of Action 7 recommendations. the dependent agent permanent establishment definition The BEPS package is designed to be implemented via changes through changes to Articles 5(5) and 5(6) of the OECD Model in domestic law and practices, and via treaty provisions. To this Tax Convention. The amendments address the artificial use end, the multilateral instrument (“MLI”) is intended to facilitate of commissionaire structures and offshore rubber stamping the implementation of the treaty-related BEPS measures, but the arrangements. Some structures common to all sectors of the adoption rate of the permanent establishment-related provisions economy involved replacing local subsidiaries traditionally acting through the MLI have been reported to be low. Some jurisdictions as distributors with commissionaire arrangements. The result was a may have reserved their position on the permanent establishment- shift of profits out of a certain jurisdiction but without a substantive related provisions of the MLI until seeing the Inclusive Framework’s change in the functions performed there. Other structures more work on “Attribution of Profits to Permanent Establishments” – specific to highly digitalised businesses, such as the online provision published in March 2018. However, the adoption rate of the new of advertising services, involved contracts substantially negotiated permanent establishment definition may increase over time in any in a market jurisdiction through a local subsidiary, but not formally case, as governments base future treaty negotiations on the 2017 concluded in that jurisdiction. Instead, an automated system OECD Model incorporating those changes. managed overseas by the parent company could be responsible for the finalisation of these contracts. Such arrangements allowed a business to avoid a dependent agent permanent establishment Unilateral UK action prompts further measures elsewhere under Article 5(5). Where the recommendations of Action 7 are implemented, these structures and arrangements would result in As part of the 2015 Finance Act, the United Kingdom introduced a permanent establishment for the foreign parent company if the the Diverted (“DPT”). The DPT operates through two local sales force habitually plays the principal role leading to the basic rules:

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1. First, a rule that counteracts arrangements that exploit does not exercise control over the investment risks that may permanent establishment rules. Very broadly, the DPT applies give rise to premium returns, that associated company should in cases where a person is carrying on activities in the UK in expect no more than a risk-free return. connection with the supply of goods and services by a non-UK ■ Guidance on transactions that involve the use or transfer resident company to customers in the UK. Detailed conditions of intangibles which ensures that legal ownership of an must be met for this “avoided PE” measure to apply. intangible by an associated company alone does not determine 2. Second, a rule to prevent tax advantages obtained through the use entitlement to returns from the exploitation of this intangible. of transactions or entities that lack economic substance. This is essentially a “sideways CFC” measure whose primary function is to counteract arrangements that exploit tax differentials and Controlled Foreign Company Rules (Action 3) will apply where the detailed conditions, including those on an “effective tax mismatch outcome”, are met. The 2015 BEPS Report on Action 3 provided recommendations in Following the UK example, Australia introduced its own DPT in the form of six building blocks, including a definition of Controlled July 2017. France attempted to legislate for a DPT in 2017 but its Foreign Company (“CFC”) income which sets out a non-exhaustive Constitutional Council ruled that the legislation was insufficiently list of approaches or combination of approaches on which CFC detailed, giving the tax authorities too much discretion. However, rules could be based. Specific consideration is given to a number France is expected to resubmit the legislation to the Constitutional of measures that would target income typically earned in the digital Council in an amended form for inclusion in its 2018 Finance Bill. economy, such as income from intangible property and income earned from the remote sale of digital goods and services to which the CFC has added little or no value. These approaches include Transfer Pricing (Actions 8–10) categorical, substance, and excess profits analyses that could be applied on their own or in combination with each other. With these Business models where intangible assets are central to the firm’s approaches to CFC rules, mobile income typically earned by highly profitability, such as those of highly digitalised businesses, have digitalised businesses would be subject to taxes in the jurisdiction in some cases involved the transfer of intangible assets or their associated rights to entities in low-tax jurisdictions that may have of the ultimate parent company. This would counter offshore lacked the capacity to control the assets or the associated risks. To structures that result in exemption from taxation, or indefinite benefit from a lower effective at the group level, affiliates in deferral of taxation in the residence jurisdiction. low-tax jurisdictions have an incentive to undervalue the intangibles (or other hard-to-value income-producing assets) transferred to them. What are jurisdictions doing about Action 3? At the same time, they could claim to be entitled to a large share of the multinational group’s income on the basis of their legal ownership The European Commission’s (the “Commission”) 2016 Anti-Tax of the intangibles, as well as on the basis of the risks assumed and the Avoidance Directive requires all 28 EU Member States to introduce financing provided (i.e. cash boxes). In contrast, affiliates operating CFC rules that draw heavily on the recommendations of Action 3. in high-tax jurisdictions could be contractually stripped of risk, and Article 7 of that Directive provides two alternative methods to define avoid claiming ownership of other valuable assets. the income earned by a CFC. One is based on formal classifications Actions 8–10 of the BEPS Action Plan developed guidance to and covers a broad range of income categories, including “royalties minimise the instances in which BEPS would occur as a result of and any other income generated from Intellectual Property” and these structures. In particular, the guidance seeks to address the “income from invoicing companies that earn sales and services prevention of BEPS by moving intangibles among group members income from goods and services purchased from and sold to (Action 8), the allocation of risks or excessive capital among associated enterprises”. This method may in some cases cover members of a multinational group (Action 9) and transactions which sales income generated primarily from the use of underlying would not occur between third parties (Action 10). intangible property (i.e. “embedded royalties”) but is limited by The guidance developed under BEPS Actions 8–10 was incorporated a substance carve-out rule available to a CFC that “carries on a into the OECD Transfer Pricing Guidelines in 2016 to ensure that substantive economic activity supported by staff, equipment, assets transfer pricing outcomes are aligned with value creation. While the and premises, as evidenced by relevant facts and circumstances”. The Transfer Pricing Guidelines play a major role in shaping the transfer other method is based on a standalone substance test which captures pricing systems of OECD and many non-OECD jurisdictions, the income “arising from non-genuine arrangements which have been put effective implementation of these changes depends on the domestic in place for the essential purpose of obtaining a tax advantage”. In legislation and/or published administrative practices of the relevant accordance with the best practices outlined in the 2015 BEPS Action countries. 3 Report, this method looks at the significant people functions within Overall, tax administrations may feel better equipped to address the group to determine whether the CFC is conducting non-genuine profit shifting by multinational groups through mechanisms such as: arrangements. However, this method may not always reach income ■ Identification of actual business transactions between the from online services, where the CFC may typically be established associated companies by supplementing, where necessary, with the necessary substance to comply with transfer pricing rules. the terms of any contract with evidence of the actual conduct of the parties. ■ An analytical framework to determine which associated Other Tax Developments Around the World company assumes risk for transfer pricing purposes, with contractual allocations of risk being respected only when they are supported by actual decision-making. Use of withholding taxes ■ Guidance to accurately determine the actual contributions made by an associated company that solely provides capital The UK introduced changes to UK royalty withholding tax where without functionality. Specifically, if the capital provider royalty payments are deemed to have a UK source. For royalty

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payments made by a foreign company on or after June 2016, where the royalty is connected with a trade carried on through Interim measures a UK permanent establishment, the royalty may be deemed to have a UK source. This is regardless of whether the royalty The EU Commission also published a second legislative proposal amount would be deductible in calculating the profits of the UK in the form of an interim 3% tax on certain revenue from digital permanent establishment. A foreign company with a UK permanent activities. This interim measure is only intended to apply until establishment paying a royalty to a group company must calculate comprehensive international reform has been implemented and is the “just and reasonable” portion of that royalty that should be intended to focus on scenarios where are escaping the sourced to the UK permanent establishment vs sourced to the foreign current tax framework altogether. parent. The portion which has a UK source is then prima facie The 3% interim tax is characterised as a basic indirect levy on gross subject to the basic rate of UK (20%) via a withholding revenues (with no deduction of costs) where users play a major role in mechanism. value creation that leads to those revenues, e.g. revenues created from: ■ selling online advertising space; Turnover taxes ■ digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them; and A meaningful number of countries have taken actions to assert taxing ■ the sale of data generated from user-provided information. rights over non-resident companies, such as foreign-based suppliers of digital products and services. These measures typically include This will capture, for example, revenues raised from social media sectoral turnover taxes targeted at (or including) revenue from online platforms or search engines, and services of supplying digital platforms advertising services, such as India’s Equalisation Levy, Italy’s levy that facilitate interaction between users, who can then exchange goods on digital transactions, Hungary’s advertisement tax and France’s tax and services via the platform (such as peer-to-peer sales platforms). on online and physical distribution of audio-visual content. In March 2018, the EU Commission published its proposal for the Broader picture – US introduction of a digital permanent establishment. Here, companies (including those in non-EU jurisdictions) that exceed certain digital The USA has made no secret of its scepticism for the digital activity thresholds in a tax year in a given Member State will trigger economy project, not least because a number of the “case studies” a digital permanent establishment in that Member State. The host used in this area are US-headquartered multinationals, and a number Member State would have the taxing rights in respect of profits of these entities are already facing scrutiny as a result of domestic attributable to that permanent establishment. The digital activity measures in EU jurisdictions or EU state aid proceedings. The thresholds set out in the EU proposal are as follows: Trump administration have also repeatedly warned of the potential ■ revenue from digital services in a Member State that exceed dangers of inhibiting growth in this area and are clearly not afraid EUR 7,000,000 (seven million euros); to enact unilateral measures to deal with what they perceive as ■ number of active users of the digital service in a Member deliberate targeting of US businesses. State that exceeds 100,000 (one hundred thousand); and Following the various amendments made to US federal tax laws ■ number of online contracts concluded that exceeds 3,000 in December 2017 under the Tax Cuts and Jobs Act, the USA also (three thousand). maintains that US multinationals do not erode tax unfairly because What the EU Commission (and other countries that have set out the companies in question pay tax where the “value” is created. A similar thresholds) does not do is provide guidance as to how “active comprehensive summary of the changes is beyond the scope of this users” will be measured. The problem is that there is little publicly chapter, but the following changes should be highlighted: available material on the process of defining and identifying active ■ the base erosion anti-abuse tax (“BEAT”), which is users and more detailed metrics need to be developed for the purpose essentially a corporate minimum tax arising from so-called of using “active users” as a factor. For example, how do countries “base erosion” payments; identify a “user” or what level of engagement is required for a user to ■ the global intangible low-taxed income (“GILTI”) regime, be considered “active”? Reliability and veracity of the information whereby a 10% or more US corporate shareholder of a would also need to be ensured to address fraudulent accounts, multiple controlled foreign company must include the relevant share accounts and false information volunteered by users. of net-income of that foreign company in its gross income. Such net income is an amount above a deemed fixed return to Turning to how contracts will be concluded. Does this mean that that foreign company on its tangible assets (subject to certain for every time online platforms provide free services to their users exceptions); and and who specify on their websites that by accessing or using the ■ the foreign-derived intangible income (“FDII”) regime, products and services of the company the user agrees to the “Terms which provides for corporate tax deductions against such of Service” and this results in the conclusion of a legally binding income which is earned directly by a US corporate. This agreement and therefore, a concluded contract? How will this is intended to provide an incentive against the transfer of work when commercial activities are carried out remotely while intangibles outside the USA to low tax jurisdictions. travelling across borders? An individual can, for example, reside in one country, purchase an application while staying in a second country, and use the application from a third country. Challenges The UK’s Position on the Digital Economy presented by the increasing mobility of users are exacerbated by the ability of many users to use virtual personal networks or proxy On 13 March 2018, the UK government issued an update (the servers that may, whether intentionally or unintentionally, disguise “update”) on its position paper entitled Corporate Tax and the the location at which the ultimate sale takes place. The fact that Digital Economy and contains the UK government’s updated many interactions on the Internet remain anonymous adds to the thinking on the digital economy. difficulty of the identification and location of users.

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Very broadly, the update provides detail of how the UK government US President Barack Obama’s Chief Economic Advisor) as Chair believes “user participation” creates value for certain digital of a new government expert panel will help in this regard and aim business through engagement and active contribution. It sets out to ensure the UK remains at the forefront of the digital revolution. four channels by which it believes value is created: However, a balance must be struck. The UK Chancellor of the ■ Generation of content by users that supports a business’s Exchequer recently raised the prospect of an “Amazon tax” for ability to attract and retain users and generate revenue. online retailers amid fears that high street shops are being put out of ■ Deep engagement with the platform allowing tailoring of business. The UK has made it clear that it is not afraid of going it platform and content and collection of valuable behavioural alone if international solutions take too long, as the introduction of data. the DPT demonstrates. ■ Development of networks through engagement and actions that create connections between users. ■ Contribution to a business’s brand through provision of Closing Remarks content, goods or services and through moderation and the rating of content. The 2015 report says that countries could introduce measures on a unilateral basis – albeit in line with international tax practices. But The update identifies a number of issues, including: how much any uncoordinated actions (as set out earlier in this chapter) serve residual profit derives from user participation; how to allocate only to create uncertainty for taxpayers and are a sure way to make it between different jurisdictions; which legal person should be the digital economy an even more complex area. liable for the tax; and what (minimum) threshold (such as number of active users or revenues) should be applied before the tax is There are considerable technical and legal hurdles to overcome imposed. The update discusses issues regarding the scope of such in any digital economy tax mechanisms, but if governments are a tax, including how to identify the businesses and revenues within to create sustainable long-term models then cooperation and its scope, challenges in identifying the location of users, how best coordination with all those directly involved is essential. to minimise distortions and avoid damaging the UK digital sector This, of course, is all in the background of countries competing (including start-ups) and whether it could be applied to revenues net for capital, trade wars and Brexit. One of the greatest challenges of certain outflows (such as payments to conduits). facing tax authorities around the world is perhaps bridging the gap Avoiding damage to the UK digital sector is the key policy objective between political rhetoric and legal reality and creating enforceable for the UK Government, as it strives to present itself as a global frameworks which offer the clarity, certainty and coherence essential leader in the digital arena and in the services it offers to help digital to long-term economic growth and stability. The OECD and the businesses grow faster and more efficiently. The appointments of G20 recognise this task is highly complex when it comes to the Jacky Wright (previously Corporate Vice President, Core Platform digital economy. Engineering at Microsoft Corporation) as New Chief Digital and The TFDE will provide an update on its work in 2019, as members Information Officer in 2017 and Professor Jason Furman (former work towards a consensus-based solution by 2020.

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Sandy Bhogal Panayiota Burquier Gibson, Dunn & Crutcher LLP Gibson, Dunn & Crutcher LLP Telephone House 2–4 Telephone House 2–4 Temple Avenue Temple Avenue London, EC4Y 0HB London, EC4Y 0HB United Kingdom United Kingdom

Tel: +44 20 7071 4266 Tel: +44 20 7071 4259 Email: [email protected] Email: [email protected] URL: www.gibsondunn.com URL: www.gibsondunn.com

Sandy Bhogal is partner in the London office of Gibson, Dunn & Panayiota Burquier is an English qualified associate in the London Crutcher and a member of the firm’s Tax Practice Group. office of Gibson, Dunn & Crutcher and a member of the firm’s Tax Practice Group. His experience ranges from general corporate tax advice to transactional advice on matters involving corporate finance & capital Ms. Burquier qualified as a solicitor in 2009 and has a range of markets, structured and asset finance, insurance and real estate. He transactional and advisory experience. Her practice focuses on also has significant experience with corporate tax planning and transfer advising clients on tax aspects of a wide variety of financing and pricing, as well as with advising on the development of domestic and corporate transactions, including mergers and acquisitions, corporate cross-border tax-efficient structures. He also assists clients with tax restructurings, accessing capital markets and finance. Ms. authority enquiries, wider tax risk management and multi-lateral tax Burquier also advises on real estate and investment fund transactions. controversies. Prior to joining Gibson Dunn, Sandy was head of tax at Mayer Brown, and prior to that was associated with Ernst & Young LLP and with a leading international legal practice.

Gibson, Dunn & Crutcher LLP is a leading international law firm. Consistently ranking among the world’s top law firms in industry surveys and major publications, Gibson Dunn is distinctively positioned in today’s global marketplace with more than 1,250 lawyers and 20 offices, including Beijing, Brussels, Century City, Dallas, Denver, Dubai, Frankfurt, , Houston, London, Los Angeles, Munich, New York, Orange County, Palo Alto, Paris, San Francisco, São Paulo, Singapore, and Washington, D.C. For more information on Gibson Dunn, please visit our website, www.gibsondunn.com.

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Albania Genc Boga

Boga & Associates Alketa Uruçi

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

1.1 How many income tax treaties are currently in force in your jurisdiction? VAT was first introduced in 1995. In 2015, the legislation was harmonised with the EU Directive on VAT. The standard rate of VAT is 20%, which applies to all persons (companies and Albania has concluded tax treaties with 41 countries, 40 of which entrepreneurs) having an annual turnover exceeding ALL 2,000,000 are currently in force. (approx. EUR 15,800). Exceptionally, persons carrying out certain specific categories of activity (such as lawyers, notaries, architects, 1.2 Do they generally follow the OECD Model Convention auditors, doctors, accountants and similar professions) are VAT or another model? taxpayers irrespective of their annual turnover (i.e. there is no VAT threshold). Only accommodation in tourism facilities is subject to Albanian tax treaties follow the OECD model. a reduced rate of 6%. of goods, goods in passenger baggage, the international 1.3 Do treaties have to be incorporated into domestic law transport of goods and passengers and related services, and services before they take effect? to international intra-governmental organisations, are subject to VAT at 0% (benefitting from VAT exemption but with a right of The Albanian Constitution requires treaties to be ratified by deduction). Parliament. 2.3 Is VAT (or any similar tax) charged on all transactions 1.4 Do they generally incorporate anti-treaty shopping or are there any relevant exclusions? rules (or “limitation on benefits” articles)? VAT regulations provide for supplies exempt from VAT without a The treaties do not incorporate anti-treaty shopping rules. right of deduction. The most important are as follows: ■ Lease and sale of land. 1.5 Are treaties overridden by any rules of domestic ■ Sale of buildings, unless the seller opts for VAT applicability. law (whether existing when the treaty takes effect or ■ Long lease of buildings (when the lease duration exceeds two introduced subsequently)? months), unless the lessor opts for VAT applicability. ■ Financial services. A treaty prevails over domestic law regardless of whether ■ Certain services rendered by not-for-profit organisations. the domestic legislation existed previously or is introduced ■ Educational services rendered by private and public subsequently. educational institutions. ■ Postal services. 1.6 What is the test in domestic law for determining the ■ Materials used for the production and packaging of medicines. residence of a company? ■ Supply of newspapers, magazines and books of any kind. Entities that are established in Albania or have their place of ■ Supply of advertising in electronic and written media but only when the advertising services are provided directly from effective management in Albania are considered resident. the media (and not through intermediaries). ■ Supply of services performed outside Albania by a taxable 2 Transaction Taxes person whose place of activity or residence is in Albania. ■ Supply of services relating to gambling activities, casinos and hippodromes. 2.1 Are there any documentary taxes in your jurisdiction?

No, there are no documentary taxes in Albania.

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will be considered deductible up to 30% of EBITDA (Earnings 2.4 Is it always fully recoverable by all businesses? If not, Before Interest, Tax, Depreciation and Amortisation). The taxpayer what are the relevant restrictions? has the right to carry forward the non-deducted part of the interest and claim its tax deductibility in the subsequent periods, except Generally, taxpayers registered for VAT are entitled to recover when the taxpayer’s ownership has changed by more than 50%. the input VAT, provided that the VAT is charged in relation to their taxable activity. VAT cannot be reclaimed on recreation and accommodation expenses, passenger vehicles, fuel under certain 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? limits, or any expenses related to the above-mentioned expenses.

Albania There is no such provision in Albanian legislation. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? There is no VAT grouping available in Albania. The debt-to-equity ratio is calculated without taking into consideration the source of the financing or relevant guarantees. 2.6 Are there any other transaction taxes payable by With regards to net interest expense as a percentage of EBITDA, companies? there are no explicit rules stipulating the inclusion of third-party loans in the calculation. There is a fee on the transfer of an ownership right on real estate, payable by legal entities in case of sale or donation of real estate. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- 2.7 Are there any other indirect taxes of which we should resident? be aware? Interest in excess of the annual average bank interest rate is non- Except for VAT and , carbon and circulation taxes are levied deductible for tax purposes. on the production and importation of certain combustible goods (including fuel) in Albania. 3.8 Is there any withholding tax on property rental payments made to non-residents? 3 Cross-border Payments Property rental payments made to non-residents are subject to a final withholding tax at a rate of 15%, unless a double tax treaty 3.1 Is any withholding tax imposed on dividends paid by provides for a lower rate. a locally resident company to a non-resident?

Dividends and profit distribution paid to non-residents are subject to 3.9 Does your jurisdiction have transfer pricing rules? a final withholding tax at a rate of 15%, unless a double tax treaty provides for a lower rate. The recently changed legislation on transfer pricing is based on the Transfer Pricing Guidelines 2010 of the Organisation for Economic Co-operation and Development (OECD). However, in case of 3.2 Would there be any withholding tax on royalties paid conflicts between the OECD Guidelines and provisions of the Albanian by a local company to a non-resident? legislation on this matter, the local legislation provisions will prevail.

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

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In addition, in case the tax authorities of a country with which Albania has signed a double tax treaty make a transfer pricing 4.7 Are companies subject to any significant taxes not adjustment that results in the taxation of the profit for which the covered elsewhere in this chapter – e.g. tax on the occupation of property? taxpayer has already been taxed in Albania, the Albanian taxpayer may submit a written request to the General Tax Directorate on the respective adjustment to be made to the profit tax in Albania. The is levied annually on all residents and non-residents requested transfer pricing adjustments may be refused or granted who own agricultural land, buildings and “terrain” in Albania. fully/partially within three months of the date of the submission of Agricultural land is classified into 10 groups and is taxed at rates the request by the taxpayer. varying from ALL 700 to ALL 5,600 per hectare. Buildings, from 1 April 2018, are taxed based on the market value of the building

(previously, a fixed amount for each square metre). Albania 4 Tax on Business Operations: General The tax rate varies: from 0.05% for buildings used as a dwelling: to 0.2% for buildings used for economic activity; and to 30% of the respective tax amount for the entire building, if the developer 4.1 What is the headline rate of tax on corporate profits? failed to complete the construction within the deadline set forth in the construction permit. The tax on buildings is paid each month. As of 1 January 2019, profits are taxed at a rate of 15% for the taxpayers having a total annual income higher than ALL “Terrain” (defined in law as land available for building upon) is 2 14,000,000, whereas the taxpayers having a total annual income taxed at ALL 0.14 to ALL 20 per m . from ALL 5,000,000 up to ALL 14,000,000 will be subject to a The local municipality may modify the tax rates set by law. In profit tax rate of 5%. addition, it decides on the payment schedule of the tax and on reductions for immediate payment of tax.

4.2 Is the tax base accounting profit subject to Albanian legislation also provides for the tax on impact on adjustments, or something else? infrastructure from new constructions (infrastructure tax). In cases of residence or business units, the tax varies from 4% to 8% Yes, the taxable profit that results from the financial statements of the sale price of such units. For constructions in the field of prepared under and pursuant to accounting standards is adjusted as tourism, industry or for public use, the tax varies from 2% to 4% in provided for and required by the tax regulation. Tirana and from 1% to 3% in other municipalities. Exceptionally, for infrastructure projects such as the construction of national roads, ports, airports, tunnels, dams or, energy infrastructure, the 4.3 If the tax base is accounting profit subject to tax is 0.1% of the investment value (which includes the value of adjustments, what are the main adjustments? equipment and machinery for the project), but not less than the cost of rehabilitating any damaged infrastructure to be replaced. The main adjustments consist of the following: depreciation In addition, there are a variety of national and local taxes. These allowances; restrictions related to thin capitalisation of loan include hotel tax, royalty tax, advertising tax, etc. interests and other expenses (e.g. thresholds of tax deductions for representation and sponsorship expenses); bad-debt requirements; penalties; provisions (except for banks and insurance companies); 5 Capital Gains and impairment and revaluation of assets, etc.

5.1 Is there a special set of rules for taxing capital gains 4.4 Are there any tax grouping rules? Do these allow and losses? for relief in your jurisdiction for losses of overseas subsidiaries? There are no specific capital gains taxes for corporate income tax subjects. As a general rule, capital gains are included in the business No, there are no tax grouping rules. profit of the entity and are taxed at the same rate of 15%.

4.5 Do tax losses survive a change of ownership? 5.2 Is there a participation exemption for capital gains? Losses are carried forward for three consecutive years (no carry Tax legislation does not provide for a participation exemption for back is allowed). However, if, during a taxable period, direct and/ capital gains. or indirect ownership of stock capital or voting rights of a person changes by more than 50% in value or number, the losses incurred in the previous years cannot be used against the profit of the year. 5.3 Is there any special relief for reinvestment?

4.6 Is tax imposed at a different rate upon distributed, as There is no rollover relief available in Albania, or any other relief. opposed to retained, profits? 5.4 Does your jurisdiction impose withholding tax on the No, there is no difference in this regard. proceeds of selling a direct or indirect interest in local assets/shares?

There is no withholding tax on the proceeds of the sale of interest in assets/shares, but the seller must declare and pay the tax on income generated from the transaction.

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6 Local Branch or Subsidiary? 8 Taxation of Commercial Real Estate

6.1 What taxes (e.g. capital duty) would be imposed upon 8.1 Are non-residents taxed on the disposal of the formation of a subsidiary? commercial real estate in your jurisdiction?

There are no taxes payable upon the formation of subsidiaries. Non-residents are taxed on the disposal of real estate in Albania, at a rate of 15% of the realised profit.

6.2 Is there a difference between the taxation of a local

Albania subsidiary and a local branch of a non-resident 8.2 Does your jurisdiction impose tax on the transfer of company (for example, a branch profits tax)? an indirect interest in commercial real estate in your jurisdiction? There are no such differences in taxes or fees specifically designed for subsidiaries. The of branches is subject to profit Current legislation does not provide for indirect interest taxation. tax at the same rate (15%) as any Albanian entity.

8.3 Does your jurisdiction have a special tax regime 6.3 How would the taxable profits of a local branch be for Real Estate Investment Trusts (REITs) or their determined in its jurisdiction? equivalent?

Branches are taxed only on taxable income from an Albanian Under current legislation, there is no special tax regime for REITs or source. Taxable income is determined in the same manner as for their equivalent in Albania. resident companies. 9 Anti-avoidance and Compliance 6.4 Would a branch benefit from double tax relief in its jurisdiction? 9.1 Does your jurisdiction have a general anti-avoidance Branches are considered permanent establishments; hence they may or anti-abuse rule? benefit from double tax relief. Albanian fiscal legislation does not provide for a general anti- avoidance rule. However, it gives the tax authorities the right to use 6.5 Would any withholding tax or other similar tax be alternative methods of when verifying the lack of imposed as the result of a remittance of profits by the economic substance in a transaction. branch?

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

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

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

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

No, there are no “controlled foreign company” rules.

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

10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base There are no preferential regimes in Albania. Erosion and Profit Shifting (BEPS)? 11 Taxing the Digital Economy The Albanian Government has indicated that the additional thin capitalisation rule, i.e. net interest expense to EBIDTA, will be introduced in response to OECD’s project (BEPS). 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture Albania digital presence? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? No, there is no action to tax digital activities in Albania. Neither is there an initiative to tax the digital presence. Except from the above-mentioned rule, there are no publicly expressed intentions to adopt any other legislation against BEPS, 11.2 Does your jurisdiction support the European either within or beyond the OECD’s recommendations. Commission’s interim proposal for a digital services tax?

10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? There is no initiative to adopt any act that regulates such areas of law. There is no support for Country-by-Country Reporting in Albania.

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Genc Boga Alketa Uruçi Boga & Associates Boga & Associates 40/3 Ibrahim Rugova Str. 40/3 Ibrahim Rugova Str. 1019, Tirana 1019, Tirana Albania Albania

Tel: +355 4 225 1050 Tel: +355 4 225 1050 Email: [email protected] Email: [email protected] URL: www.bogalaw.com URL: www.bogalaw.com Albania Genc Boga is the founder and Managing Partner of Boga & Alketa Uruçi is a Partner at Boga & Associates, which she joined in Associates, which operates in the jurisdictions of both Albania and 1999. Kosovo. Mr. Boga’s fields of expertise include business and company Alketa practises in the areas of concession and energy, where law, concession law, energy law, corporate law, banking and finance, she manages energy assignments on regulatory, corporate and taxation, litigation, competition law, real estate, environment protection commercial matters, including international arbitration proceedings. law, etc. She has extensive experience in providing regular tax advice to Mr. Boga has solid expertise as an advisor to banks, financial commercial companies in corporate tax, VAT and employee taxation institutions and international investors operating in major projects in matters, and is involved in the management of several tax aspects of energy, infrastructure and real estate. Thanks to his experience, Boga mergers and acquisitions transactions, tax planning and restructuring. & Associates is retained as a legal advisor on a regular basis by the most important financial institutions and foreign investors. In addition, Alketa has performed a number of tax and legal due diligence assignments and managed legal consultancy to international He regularly advises EBRD, IFC and World Bank in various investment clients. She has also assisted foreign clients during international projects in Albania and Kosovo. arbitration proceedings and is active as a tax litigator in the Albanian Mr. Boga is continuously ranked as a leading lawyer in Albania by courts. Alketa chairs the tax and legal committee of the American major legal directories: Chambers Global; Chambers Europe; The Chamber of Commerce in Albania. Legal 500; and IFLR1000. Alketa is fluent in English and Italian. He is fluent in English, French and Italian.

Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina) offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga, was also the Senior Partner/Managing Partner of KPMG Albania. The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment. The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods. The firm is continuously ranked as a “top tier firm” by major directories: Chambers Europe; The Legal 500; and IFLR1000.

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Argentina Walter C. Keiniger

Marval, O’Farrell & Mairal María Inés Brandt

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? In general terms, they are not. Under section 75:22 of the Argentine Federal Constitution, international treaties prevail over domestic Argentina has 20 income tax treaties in force and has signed income law. Nevertheless, the economic reality principle (sections 1 and tax treaties with the following countries: Australia; Belgium; 2 of the Tax Procedure Law), which is deemed to be a general anti- Bolivia; Brazil; Canada; Chile; Denmark; Finland; France; avoidance rule, has been invoked by the Tax Authority and courts to Germany; Italy; Mexico; the Netherlands; Norway; Russia; Spain; deny treaty benefits to specific cases and/or arrangements. Sweden; Switzerland; the United Kingdom; and Uruguay. Recently, Argentina signed tax treaties with the United Arab Emirates and Qatar but they are not in force yet. 1.6 What is the test in domestic law for determining the residence of a company?

1.2 Do they generally follow the OECD Model Convention In principle, the place of incorporation (i.e., a company set up in or another model? Argentina according to Argentine law is deemed to be an Argentine tax resident). Most of the income tax treaties signed by Argentina follow the OECD Model Convention and, in certain specific aspects, the UN Model Convention. The treaty signed with Bolivia follows the 2 Transaction Taxes “Pacto Andino” Model Convention.

2.1 Are there any documentary taxes in your jurisdiction? 1.3 Do treaties have to be incorporated into domestic law before they take effect? Yes. Stamp tax is a local tax levied on public or private instruments, executed in Argentina or, if executed abroad, to the extent that those To take effect, treaties should be approved according to the process instruments are deemed to have effects in one or more relevant required by the Argentine Constitution. Under section 75:22 of the jurisdictions within Argentina. In general, the tax rate is around 1% Argentine Constitution, international treaties prevail over domestic and this tax is calculated on the economic value of the agreement law. (i.e., purchase price, fees and royalties).

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

Traditionally, tax treaties signed by Argentina do not include anti- Yes. Argentina applies value added tax (“VAT”) at a general rate treaty shopping rules. However, most of the tax treaties include the of 21%. beneficial owner requirement for passive income such as dividends, royalties and interest. Moreover, most recent treaties signed by Argentina (e.g., tax treaties with Chile and Mexico) include 2.3 Is VAT (or any similar tax) charged on all transactions general anti-treaty shopping rules. On the other hand, Argentina or are there any relevant exclusions? has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting VAT applies to the sale of goods, the provision of services and the (“BEPS”), which – once in effect – will incorporate different import of goods in Argentina. Under certain circumstances, services anti-treaty shopping rules to Argentina’s treaty network. Under rendered outside Argentina that are effectively used or exploited in such Multilateral Convention, Argentina has adopted a simplified Argentina (including digital services), usually called “importation limitation of benefits clause (“LoB”) and the principal purpose test of services”, are deemed rendered in Argentina and thus subject clause (“PPT”). to VAT. Exports of goods are not subject to VAT and services

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rendered in Argentina that are effectively used or exploited outside of Argentina are not subject to VAT. 2.7 Are there any other indirect taxes of which we should be aware?

2.4 Is it always fully recoverable by all businesses? If not, Yes. The excise tax (“impuestos internos”) is a tax that applies to a what are the relevant restrictions? wide variety of items sold in Argentina (not on exports), principally on tobacco, wines, soft drinks, gasoline, lubricants, insurance VAT is paid at each stage of the production or distribution of goods premiums, automobile, mobile services, perfumes, jewellery, and or services based on the value added during each of the stages. This precious stones. means that the tax does not have a cumulative effect. The tax is levied The bases of the assessment and tax rate depend on each product on the difference between the so-called “tax debit” and “tax credit”.

Argentina (for example, for alcoholic drinks the nominal rate is between 20% The difference between “tax debit” and “tax credit” if positive, and 26%, for beers the nominal rate is between 8% and 14% and for constitutes the amount to be paid to the Tax Authority. The current jewellery and precious stones the nominal rate is 20%). general rate for this tax is 21%. However, sales and imports of capital goods are subject to VAT at a lower tax rate of 10.5%. Under a recent tax reform, VAT Law provides a system to reimburse 3 Cross-border Payments VAT credits resulting from the purchase, manufacture, preparation or import of fixed assets (other than automobiles) that remain as a VAT credit for the taxpayer after six months. The regulations to establish the 3.1 Is any withholding tax imposed on dividends paid by method, terms and conditions for this reimbursement are still pending. a locally resident company to a non-resident? The reimbursement will be subject to the condition that the VAT Yes. According to a recent tax reform, the income accrued for fiscal credits would have normally been absorbed within a 60-month years 2018 and 2019 will be subject to income tax at a rate of 30%. period, through VAT payable for local transactions or VAT Such rate will be further reduced to 25% for fiscal years beginning reimbursements related to exports. If such condition is complied on or after January 1, 2020. The aforementioned tax reform also with, the reimbursement will be considered definitive (i.e., the introduced a withholding on dividend distributions and branch profit tax authorities will not make a request to be repaid the reimbursed remittances at rates of 7% (while the applicable corporate tax rate amounts). Otherwise, the taxpayer will be required to reimburse to is 30%) and 13% (once the applicable corporate rate is reduced to the tax authorities with the amount that did not meet the condition, 25%). Such rates could be reduced under certain treaties to avoid plus interest. double taxation executed by Argentina. Exports of goods and services are exempt from VAT. A reimbursement regime is in place for VAT credits related to the activity. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

2.5 Does your jurisdiction permit VAT grouping and, if so, Yes. Royalty payments will be subject to withholding tax. The is it “establishment only” VAT grouping, such as that effective withholding rate varies, depending on the type of royalty applied by Sweden in the Skandia case? that is being paid. For example, royalties for software licences are subject to an effective 31.5% rate, payments for trademark licences This is not applicable in Argentina. are subject to an effective 28% rate, etc. In general, double tax treaties executed by Argentina reduce such rates. 2.6 Are there any other transaction taxes payable by companies? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? Yes. : This tax is a local tax levied on gross income. Each Yes. The general withholding rate is 35%. A reduced 15.05% of the provinces and the City of Buenos Aires apply different tax withholding rate is applicable if: (i) the borrower is a local financial rates to different activities. The tax is levied on the amount of gross institution governed by Law N° 21,526; (ii) the lender is a bank or income resulting from business activities carried out within the a financial institution not located in a low tax jurisdiction; and (iii) respective local jurisdictions. The provinces and the City of Buenos the transaction involves seller’s financing of depreciable movable Aires have entered into an agreement to prevent double taxation on property (except automobiles). In general, double tax treaties activities carried out in more than one jurisdiction. executed by Argentina reduce such rates. Tax on debits and credits: This tax is levied on debits and credits in Argentine bank accounts and on other transactions that, due to their 3.4 Would relief for interest so paid be restricted by special nature and characteristics, are similar or could be used in reference to “thin capitalisation” rules? substitution for a bank account, such as payments on behalf of, or in the name of, third parties. Transfers and deliveries of funds also fall The tax reform introduced by Law N° 27,430 has also replaced within the scope of this tax, regardless of the person or entity that the thin capitalisation rules, although many aspects still need to be performs them, when those transactions are made through organised addressed by regulations. The current rules only apply with respect payment systems as a substitute for bank accounts. and to “financial debt” (debt incurred to acquire assets or services regulations allow for several exemptions to this tax. The general related to the operation of the company is excluded) entered with rate of the tax is 0.6% on each credit and debit. An increased rate related parties, whether resident in Argentina or not. The deduction of 1.2% applies in cases in which there has been a substitution of a of this type of interest and negative foreign exchange differentials is bank account. 33% of the tax on debits and credits paid can be used limited to a fixed amount per year which will be determined by the as a credit to offset income tax liabilities. Executive Branch, or 30% of the taxpayer’s taxable income before

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interest and depreciation, whichever limit is higher. The new rules 25%). Such rates could be reduced under certain treaties to avoid provide for a carry back of three years and a carry forward of five double taxation executed by Argentina. years to allocate interest that was not deductible when accrued. The withholding on dividends applies when the dividend is paid: Moreover, a company may avoid the applicable limitations if it can (i) to an Argentine resident individual; and (ii) to a non-Argentine demonstrate that the annual amount of interest related to financial resident (either individual or a legal entity). debt, as compared to its taxable income, is within or below the ratio of indebtedness with third parties determined by the economic group to which the company belongs. Furthermore, interest may 4.2 Is the tax base accounting profit subject to adjustments, or something else? be deducted without limitations if the company incurring the debt can demonstrate that the beneficiary of the interest paid the Yes. The tax base is the accounting profit subject to adjustments.

corresponding income tax for those benefits. Argentina

3.5 If so, is there a “safe harbour” by reference to which 4.3 If the tax base is accounting profit subject to tax relief is assured? adjustments, what are the main adjustments?

Please refer to our answer to question 3.4. The main adjustments are related to valuation of assets, depreciations, uncollectable credits, among others.

3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas subsidiaries? There are no specific provisions in the income tax law; therefore, general rules as described in the answer to question 3.4, would apply. There are no tax grouping rules.

3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- 4.5 Do tax losses survive a change of ownership? resident? Yes, although such change of ownership might preclude the transfer No, there are not. of tax losses if a tax-free reorganisation takes place within a two- year term of such change of ownership.

3.8 Is there any withholding tax on property rental payments made to non-residents? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? Rental payments are subject to an effective income tax withholding of 21%. Such rate could be reduced under certain treaties to avoid Please see our answer to question 4.1. double taxation executed by Argentina. 4.7 Are companies subject to any significant taxes not 3.9 Does your jurisdiction have transfer pricing rules? covered elsewhere in this chapter – e.g. tax on the occupation of property? Yes. In general these rules follow the OECD Guidelines. Transfer Personal assets tax (“”) applies on shares and other equity pricing practices take place when an Argentine company enters into participations in local companies and is paid by the local company business transactions with: (i) a related party located abroad and itself. The applicable rate is 0.25% on the company’s net worth or the prices agreed in such transactions do not reflect normal market market value if the company is listed. practices, i.e., they are not at arm’s length; or (ii) a non-related party located in a low-tax or non-cooperative jurisdiction, as defined by the income tax law. 5 Capital Gains Export and import operations with an international intermediary are subject to additional scrutiny by tax authorities as the taxpayers must show that the intermediary’s fee is reasonable considering its 5.1 Is there a special set of rules for taxing capital gains and losses? functions, risks and assets involved in the transactions.

Capital gains obtained by Argentine companies are treated as 4 Tax on Business Operations: General ordinary income. If a non-Argentine resident sells shares issued by an Argentine company, the gain – if any – is subject to a 15% tax rate calculated on the actual net gain or a presumed net gain of 90% 4.1 What is the headline rate of tax on corporate profits? of the gross amount of the transaction. Losses from the sale of shares may be set off only against profits of According to a recent tax reform, the income accrued for fiscal the same kind and the same source. years 2018 and 2019 will be subject to income tax at a rate of 30%. Such rate will be further reduced to 25% for fiscal years beginning The results obtained by Argentine individuals from the sale, transfer on or after January 1, 2020. The aforementioned tax reform also or disposition of shares, securities representing shares and certificates introduced a withholding on dividend distributions and branch profit of deposit of shares that are carried out through stock exchanges or remittances at rates of 7% (while the applicable corporate tax rate stock markets authorised by the Argentine Securities and Exchange is 30%) and 13% (once the applicable corporate rate is reduced to Commission, will be exempt. The foregoing exemption will also be

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applicable to foreign beneficiaries to the extent that said beneficiaries (2) The shares, participations or rights of the foreign entity being do not reside in, and the funds do not come from, non-cooperative sold represent at least 10% of the equity of that entity, at the jurisdictions as defined by the income tax law. time of their disposal or in any of the previous 12 months.

5.2 Is there a participation exemption for capital gains? 6 Local Branch or Subsidiary?

There is no participation exemption for capital gains obtained by Argentine companies. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

Argentina 5.3 Is there any special relief for reinvestment? No specific tax would be imposed upon the formation of a branch or a subsidiary. Taxation on capital gains obtained upon the transfer of land or buildings which have been held as fixed assets (“bienes de uso”) for 6.2 Is there a difference between the taxation of a local a minimum of two years may be deferred to the extent that the whole subsidiary and a local branch of a non-resident amount obtained upon the transfer is reinvested in compliance with company (for example, a branch profits tax)? the following requirements: (i) the total amount arising from the disposal must be reinvested No, except for certain specific aspects (e.g., a branch cannot be part within one year in assets of a similar nature; or of a tax-free merger, while a subsidiary can). Taxation of a local (ii) the total amount arising from the disposal must be reinvested branch and a subsidiary is very similar. Please see the answer to in the construction of a new building or the refurbishment of question 4.1. an existing building, and the construction or refurbishment works must commence within one year as from the disposal and the works must be completed within four years. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? A rollover alternative is also available for depreciable assets. The taxpayer may defer the capital gains arising from the sale or transfer of depreciable assets if: The tax base is the accounting profit subject to adjustments, as in the case of a subsidiary. Please see the answer to question 4.2. (i) the taxpayer invested in a substitute asset; and (ii) the sale or transfer of the fixed asset and the acquisition of the new one is done within a 12-month period. 6.4 Would a branch benefit from double tax relief in its jurisdiction? If the taxpayer defers the capital gains, the tax basis of the substitute asset will be reduced by the capital gains so reinvested. Yes. A local branch is deemed as an Argentine resident for tax purposes. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? According to the amendments introduced by Law N° 27,430, the indirect disposal of assets in Argentina was included as a taxable event under certain conditions. A presumption of income from an Remittance of profits by a local branch is treated similarly toa Argentine source was introduced into income tax law when non- dividend distribution by a subsidiary. Please see the answer to residents transfer shares and participations of foreign entities whose question 4.1. underlying assets are fully or partly located in Argentina. This new concept is in the article following Article 13 of income tax law and is 7 Overseas Profits entitled “indirect disposal of assets located in the national territory”. This concept establishes that when a non-resident transfers shares, quotas, participations and other rights representative of the capital 7.1 Does your jurisdiction tax profits earned in overseas or equity of an entity incorporated, domiciled or located abroad, the branches? resulting income will be considered as Argentine source income as long as the following conditions are met: Yes. The income obtained by overseas branches is taxed for the resident parent company in Argentina as foreign-source income. (1) At least 30% of the value of the shares, participations or rights of the foreign entity, at the time of sale or in any of the The profits of foreign permanent establishments are attributed previous 12 months, derives from assets that the entity owns to the owner even if such profits have not been distributed or directly or indirectly in Argentina. remitted. The same rule applies to the attribution of tax losses, Argentine assets will be valued at their fair market value and except with respect to losses derived from the sale of securities will include: or interest or units in foreign mutual funds, which can be offset only from foreign source income obtained by the permanent (i) shares, rights, quotas or other forms of ownership, control or participation in the profits of a company, fund, establishment from the same type of transactions. According to trust or other entity incorporated in Argentina; income tax law, foreign taxes paid will be allowed as a tax credit against the Argentine tax liability to the extent the foreign tax does (ii) permanent establishments in Argentina belonging to a non-resident person or entity; and not exceed the Argentine tax. (iii) other assets of any nature located in Argentina or rights over them.

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medium- and low-income populations; (ii) mortgage loans; and/ 7.2 Is tax imposed on the receipt of dividends by a local or (iii) mortgage securities, distributions originated in rental or the company from a non-resident company? result of the sale of the assets.

Yes. The receipt of dividends by a local company from a non- resident company is subject to income tax as foreign source income. 9 Anti-avoidance and Compliance According to income tax law, foreign taxes paid will be allowed as a tax credit against the Argentine tax liability to the extent the foreign 9.1 Does your jurisdiction have a general anti-avoidance tax does not exceed the Argentine tax. or anti-abuse rule?

7.3 Does your jurisdiction have “controlled foreign Yes. The general anti-avoidance rule is the economic reality Argentina company” rules and, if so, when do these apply? principle established the Tax Procedure Law.

Yes. CFC rules apply to foreign companies that have “fiscal 9.2 Is there a requirement to make special disclosure of personality” (this is, companies that are treated as local taxpayers in avoidance schemes? the jurisdictions where they are residents) in the jurisdiction where the company is located and to the extent certain conditions are met, No, there is not. including the following: (i) the resident taxpayer (together with related parties, if applicable) owns at least a 50% participation in the foreign entity; (ii) the foreign entity “does not have organization of 9.3 Does your jurisdiction have rules which target not material and personal resources to carry out its activity” or obtains only taxpayers engaging in tax avoidance but also at least 50% of passive income, or its revenues constitute deductible anyone who promotes, enables or facilitates the tax expenses for resident related parties; and (iii) the income tax paid avoidance? abroad is lower than 75% of the tax that would have corresponded with Argentine income tax rules. If such conditions are met, the Yes. Pursuant to section 8 of the Tax Procedure Law, joint and Argentine resident shareholder should recognise the income several liability for tax debts and penalties of a taxpayer is extended obtained by the foreign company as if the foreign company did not to those persons who “through their fraud or negligence, facilitate exist. the tax evasion”.

9.4 Does your jurisdiction encourage “co-operative 8 Taxation of Commercial Real Estate compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? There is no specific provision regarding “cooperative compliance rules”. The income arising from the sale of the real estate obtained by a non- Argentine resident is subject to a withholding. The corresponding 10 BEPS and Tax Competition withholding rate is 17.5% (the approximate percentage gross-up being 21.21%), since the law presumes that 50% of the amount paid abroad constitutes net income for the foreign beneficiary. By 10.1 Has your jurisdiction introduced any legislation applying a tax rate of 35% to that amount, the withholding rate in response to the OECD’s project targeting Base becomes, in effect, 17.5%. Erosion and Profit Shifting (BEPS)? The non-resident may opt to pay tax at the rate of 35% on net income, instead of the presumed net income. Net income is On December 29, 2017, Argentina published Law N° 27,430 in calculated by deducting the actual expenses incurred in Argentina the Official Gazette. Law N° 27,430 contains the following BEPS for obtaining the taxable income (i.e., the acquisition cost of the real measures: estate) from the gross amount received. ■ VAT on digital services and income tax on cryptocurrencies – BEPS Action 1. ■ New CFC rules included in the income tax law – BEPS 8.2 Does your jurisdiction impose tax on the transfer of Action 3. an indirect interest in commercial real estate in your jurisdiction? ■ Modification of the thin capitalisation rules – BEPS Action 4. ■ Anti-abuse clause included in recent Double Taxation Treaties Yes. Please see the answer to question 5.4. executed by Argentina (Spain, Chile, Mexico, Brazil) – BEPS Action 6. ■ New definition of Permanent Establishment – BEPS Action 8.3 Does your jurisdiction have a special tax regime 7. for Real Estate Investment Trusts (REITs) or their equivalent? ■ Regulation of Joint Determination of Prices of International Operations – BEPS Actions 8–10. No. However, there is a specific regime to encourage the ■ Sanctions related to Country-by-Country (“CbC”) Reporting – BEPS Action 13. development of housing construction for medium- and low-income population, mutual funds or financial trusts, whose investment ■ Regulation of the Mutual Agreement Procedure – BEPS objectives are: (i) real estate developments for social housing of Action 14.

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■ Signature of the Multilateral Convention to Implement Tax Argentine residents abroad whose use or effective exploitation is Treaty Related Measures to Prevent Base Erosion and Profit carried out in Argentina, as long as the customer is not subject to Shifting – BEPS Action 15. the tax for other taxable events and does not assume the quality of registered taxpayer. In this respect, a definition of the concept of 10.2 Does your jurisdiction intend to adopt any legislation digital services is introduced as subparagraph “m” of paragraph 21 to tackle BEPS which goes beyond what is of subparagraph “e” of Article 3. Digital services will be understood, recommended in the OECD’s BEPS reports? whatever the device used for download, display or use is, as those carried out through the internet or any adaptation or application of No, it does not. protocols, platforms or technology used by the internet or other network through which equivalent services are provided that,

Argentina by their nature, are basically computerised and require minimum 10.3 Does your jurisdiction support public Country-by- human intervention. Various cases are also established in which Country Reporting (CBCR)? digital services are considered.

On June 30, 2016, Argentina signed the Multilateral Competent Authority Agreement on the Exchange of CbC Reports which 11.2 Does your jurisdiction support the European establishes a roadmap to automatically exchange CbC Reports Commission’s interim proposal for a digital services between nations. General Resolution 4130-E implemented a tax? supplementary information regime applicable to the local entity of an MNE Group regardless of whether such MNE Group is subject to This is not implemented. CbC reporting, i.e., regardless of whether the €750,000.00 threshold is exceeded. The following information must be provided annually Acknowledgment to the AFIP. The authors would like to thank María Soledad González for her invaluable assistance in the preparation of this chapter. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? María Soledad Gonzalez joined Marval, O’Farrell & Mairal in 2003 and is currently a senior associate of the tax department. Before No, it does not. joining the firm, she worked at Dr. Duloup’s Law Firm, as an intern and paralegal. She graduated from the Universidad de Buenos Aires with a Law Degree in 2002 and later completed an International 11 Taxing the Digital Economy Program in Tax Law at the Universidad Torcuato Di Tella. María Soledad is a member of the Asociación Argentina de Estudios Fiscales, where she actively participates on different research 11.1 Has your jurisdiction taken any unilateral action to tax commissions. digital activities or to expand the tax base to capture digital presence? Tel: +54 11 4310 0100 / Email: [email protected]

Not regarding income tax. Unilateral actions have been adopted regarding VAT. Article 1 of the Law on VAT introduces a new taxable event related to the provision of digital services by non-

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Walter C. Keiniger María Inés Brandt Marval, O’Farrell & Mairal Marval, O’Farrell & Mairal Leandro N. Alem 882 Leandro N. Alem 882 Buenos Aires Buenos Aires Argentina Argentina

Tel: +54 11 4310 0100 Tel: +54 11 4310 0100 Email: [email protected] Email: [email protected] URL: www.marval.com URL: www.marval.com

Walter C. Keiniger joined Marval, O’Farrell & Mairal in 1999 and is a María Inés Brandt is a partner of Marval, O’Farrell & Mairal Tax Argentina partner in the tax department. He has provided advice to local and Department with more than 20 years’ experience in tax matters. She foreign companies in the design, planning and organisation of a variety focuses on tax advice and planning and has outstanding expertise of transactions, including loans, project financing, securitisation of in the tax aspects of large, challenging corporate and finance assets, IPOs, etc. transactions, including the design, planning and organisation of tax- efficient transactions. Before joining Marval, she was a founding From 1995 to 1999, he worked at Gutman Tax Law Firm. He graduated partner at Tanoira Cassagne Abogados and a partner at Estudio as a lawyer specialising in Tax Law from the Universidad de Buenos Beccar Varela. Aires in 1994 and in 1997 he earned the degree of Tax Specialist from the same university. In 1998, he took a course specialising in Tax Law María Inés is recognised as a leading tax lawyer by all the key legal at the University of Salamanca, Spain. In 2003, he obtained a Master publications, including Chambers Global, Chambers Latin America, of Laws in Taxation from the University of Florida, USA. The Legal 500 and LL250. He has written articles and has been a speaker both nationally and She is a member of the Argentine Fiscal Association, regularly internationally. He has also given classes in several universities in contributes articles to well-known legal publications and has been Argentina and the USA. invited as a speaker at various conferences She graduated with honours from the Universidad de Buenos Aires in 1993 and specialised in Tax Law in 1995 at the same university.

Marval’s tax department has an unrivalled range of expertise. Our team is equally strong in all types of advisory work, tax planning and transactional matters, as well as litigation before all levels of the courts. Our tax department is renowned for assisting clients with sophisticated tax structures, complex cross-border transactions and high-profile tax litigation. We also have unmatched experience advising clients on regional tax matters involving other Latin American jurisdictions. Our tax department works closely with the firm’s market-leading corporate, finance and capital markets departments, particularly in M&A and other transactions. Our tax practice covers a wide range of matters including: ■■ Comprehensive tax advisory service. ■■ Advising in domestic and international transactions. ■■ Tax aspects of M&A, corporate reorganisations, foreign investments and international financial transactions. ■■ Tax advisory and planning services for individuals. ■■ Representation of clients before the Argentine tax authorities. ■■ Tax litigation before all levels of the local courts, including the Argentine Supreme Court. ■■ Advising and representation before local courts regarding taxation.

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Australia Richard Hendriks

Greenwoods & Herbert Smith Freehills Cameron Blackwood

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Australia’s tax treaties traditionally did not incorporate anti-treaty shopping rules. However, limitation of benefits articles are included in some of Australia’s more recently negotiated treaties, including Australia has comprehensive income tax treaties with 45 countries, its treaties with the US, Japan and Germany. Other new treaties including the US, UK, most Western European countries, most East contain specific provisions within the dividend, interest, and royalty and South-East Asian countries and New Zealand. articles. In addition, Australia’s domestic general anti-avoidance Australia has also concluded Tax Information Exchange Agreements rules and the new diverted profits tax (see question 9.1 below) may with a number of countries, including many low-tax jurisdictions apply to prevent treaty shopping. such as the Cayman Islands. It is a signatory to the Multilateral Australia’s treaty with Germany includes a simplified anti-treaty Convention to Implement Tax Treaty Related Measures to Prevent shopping rule that incorporates a BEPS-style principal purpose test. Base Erosion and Profit Shifting (MLI), and to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (Common Reporting Standard or 1.5 Are treaties overridden by any rules of domestic CRS). Australia has entered into a “Model 1” intergovernmental law (whether existing when the treaty takes effect or agreement with the US and enacted domestic legislation to give introduced subsequently)? effect to the US Foreign Account Tax Compliance Act (FATCA). Yes, occasionally. The Agreements Act gives treaties the force of Australian law. To the extent that a treaty provision conflicts 1.2 Do they generally follow the OECD Model Convention with domestic legislation, the treaty provision takes precedence. or another model? However, specific overriding provisions found in the Agreements Act allow Australia’s general anti-avoidance rule to operate Australia’s income tax treaties generally follow the OECD model. unaffected by a treaty. However, the US treaty follows the US model and some differences exist in some other treaties. Australia’s treaties vary as to the allocation of rights to tax alienation of interests in land-rich entities. 1.6 What is the test in domestic law for determining the residence of a company? The US, UK, Finnish, New Zealand, Norwegian, Japanese, French, South African, Swiss and German treaties provide withholding concessions and exemptions for interest paid to unrelated A company is tax-resident in Australia if it is incorporated in financial institutions and dividends paid to holding companies Australia, or if it carries on business in Australia with central and significant corporate shareholders. For details, please see management and control in Australia or its voting power is questions 3.1 and 3.3. controlled by shareholders resident in Australia. Most of Australia’s tax treaties include a tie-breaker for dual residency, usually by Australia’s most recently signed double tax treaty – its treaty reference to the place of effective management, though this will be with Germany, signed in November 2015 – largely gives effect removed for some treaties pursuant to the MLI. to the OECD’s Base Erosion and Profit Shifting (BEPS) recommendations. The Tax Office has updated its guidance on the meaning of these tests in a recent ruling (TR2018/5), following 2016 Australian High Court decisions in Bywater Investments and Hua Wang Bank. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2 Transaction Taxes Treaties must be incorporated into Australia’s domestic law before they take effect. Each time a treaty is concluded, the International 2.1 Are there any documentary taxes in your jurisdiction? Tax Agreements Act 1953 (Agreements Act) is amended to give force of law to the treaty. Yes. is a documentary tax.

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Stamp duty is levied by the various Australian States and Territories. business entities if they are 90% commonly-owned. Both the head Although largely aligned, the duty regimes differ between the States office of a company and its branch office are treated as a single entity and Territories. for Australian GST purposes, although it is possible to register a Stamp duty is levied on transfers of interests in land (including on the branch as a separate taxpayer for GST purposes. A foreign company value of plant and equipment transferred with land), the creation of (whether or not it has an Australian branch) can join an Australian beneficial interests in land, transfers of shares and units in landholder GST group. entities, motor vehicle transfers and insurance contracts at rates of up to 7%. Victoria, New South Wales, South Australia, Tasmania and 2.6 Are there any other transaction taxes payable by Queensland have introduced a foreign purchaser surcharge of up to companies? 8% on foreign purchases of residential land; a similar surcharge is also proposed in Western Australia to commence on 1 January 2019. Various States impose minor licensing fees. Australia Queensland, Western Australia and the Northern Territory also levy duty on transfers of business assets such as goodwill. 2.7 Are there any other indirect taxes of which we should A nominal amount of duty also applies to some documents, e.g. trust be aware? deeds in New South Wales and Victoria. While stamp duty was historically a documentary tax, avoidance- Yes. Australia also imposes the following indirect taxes: type rules can also trigger duty if transactions are effected without Excise duty documents. Excise duty is levied on some goods manufactured in Australia, including alcohol, tobacco and petroleum. 2.2 Do you have Value Added Tax (or a similar tax)? If so, Land tax at what rate or rates? Land tax is imposed by each State and the Australian Capital Territory on the value of commercial real estate. Agricultural land is Goods and services tax (GST) is imposed on supplies that are excluded. Broadly, the liability for land tax rests with the landowner connected with Australia and on goods imported into Australia. The and the rates differ depending on the jurisdiction. The maximum GST rate is 10%. GST is similar in scope and operation to the Value rate is 3.7% per annum for land values in excess of A$1.231 million Added Tax systems of European Union Member States. in South Australia. Queensland, Victoria and New South Wales have each introduced a 2.3 Is VAT (or any similar tax) charged on all transactions surcharge for foreign owners of residential property at rates of up to or are there any relevant exclusions? 1.5% per annum. Customs duty Supplies that are classified as “GST-free” do not attract GST. These supplies include education, health-related services, most basic Goods imported into Australia may be subject to customs duty. types of food, exports (of goods and services), and the supply of a Major bank levies business as a going concern. A UK-style levy on Authorised Deposit-taking Institutions (ADIs) Other supplies that do not attract GST are known as “input-taxed” with licensed entity liabilities of at least A$100 billion commenced supplies. These include financial supplies such as a transfer of on 1 July 2017. Currently only five Australian banks have liabilities shares in a company, residential rent and the sale of previously of that magnitude. The levy rate is 0.015% per quarter. occupied residential premises. The distinction is important because while neither class of supply is 3 Cross-border Payments subject to GST, input tax credits cannot be claimed for GST included in the price of acquisitions that relate to input-taxed supplies. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Dividends paid by a resident company out of untaxed profits are An entity is broadly entitled to claim input tax credits for things subject to a 30% dividend withholding tax, unless the rate is reduced acquired in the course of its business, except to the extent that the under an applicable treaty (generally to 15%). On the other hand, acquisition relates to input-taxed supplies (for example, financial dividends paid by an Australian resident company out of post-tax supplies such as money lending or other dealings with debt or equity profits are exempt from dividend withholding tax. interests). Input tax credits are offset against the taxpayer’s own GST Under the US, UK, Japanese, Finnish, New Zealand, Norwegian, liabilities so that only a net GST amount is payable. Apportionment Swiss and German treaties (each a recently concluded or renegotiated for “mixed use” acquisitions is required. Reduced input tax credits treaty), dividend withholding tax is also reduced to nil where certain are available for some transactions that would otherwise be input- beneficially entitled companies (generally, listed companies, or taxed supplies (for example, transaction banking and funds transfer companies that are wholly or mainly owned by a listed company services, securities brokerage and trustee and custodial services). or listed companies) hold at least 80% of the voting power in the Australian company paying the dividends, and a 5% rate applies where any beneficially entitled company holds at least 10% of the 2.5 Does your jurisdiction permit VAT grouping and, if so, voting power. The second concession also applies under the French, is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? Chilean, South African and Turkish treaties, which are also recently renegotiated treaties. Australian GST law allows the grouping of multiple registered Finally, dividends will not be subject to dividend withholding tax where they are paid out of “conduit foreign income”. Conduit

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foreign income is essentially foreign income of the Australian company that is not subject to Australian tax (for example, non- 3.5 If so, is there a “safe harbour” by reference to which portfolio dividends – please refer to question 7.2 below) and is paid tax relief is assured? on to a foreign resident as a dividend rather than accumulated in Australia. Safe harbours are provided under de minimis exemptions and maximum allowable debt tests. Dividends paid by an Australian company that are effectively connected with the Australian branch of a non-resident are taxed in De minimis exemptions Australia by assessment rather than by a withholding tax. Exemptions from the thin capitalisation rules apply to: ■ taxpayers with interest deductions of less than A$2 million; and

Australia 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? ■ outward investors whose Australian assets make up 90% or more of total assets by value. Royalties paid to a non-resident are subject to a 30% royalty Maximum allowable debt tests withholding tax. If a treaty applies, royalty withholding tax is Thin capitalisation rules will not deny any portion of an entity’s usually reduced to 10%. Royalty withholding tax is reduced to 5% interest deductions provided that the entity’s debt is within the under the US, UK, New Zealand, Finnish, South African, Japanese, maximum allowable amount. Norwegian, French, Swiss and German treaties. Entities that are not ADIs are allowed a “safe harbour” debt-to- The term “royalty” is broadly defined in Australia’s domestic equity ratio of 1.5:1. The safe harbour may be exceeded if a higher legislation and includes fees paid for the use or supply of commercial level of debt could reasonably be borrowed by the entity from property and rights. The term “royalty” is also defined in Australia’s commercial lenders. However, this “arm’s length debt” level is treaties and can differ from Australia’s domestic legislation. In judged according to strict statutory criteria (parent company support those cases, the treaty definition prevails. is disregarded). More recently negotiated treaties exclude natural resource payments Investors that are not ADIs are also allowed gearing of their and equipment royalties from royalty withholding tax. However, Australian operations at up to 100% of the overall group’s worldwide interest withholding tax applies to rental payments to non-residents gearing. under arrangements in which cross-border leases are structured as Significantly higher debt levels are afforded to financial institutions, hire-purchase arrangements. including a 15:1 safe harbour. ADIs are allowed gearing levels Royalties derived by a resident of a country with which Australia has referable to their regulatory prudential capital requirements. concluded a comprehensive income tax treaty, that are effectively connected with an Australian branch, are treated as business profits and are taxed in Australia on an income tax assessment rather than 3.6 Would any such rules extend to debt advanced by a a withholding tax basis. third party but guaranteed by a parent company?

The thin capitalisation rules apply to all debt interests, including 3.3 Would there be any withholding tax on interest paid debt advanced by related and unrelated parties, whether Australian by a local company to a non-resident? or foreign-resident, and in the case of debt advanced by an unrelated party, whether or not it is supported by a related party. Interest paid to a non-resident is generally subject to a 10% interest withholding tax, although interest paid on debentures and other debt instruments (such as Eurobonds) offered publicly is exempt from 3.7 Are there any other restrictions on tax relief for withholding tax. interest payments by a local company to a non- resident? If the tax applies, this rate may be reduced under an applicable treaty. Under Australia’s recently concluded and renegotiated treaties (e.g. Any interest withholding tax due on interest payments by a local the US, UK, French, Japanese, Finnish, New Zealand, Norwegian, company to a non-resident must be remitted to the Tax Office before South African, Swiss and German treaties), interest paid to an the local company is entitled to a tax deduction for the interest unrelated financial institution is also exempt from withholding tax. payments. Interest that is effectively connected with an Australian branch of Australia’s transfer pricing rules (see question 3.9 below) also a non-resident is taxed in Australia on an income tax assessment require Australian operations to have an arm’s length capital rather than a withholding tax basis. structure and can therefore also restrict interest deductions beyond the restrictions imposed by the thin capitalisation rules. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 3.8 Is there any withholding tax on property rental payments made to non-residents? Australia’s thin capitalisation rules apply to foreign-controlled Australian groups (inward investors) and Australian groups that Generally, no. Income derived by non-residents from real property invest overseas (outward investors). The rules restrict interest located in Australia is subject to tax in Australia on an income tax deductions when the amount of debt used to finance the Australian assessment basis. However, there are two significant exceptions. operations exceeds specified limits (see question 3.5 below). Net rental income distributed by an Australian-managed investment fund (i.e. an Australian REIT – please refer to question 8.3 below) is subject to 15% or 30% withholding tax depending on the country of residence of the investor. In addition, rent paid to a non-resident for the use of industrial, scientific or commercial equipment can

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constitute a royalty subject to the withholding tax regime (with some treaty-based exceptions as described in question 3.2 above). 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

3.9 Does your jurisdiction have transfer pricing rules? Taxable income often differs from commercial accounting profit because of: Australia has transfer pricing rules that are modelled on the OECD ■ different tax depreciation rates for plant and equipment; Transfer Pricing Guidelines. The rules are contained in Australia’s ■ differences in the timing of recognition of income and domestic legislation and its tax treaties. The rules apply to “non- deductions for tax purposes compared to revenue and arm’s length” cross-border transactions. Guidance on what is expenses for accounting purposes; considered “arm’s length” is provided by the Tax Office via a ■ tax concessions for certain research and development Australia number of public rulings. expenditure; The rules give the Tax Office the discretion to adjust non-arm’s ■ recognition of some taxable capital gains not recognised for length pricing of transactions to increase taxable income in accounting purposes; Australia. Conversely, treaties can require Australia to reduce ■ capitalisation of some expenses for tax purposes; taxable income. ■ in the case of consolidated groups (see question 4.4 below), The preferred methods applied in Australia to determine the different calculations of the tax cost of assets; and appropriate arm’s length pricing of cross-border transactions are: ■ elimination from taxable income of impairment, fair value ■ the Comparable Uncontrolled Price method; and mark-to-market type adjustments made for commercial ■ the Resale Price method; accounting purposes. ■ the Cost Plus method; ■ the Profit Split method; and 4.4 Are there any tax grouping rules? Do these allow ■ the Transactional Net Margin method. for relief in your jurisdiction for losses of overseas subsidiaries? To confirm that international prices are arm’s length, taxpayers can apply for an advanced pricing agreement with the Tax Office. Special grouping rules apply in respect of income tax and GST. Legislation enacted in 2012 also allows taxation of profits on an Income tax consolidated group independent entity basis, having regard to OECD principles, rather than on a purely transaction-by-transaction basis. An Australian resident head company may irrevocably elect to form an income tax consolidated group. A consolidated group consists of a head company and all its wholly-owned Australian subsidiary 4 Tax on Business Operations: General companies, trusts and . The consolidated group is taxed as a single entity and intra-group transactions are ignored. The head company is primarily liable for the group income tax although 4.1 What is the headline rate of tax on corporate profits? subsidiaries may be jointly and severally liable if it fails to pay. Broadly, the tax consolidation regime allows group restructuring, The headline rate of company tax is currently 30%. A reduced pooling of losses and other tax attributes and movement of assets 27.5% tax rate applies to companies with an annual turnover of up within the group, without tax consequences. The tax costs of a to A$50 million in the 2018–19 income year. However, legislation subsidiary member’s assets are set at the time of joining the group before the Australian Parliament will deny the lower tax rate to and the tax costs of shares in the subsidiary are set on leaving the companies with at least 80% of their turnover comprising passive group. income such as dividends, interests, royalties and rent. Losses made by overseas subsidiaries cannot be brought onshore. Companies are generally required to pay tax under a “Pay As You This is the case irrespective of income tax consolidation. Go” (PAYG) collection system which requires large companies First-tier Australian companies in a wholly-owned multinational (and most other large taxpaying entities) to pay monthly or quarterly corporate group that has multiple entry points into Australia may instalments of estimated tax, calculated by reference to the amount irrevocably elect to form a “Multiple Entry” consolidated (MEC) of income derived during that period. Any difference in tax payable group for income tax purposes. from the estimate is due, in the case of a company, five months after the year’s end. GST Group As a separate election, groups with 90% common ownership may be registered as a GST group. A GST group must nominate a 4.2 Is the tax base accounting profit subject to adjustments, or something else? representative member who is responsible for the GST liabilities of the whole group. Supplies and acquisitions made within the group are ignored for GST purposes. Broadly, Australian taxpayers are taxed on their worldwide “taxable income”, typically for the year ending 30 June. Taxable income comprises “assessable income”, as defined by 4.5 Do tax losses survive a change of ownership? statute, less allowable tax deductions. The amount of assessable income and tax deductions often varies from the amount of income Companies and stock-exchange-listed trusts can utilise losses and expenses recognised for accounting purposes. Tax adjustments following a change of majority ownership if they continue to carry often therefore produce differences between a company’s taxable on substantially the same business and do not undertake a new income and its reported profits. business or transactions of a kind not undertaken before the change. Unlisted trust losses do not survive a change of ownership.

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

Australian tax is generally imposed on company profits, regardless 5.2 Is there a participation exemption for capital gains? of distributions. In addition, “conduit foreign income” rules allow the active foreign business income and foreign non-portfolio Different exemptions from apply to non-resident dividends of an Australian resident company to be passed on to and resident investors. foreign investors (as dividends) free of Australian tax. Non-resident investors A non-resident investor is not subject to capital gains tax on a sale of

Australia 4.7 Are companies subject to any significant taxes not shares in an Australian company, unless the investor’s shareholding covered elsewhere in this chapter – e.g. tax on the exceeds 10% of the company and the Australian company’s value is occupation of property? mostly attributable to Australian real property. Resident investors Fringe benefits tax Australian resident companies are prima facie subject to Australian Fringe benefits tax (FBT) is a tax on employers on the value of non- tax on their worldwide income. However, a capital gain or loss cash “fringe benefits”, provided to their employees. Fringe benefits made by a resident company on shares in a foreign company may typically include the use of motor vehicles, expense payments and be reduced (in some cases to nil) under a “participation exemption”. low-interest loans. Employees are not taxed on these benefits. The resident company must have held a 10% or greater direct voting The FBT rate is currently 47% of the “grossed-up” value of benefits interest in the foreign company for a continuous period of 12 months (that is, grossed-up so that the tax payable is equivalent to the tax in the last two years. In that case, the capital gain or loss is reduced that would be payable on an equivalent amount of salary). by the value of the foreign company’s active business assets as a Petroleum resource rent tax percentage of the value of its total assets. Petroleum resource rent tax is imposed on income from the recovery of petroleum products from offshore petroleum projects and, since 1 5.3 Is there any special relief for reinvestment? July 2012, also from onshore petroleum projects. Various other natural resource royalties are also applied by the Relief for reinvestment is not available in Australia per se. Federal Government and the States. However, the CGT provisions contain some “replacement asset” rollovers which allow deferral of tax on capital gains. They are Luxury car tax generally targeted at restructures and takeovers. A commonly used Luxury car tax is levied at 33% of the excess of the retail value of a rollover (“scrip-for-scrip” rollover) is available where the bidder new car sold in or imported into Australia over (A$66,331 (indexed) acquires at least 80% of the shares in the target company and pays or A$75,526 (indexed), for specified fuel-efficient cars). sellers in scrip. A reinvestment rollover is available where the Wine equalisation tax ownership of a capital asset ends due to compulsory acquisition by Wine equalisation tax is levied at 29% of the wholesale value of the Government or where an asset is lost or destroyed provided it is wine for consumption in Australia. replaced within 12 months. Payroll tax is a tax imposed by each State and Territory, on aggregate 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local wages, salaries and other employee benefits above annual threshold assets/shares? amounts ranging from A$650,000 to A$2 million, at rates of up to 6.85%. Purchasers of Australian real property or interests in land-rich entities must withhold 12.5% of the purchase price if payable to 5 Capital Gains a non-resident vendor. This is a non-final withholding tax, and does not apply to transactions valued at less than A$750,000 or on- market securities transactions. Non-resident vendors can provide 5.1 Is there a special set of rules for taxing capital gains purchasers with Tax Office clearance certificates confirming that and losses? tax need not be withheld. An Australian agent can also be required to answer for tax payable A comprehensive set of statutory rules within the income tax by a non-resident principal on profits derived through the agent, and legislation includes capital gains (after netting off capital losses) in the Commissioner can, by notice, require any person controlling assessable income. money belonging to a non-resident to account for tax due by the These rules also contain capital gains tax exemptions and non-resident. concessions, including the ability to index cost bases until 19 September 1999 and, alternatively, reductions of taxable gains made by individuals, trusts, life insurance companies and complying 6 Local Branch or Subsidiary? superannuation funds (but not companies) on assets held for at least 12 months. The reduction does not apply to gains accrued 6.1 What taxes (e.g. capital duty) would be imposed upon after 8 May 2012 by foreign individuals, either directly or as trust the formation of a subsidiary? beneficiaries. However, non-residents are only taxable on gains from real property interests (see question 5.2 below). No tax is imposed on the formation of a subsidiary. A nominal The rate of tax imposed on capital gains made by a company is the administrative charge is levied by the Australian corporate regulator same 30% tax rate imposed on income. Companies are not eligible

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(ASIC) on incorporation of a company and also applies to the Australian resident companies are unable to deduct costs incurred registration of a branch of a foreign company. to derive income earned through an offshore branch if the income is exempt.

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

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

Subsidiary company profits on which tax has been paid in Australia 7.3 Does your jurisdiction have “controlled foreign are able to be repatriated as dividends free of Australian dividend company” rules and, if so, when do these apply? withholding tax, and Australia does not impose a branch profits tax. Australia’s “controlled foreign company” rules attribute to Australian 6.3 How would the taxable profits of a local branch be residents a share of income earned or gains made by foreign determined in its jurisdiction? companies they control, even though the foreign income or gains may not be distributed. A foreign company with an Australian branch is taxed on its A foreign company is a “controlled foreign company” if: Australian-sourced income that is attributable to that branch. ■ a group of five or fewer Australian entities, each individually Arm’s-length transfer pricing rules apply to allocate profits between controlling at least 1% of the company, collectively controls a branch and its offshore head office or other foreign branches. at least 50% of the company shares; ■ a single Australian entity (and its associates) controls 40% or 6.4 Would a branch benefit from double tax relief in its more of the company, unless it is controlled by another person jurisdiction? or group; or ■ a group of five or fewer Australian entities (either alone or Generally yes, but Australia’s tax treaties broadly allow full taxing together with their associates) otherwise controls the company. rights to the source country where a treaty resident company carries To be attributable, the taxpayer must hold at least 1% within a group on business through a permanent establishment in Australia. The of five controllers, or hold 10% itself. treaties invariably require arm’s-length principles to be applied in determining the taxable income of the branch. In these respects, Australia’s treaties broadly follow OECD treaty principles. 8 Taxation of Commercial Real Estate However, the branch of a non-resident generally would not be able to take advantage of Australia’s treaties with a third country. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the Yes. Gains on the disposal of Australian commercial real estate branch? are currently subject to tax on an income tax assessment basis. In addition, as mentioned in question 5.4 above, a non-final 12.5% No withholding tax or other tax is imposed on the remittance of withholding tax applies to the proceeds of substantial real estate profits by a branch. sales by non-residents.

7 Overseas Profits 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 7.1 Does your jurisdiction tax profits earned in overseas branches? Yes, capital gains tax applies to these sales, and the 10% non-resident withholding tax mentioned in questions 5.4 and 8.1 above also Income derived by an Australian resident company in carrying applies to them. on business at or through a permanent establishment in a foreign An indirect interest is an interest in a resident or non-resident entity country generally will not be subject to Australian tax. Likewise, with more than 50% of its assets comprising Australian real estate, a capital gain or loss made by an Australian resident company on held either directly or indirectly. However, only indirect interests an asset used in carrying on business at or through a permanent of at least 10% held for 12 of the past 24 months are subject to tax. establishment in a foreign country generally will be disregarded. Treaty relief may also be available for residents of Germany.

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A revenue account gain on transfer of an indirect interest in advance of the company’s tax return being submitted, although Australian real property is also subject to tax in Australia if sourced a regime is being developed by the government. However, large in Australia, applying common-law source-of-income rules. company tax returns are required to report any tax position that is only “as likely as not to be correct”, or which is both uncertain and disclosed in the company’s or a related party’s financial statements, 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their e.g. pursuant to the US Fin 48 accounting rule. equivalent? Taxpayers may seek a Tax Office ruling for assurance about the tax treatment of a potentially contentious transaction. Rulings are Australia uses the term “managed investment trust” (MIT) to binding on the Tax Office. describe domestic REITs. These trusts (or their managers) are Australia required to be regulated by Australian-managed fund laws, to be 9.3 Does your jurisdiction have rules which target not sufficiently widely held (there are varying thresholds for retail and only taxpayers engaging in tax avoidance but also wholesale funds) and to satisfy non-trading conditions. anyone who promotes, enables or facilitates the tax Distributions to non-residents of MIT rental income and capital avoidance? gains are subject to a final withholding tax of 30%, or 15% if the non-resident is a resident of a country with which Australia has Australian law prohibits an adviser or another person promoting concluded an information exchange agreement. (To the extent that a scheme for the dominant purpose of a tax benefit that is not a distribution includes interest and dividends, those components are reasonably arguable (a “tax exploitation” scheme), or promoting any subject to interest and dividend withholding taxes.) An MIT can scheme on the basis of its conformity with a Tax Office “product” also make an election for gains on property to be taxed on capital ruling if the scheme actually implemented is materially different to account rather than revenue account. the scheme ruled on. Investors in MITs with a single unitholder class or that are registered with (and therefore regulated by) the Australian Securities and 9.4 Does your jurisdiction encourage “co-operative Investments Commission, are taxed on amounts attributed to them, compliance” and, if so, does this provide procedural rather than distributions. Withholding tax applies to income that is benefits only or result in a reduction of tax? attributed but retained by the fund. The Tax Office applies a “risk-differentiation framework” to assess taxpayer compliance risk. The framework is designed to identify 9 Anti-avoidance and Compliance the likelihood of tax positions being taken that the Tax Office disagrees with. It takes into account the Tax Office’s perception of taxpayer behaviour, its approach to business (e.g. risk appetite), its 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? governance, and its past compliance with tax laws. The assessment outcomes determine the extent of Tax Office Australia has a general anti-avoidance rule, contained in Part IVA resources to monitoring ongoing taxpayer compliance. Higher- of the tax legislation. It supplements other, more specific anti- risk taxpayers are subject to continuous review, typically including avoidance rules dealing with, for example, franking credit streaming comprehensive audit and intensive risk analysis. and dividend stripping. In addition, the new DPT applies a 40% tax rate in lieu of the 30% The provisions of Part IVA are extremely broad and extend to general company tax rate, with an express intention that taxpayers schemes entered into with the sole or dominant purpose of obtaining conform to cross-border tax positions that the Tax Office considers a tax benefit. A tax benefit is essentially a reduction of assessable acceptable and therefore avoid DPT assessments. income, an increase in allowable tax deductions (including tax deferral beyond what would be reasonably expected), a reduction 10 BEPS and Tax Competition in withholding tax or access to a tax credit. The application of Part IVA is dependent on the Commissioner’s discretion, which is generally reserved for schemes that the Commissioner considers 10.1 Has your jurisdiction introduced any legislation artificial or contrived. Part IVA prevails over other provisions of in response to the OECD’s project targeting Base the Australian tax legislation and Australia’s tax treaties. Where it Erosion and Profit Shifting (BEPS)? is applied, the tax benefits are denied and administrative penalties are generally imposed. Australia has taken a number of initiatives directed at base erosion In December 2015, the Part IVA was extended to schemes for the and profit shifting. avoidance of Australian permanent establishments. It applies from As mentioned in question 9.1 above, legislation was enacted in 1 January 2016 to groups with worldwide income in excess of A$1 December 2015 to extend Australia’s general anti-avoidance law to billion. schemes for the avoidance of Australian permanent establishments. In May 2016, Australia introduced a UK-style, 40% diverted profits As also mentioned in question 9.1 above, legislation was enacted tax (DPT). This tax commenced on 1 July 2017 and also applies to in June 2017 to introduce a DPT, and Australia has also introduced groups with worldwide income in excess of A$1 billion. Country-by-Country Reporting requirements (discussed below) with effect from 1 January 2016. Legislation to introduce anti-hybrid rules is currently before 9.2 Is there a requirement to make special disclosure of avoidance schemes? Parliament. These rules are to be modelled on the OECD’s BEPS recommendations. Australia does not yet have a special disclosure rule imposing a Australia’s recent treaty practice has incorporated recommendations requirement to disclose avoidance schemes to the Tax Office in of the BEPS project and Australia’s domestic transfer pricing rules

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have been amended to incorporate changes to the OECD Transfer Pricing Guidelines. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? In June 2017, the Australian Government signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Australia maintains a preferential tax regime for “offshore banking Base Erosion and Profit Shifting. units” (OBUs). An OBU is a “unit” or notional division of (usually) a bank that conducts offshore banking activities. In broad terms the 10.2 Does your jurisdiction intend to adopt any legislation taxable profit of an OBU is effectively taxed at 10%, rather than the to tackle BEPS which goes beyond what is standard 30% company tax rate. recommended in the OECD’s BEPS reports? Australia In addition to the measures discussed in questions 9.1, 9.2 and 11 Taxing the Digital Economy 10.1 above, the Australian Government has promoted a new tax transparency code (i.e. voluntary public disclosure of income and taxation statistics) for taxpayers with an annual turnover in excess 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture of A$100 million. digital presence? Since a May 2016 Australian Government directive, Australia’s Foreign Investment Review Board is also now actively imposing Yes. The expansion of Australia’s general anti-avoidance rule in tax (e.g. capitalisation) conditions on approval of significant foreign 2015 (see question 9.1 above) was directed primarily at non-resident investment into Australia. companies which carry on business but without a permanent establishment in the country. In addition, non-residents who sell 10.3 Does your jurisdiction support public Country-by- digital products over the internet to Australian customers (and Country Reporting (CBCR)? exceed the A$75,000 threshold) are required to register for the GST. The rules can also extend to companies which operate electronic Yes, Australia has signed the Multilateral Competent Authority platforms. Finally, in May 2018, the government announced that it Agreement on the Exchange of Country-by-Country Reports, and will release a discussion paper to explore further options for taxing in December 2015 enacted legislation to introduce a CBCR regime. digital business in Australia. Multinational entities with worldwide income in excess of A$1 billion are required to comply with CBCR requirements for 11.2 Does your jurisdiction support the European income years commencing on or after 1 January 2016. Statements Commission’s interim proposal for a digital services corresponding to the Local file, Master file and Country-by-Country tax? Reports outlined in the OECD’s BEPS recommendations are required within 12 months of year-end. Australian officials have been involved in work on this topic being undertaken by the G-20 and OECD and will likely follow the recommendations arising from that work very closely.

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Richard Hendriks Cameron Blackwood Greenwoods & Herbert Smith Freehills Greenwoods & Herbert Smith Freehills ANZ Tower, 161 Castlereagh Street ANZ Tower, 161 Castlereagh Street Sydney, NSW 2000 Sydney, NSW 2000 Australia Australia

Tel: +61 2 9225 5971 Tel: +61 2 9225 5950 Fax: +61 2 9221 6516 Fax: +61 2 9221 6516 Email: richard.hendriks@ Email: cameron.blackwood@ greenwoods.com.au greenwoods.com.au URL: www.greenwoods.com.au URL: www.greenwoods.com.au

Australia Richard is Head of Corporate and M&A at Greenwoods. He Cameron brings more than a decade of transactional tax expertise to specialises in listed-company M&A and demergers, capital his role as Director in Greenwoods & Herbert Smith Freehills’ Sydney management, and corporate restructures, including equity and debt office. He specialises in advising clients on the tax complexities of raisings. Richard has in-depth knowledge of tax consolidation, mergers, acquisitions and restructures, including capital management executive share and option plans, and cross-border tax matters. and cross-border issues, and all aspects of employee share schemes Richard has acted in several recent key Australian M&A deals. He led and regularly works in close collaboration with Herbert Smith Freehills. the Greenwoods team advising the Westfield Corporation in relation to Cameron has also been involved in undertaking tax due diligence its acquisition by Unibail-Rodamco for A$32.7 billion, Australia’s largest for insurers providing warranty and indemnity insurance in M&A M&A transaction, and is leading the Greenwoods team advising The transactions. Walt Disney Company on its acquisition of Twenty-First Century Fox. Cameron has also been heavily involved in recent ATO and Treasury Richard also acts for a number of large Australian private groups and consultation on capital management, cross-border and employee high-net-worth individuals. share scheme issues. Cameron is a member of The Tax Institute’s Large Business and International Committee and NSW Technical Committee. He holds a Bachelor of Business (Hons) and Bachelor of Laws (Hons) from the University of Technology, Sydney, and a Master of Taxation from the University of Sydney. Cameron is admitted as a solicitor in New South Wales.

Greenwoods & Herbert Smith Freehills is Australia’s largest specialist tax advisory firm and one of the country’s leading providers of tax services. Greenwoods advise clients on a range of taxation issues, with specific expertise in the Real Estate, Financial Services, Projects & Infrastructure, and Energy & Resources sectors. The Corporate and M&A team regularly act on Australia’s most significant transactions and the Private Wealth team advise many of the country’s most successful private groups and emerging entrepreneurial businesses. Unique to Greenwoods is the hands-on role taken by Directors, ensuring the highest standards of technical expertise and providing the experience necessary for creative, yet commercial, solutions. Greenwoods is consistently recognised for its expertise: The Legal 500, Asia Pacific | 2018 ■■ Tier 1 firm. Best Lawyers, Australia | 2018 ■■ Best law firm for Tax in Australia. International Tax Review – World Tax | 2018 ■■ Tier 1 firm. Financial Review Client Choice Awards | 2018 ■■ Best Accounting Firm (revenue under A$50 million). Doyles Guide | 2017 ■■ Tier 1 firm for tax law in NSW, Victoria and Western Australia.

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Austria Clemens Philipp Schindler

Schindler Attorneys Martina Gatterer

“lex specialis”. Technically, a provision introduced subsequently 1 Tax Treaties and Residence could override treaty law as “lex posterior”, but Austria has not enacted any tax treaty override legislation so far. However, Austrian 1.1 How many income tax treaties are currently in force in tax authorities take the view that tax treaty law does not limit the your jurisdiction? application of domestic anti-abuse provisions. For example, the Annual Tax Act 2018 introduced CFC rules (see question 7.3) for Austria has an extensive network of income tax treaties, with 89 permanent establishments (applicable for business years starting treaties currently in force (as of 1 January 2018). In addition, 1 January 2019) overriding the rules of treaties for permanent Austria has concluded seven tax information exchange agreements establishments. with Andorra, Gibraltar, Guernsey, Jersey, Mauritius, Monaco and St. Vincent & the Grenadines. Furthermore, the Convention on 1.6 What is the test in domestic law for determining the Mutual Administrative Assistance in Tax Matters is applicable. residence of a company?

1.2 Do they generally follow the OECD Model Convention A corporation will be deemed tax-resident in Austria if either its legal or another model? seat (place which is designated as such in its articles of association) or its place of management is situated in Austria. The place of Austrian tax treaties generally follow the OECD Model Convention, management is defined as the centre from which the activities of the with certain minor modifications. Double taxation of dividends, company are effectively directed from a management perspective; interest and royalties is mostly eliminated by the credit method whereas in the past the focus was mainly on where the relevant under Austrian tax treaties, while double taxation of other income decisions are taken (usually proven by board meeting minutes), the is avoided by the exemption method. Some of the tax treaties tax authorities now increasingly also take into account where such contain tax-sparing provisions for different types of income, such decisions are communicated and implemented by the management. as royalties and interest. Resident companies are subject to unlimited taxation in Austria on their worldwide income. Based on the tax treaties concluded by Austria, a company is 1.3 Do treaties have to be incorporated into domestic law before they take effect? considered to be resident in the state in which the place of its effective management is located. In practice, the domestic term “place of management” is understood in the same way as “place of After ratification by the Austrian Federal President and the two effective management”. chambers of Austrian parliament, tax treaties apply directly without further incorporation into domestic law. 2 Transaction Taxes 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.1 Are there any documentary taxes in your jurisdiction? Austria has no general policy to include anti-avoidance rules in tax treaties that go beyond the rules in the OECD Model Convention, The Austrian Stamp Duty Act (Gebührengesetz – “GebG”) contains but Austrian courts rely on the general anti-abuse rules (see question an exhaustive list of legal transactions that are subject to Austrian 9.1 for further details). On the request of the tax treaty partner, a few stamp duty provided that a signed written deed is executed and a treaties incorporate such rules. For example, the tax treaty concluded nexus to Austria exists. Legal transactions such as, inter alia, lease with the United States includes a limitation-on-benefits clause. agreements, assignments, suretyships and mortgages are covered by the stamp duty provisions at rates of between 0.8% and 1% of the contract value. No stamp duty is levied on share transfer 1.5 Are treaties overridden by any rules of domestic agreements, furthermore on loan and credit agreements signed after law (whether existing when the treaty takes effect or 31 December 2010. introduced subsequently)? Signing a written deed on a stamp-dutiable transaction in Austria will trigger stamp duty. Due to a broad interpretation of the term In general, the tax treaty provisions prevail over domestic law as

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“signed written deed”, even if the contract is not signed in Austria, is any person (individual or legal entity) conducting a business bringing a written deed originally signed outside Austria into independently in order to realise earnings (though not necessarily Austria may result in the necessary nexus to Austria for a stamp- profits), regardless of nationality or residence. dutiable transaction. In addition, any written reference to the If an entrepreneur renders both VAT-able and VAT-exempt supplies, contract/transaction that is signed by only one of the parties to the only the input VAT attributable to the VAT-able supplies can be transaction but is then handed over (sent) to another party or (in recovered. Input VAT deduction is only allowed if an invoice that certain circumstances) to a third party, could provide sufficient fulfils certain formal requirements has been provided by the supplier. evidence of the transaction to give rise to stamp duty. The term It should be noted that holding companies (including acquisition “written deed” comprises even email communication carrying an vehicles) are usually not entitled to claim credit for input VAT, unless electronic or digital signature (details are disputed), which gives Austria they also provide VAT-able services, in which case input VAT may evidence of a stamp-dutiable transaction (e.g. mentioning of a lease be claimed for the related expenses. Accordingly, holding entities or assignment agreement by a party thereto). often provide such VAT-able services (e.g. accounting, procurement or IT services) to other (group) entities, to recover some input VAT. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that VAT is levied at all levels of the supply of goods and services with applied by Sweden in the Skandia case? the right to deduct input VAT to the extent the recipient thereof qualifies as an entrepreneur. Austria’s VAT Act is based on the EU The Austrian Value Added Tax Act provides that the effects of a Council Directive on the common system of VAT. VAT tax group are limited to the Austrian parts of the company. The standard rate is 20%. A reduced rate of 10% applies, inter Therefore, it is possible, under current legislation, to include an alia, to food, books, newspapers and periodicals, passenger Austrian permanent establishment of a foreign company (but not the transport and renting of residential immovable property. As of 1 entire company) into an Austrian VAT tax group. Services between January 2016, a second reduced rate of 13% has been introduced the foreign head office and the domestic permanent establishment (including accommodation in hotels (as of 1 May 2016), and various are thus taxable. The Austrian tax authorities interpret the provisions recreational and cultural services). in place in line with the Skandia case.

2.3 Is VAT (or any similar tax) charged on all transactions 2.6 Are there any other transaction taxes payable by or are there any relevant exclusions? companies?

There are two types of exemption from VAT: an exemption under Real estate transfer tax is levied on every acquisition of domestic which credit for input VAT is not possible; and an exemption which real estate and, in some cases, also if shares in corporations or entitles the taxpayer to credit for input VAT. interests in partnerships that directly own real estate are transferred. The first type of exemption includes banking, finance and insurance- In particular, the transfer of buildings and land, building rights and related transactions, the disposal of shares, the leasing or letting buildings on third-party land falls within the scope of the Austrian of immovable property for commercial purposes, the supply of real estate transfer tax, whereas the transfer of machinery and plants land and buildings, health and welfare services, and supplies by is not subject to real estate transfer tax. charitable organisations. For most of these transactions, there is an In short, the real estate transfer tax is 3.5% (reduced rates apply option for standard VAT treatment (i.e. VAT has to be charged, but between specific family members and in the case of a transfer of with the benefit that credit for input VAT may be claimed). For the shares in corporations or interests in partnerships or reorganisations) rental of land and buildings for commercial purposes, the option to and it is irrelevant whether it is acquired by an Austrian or a foreign charge VAT is only applicable if the tenant uses the object to render citizen or resident. services that are subject to VAT. In sale and purchase transactions, the tax base of the real estate The second type of exemption includes exports, intra-community transfer tax is the amount of consideration for the transfer (fair supplies, the supply of services consisting of work on movable market value) – at least the value of the real estate. In the absence property acquired or imported for the purpose of undergoing such of a consideration (e.g. if shares are transferred), special rules work, and the supply of services when these are directly linked to determine the relevant tax base. In general, taxation is based on the the transit or the export of goods. fair market value of real estate property. The supply of services and the delivery of goods of an entrepreneur, In addition to real estate transfer tax, a registration duty for the land who operates his business domestically and whose turnover does register at a rate of 1.1%, also based on the purchase price or the fair not exceed an amount of EUR 30,000 p.a. (regime for small market value, is levied if a new owner is registered (i.e. not if shares entrepreneurs – Kleinunternehmerregelung), are exempt from VAT are transferred, as the owner of the real estate does not change in without credit for input VAT. such case).

2.4 Is it always fully recoverable by all businesses? If not, 2.7 Are there any other indirect taxes of which we should what are the relevant restrictions? be aware?

A deduction or refund for input VAT is available to both resident Austrian Capital Duty (a 1% tax on equity contributions by the and non-resident entrepreneurs, if the respective supplies are used to direct shareholder) has been abolished as of 1 January 2016. Due to render supplies that are not VAT-exempt under the first type (without EU legislation, such capital duty cannot be reintroduced. the entitlement to claim credit for input VAT), with financial Austrian Insurance Tax applies on the payment of insurance institutions being the most relevant example. An entrepreneur premiums for several types of insurance contracts.

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capitalisation, as a matter of administrative practice and case law, 3 Cross-border Payments loans provided by related parties to an Austrian company may be considered “hidden” equity and thus not be treated as debt 3.1 Is any withholding tax imposed on dividends paid by if the Austrian corporation is too thinly capitalised (taking into a locally resident company to a non-resident? account debt provided by unrelated parties). In such case, interest payments are reclassified as dividends for Austrian tax purposes, Dividends paid to a non-resident are subject to a withholding tax and accordingly are not deductible and are subject to withholding of 27.5%. tax. However, an interest barrier rule is foreseen under the Anti- BEPS Directive (national implementation is expected closer to the A reduction or relief from withholding tax might be available based implementation deadline). on a tax treaty or the EU Parent-Subsidiary Directive. According Austria to the Austrian rules implementing the EU Parent-Subsidiary Directive, there is no withholding tax on dividends if (i) the parent 3.5 If so, is there a “safe harbour” by reference to which company has a form listed in the EU Parent-Subsidiary Directive, tax relief is assured? (ii) the parent company owns (directly or indirectly) at least 10% of the capital in the subsidiary, and (iii) the shareholding has been held While there is no official “safe harbour” rule, the Austrian tax continuously for at least one year. authorities generally accept debt-to-equity ratios of around 4:1 to Provided that certain documentation requirements (including a tax 3:1. However, this can only serve as guidance and the adequate debt- residence confirmation for the foreign recipient, which needs to be to-equity ratio has to be analysed on a case-by-case basis. Having issued by the foreign tax authorities on a special tax form) are met, said that, higher debt-to-equity ratios have also been accepted. a reduction or relief can be granted at source. No relief at source is granted in cases of potential tax avoidance, e.g. in case of holding 3.6 Would any such rules extend to debt advanced by a companies with little or no substance in the state of residence (i.e. third party but guaranteed by a parent company? if the recipient is a company that does not have an active trade or business, employees and business premises). If no reduction or No. However, debt provided by unrelated parties is to be taken into relief was granted at source, companies can apply for a refund. In account when determining the debt-to-equity ratio. the course of the refund procedure, the company has to provide evidence that the interposition of the foreign company does not constitute an abusive arrangement. If such refund procedure was 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- successful, a simplified procedure is applied in the following three resident? years. As a further option, a refund of withholding tax on dividends No, there are no other restrictions on tax-deductibility of interest can also be claimed by a foreign corporation resident in the EU paid to third (i.e. unrelated) parties. In cases of interest payments to to the extent that the Austrian company is not relieved from its related parties, limitations apply to avoid base erosion if the interest withholding obligation, so long as the tax withheld is not creditable income is not sufficiently taxed abroad (see question 10.1). in the recipient’s home state under a double taxation treaty. Although not limited to cross-border payments in other jurisdictions, one should note that Austria, as of today, has no interest barrier rule. 3.2 Would there be any withholding tax on royalties paid Accordingly, interest payments made to third (i.e. unrelated) parties by a local company to a non-resident? are always tax-deductible. However, as a result of the OECD BEPS project, it is worth noting that the Anti-BEPS Directive provides Royalties paid to a non-resident are subject to a withholding tax of for such interest barrier rule to be implemented by the EU Member 20%. States before and applied as of 1 January 2019. A reduction or relief from withholding tax might be available The Austrian tax administration is of the opinion that the existing based on a tax treaty or the EU Interest and Royalties Directive. provisions in connection with interest payments to related parties According to the Austrian rules implementing the EU Interest and are sufficient as national implementation. Royalties Directive, there is no withholding tax on royalties if (i) the parent company has a form listed in the EU Interest and Royalties 3.8 Is there any withholding tax on property rental Directive, (ii) the parent company owns directly at least 25% of the payments made to non-residents? capital in the subsidiary, and (iii) the capital holding has been held continuously for at least one year. Such payments would not be subject to withholding tax, but the The procedures for the application of reduction or relief, as well as rental payments that relate to domestic real estate would be subject for refund, are the same as for dividends. to limited taxation and the non-residents would be obliged to file a tax return for the rental payments. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 3.9 Does your jurisdiction have transfer pricing rules?

Interest paid to non-resident corporations is generally not subject to Austria has generally adopted the OECD Transfer Pricing withholding tax. Guidelines. The Austrian Ministry of Finance has issued transfer pricing guidelines as well, which are based on the OECD Guidelines. 3.4 Would relief for interest so paid be restricted by Therefore, transactions between related corporations, as well as reference to “thin capitalisation” rules? profit attributions to permanent establishments, must be at arm’s length. There is also an obligation to prepare documentation for Despite the fact that there are no Austrian statutory rules on thin transfer prices in inter-group transactions.

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

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

According to the Austrian group taxation regime, a group parent No. Both retained and distributed profits are taxed at the same rate company can form a tax group with a subsidiary if the parent at the level of the corporation (i.e. only corporate income tax), but company exercises financial control over the subsidiary (i.e. the additional taxes may apply at the shareholder level when the profits parent owns more than 50% of the capital and voting power in the are then distributed. By comparison, in the case of a partnership, subsidiary). the profits are immediately taxed at the progressive income tax rate if the partner is an individual or at the rate of 25% corporate income Eligible group members include both resident companies and non- tax if the partner is a corporation, irrespective of whether or not they resident companies; in case of the latter, however, this is only if they are distributed, so that no further tax is triggered upon distribution are resident in an EU Member State or in a third state with which to the partners. Austria has concluded a comprehensive administrative assistance agreement regarding the exchange of information. With regard to Austrian group members, 100% of the profit/loss of 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the the company is attributed to and taxed at the level of the parent occupation of property? company (i.e. irrespective of the participation held), while losses of non-resident group members are only attributed to the group An annual real estate tax on all domestic immovable properties is

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levied at a basic federal rate, multiplied by a municipal coefficient further differences between the taxation of a local subsidiary and a on assessed value of real estate for tax purposes (Einheitswert). local branch of a non/resident company. In particular, there is no The basic federal rate is usually 0.2% and the municipal coefficient branch profit tax in Austria. ranges up to 500%. Transactions between the subsidiary and the foreign parent have to comply with the “arm’s length” principle. On the other hand, a 5 Capital Gains permanent establishment cannot conclude contracts with the head office, as both are considered to be one legal entity. Therefore, it can be more burdensome in practice to determine and allocate an 5.1 Is there a special set of rules for taxing capital gains appropriate profit to the permanent establishment, as compared to and losses? a subsidiary. Austria

Capital gains and losses derived from the sale or other disposal 6.3 How would the taxable profits of a local branch be of business property are taxed as ordinary business income of a determined in its jurisdiction? company at normal rates (in the case of individuals, reduced rates apply to certain capital gains). For the calculation of the taxable profit, a permanent establishment will be treated as a notional “independent enterprise”. A functional 5.2 Is there a participation exemption for capital gains? analysis has to be conducted, which is based on “significant people functions”. Functions, risks and assets, as well as an appropriate Capital gains derived from the sale of shares in a foreign corporation amount of capital, have to be allocated to the permanent may be exempt under the International Participation Exemption (see establishment to determine the arm’s length profit of the permanent question 7.2). By comparison, there is no exemption for capital establishment. Besides a transfer pricing concept, there is also gains derived from the sale of shares in a domestic corporation. a requirement to have separate tax accounts for the permanent establishment (while, according to the prevailing view in legal writing, there is generally no such obligation under commercial 5.3 Is there any special relief for reinvestment? law).

No, there is no rollover relief available for companies in relation to capital gains. It should, however, be noted that the regime 6.4 Would a branch benefit from double tax relief in its jurisdiction? applicable to Austrian private foundations, which often are the shareholders of Austrian companies, provides for such relief if the private foundation reinvests within a period of 12 months. The branch as such would not be entitled to tax treaty benefits, as it is not a legal person. Only the head office would be able to claim treaty protection. However, the branch can, in fact, in many cases 5.4 Does your jurisdiction impose withholding tax on the benefit from treaty relief as a consequence of the anti-discrimination proceeds of selling a direct or indirect interest in local clauses contained in most Austrian tax treaties or on the basis of assets/shares? EC law.

There is a withholding tax of 27.5% on proceeds from shares sold over a securities account at an Austrian credit institution. This does 6.5 Would any withholding tax or other similar tax be not apply to the sale of limited liability companies. imposed as the result of a remittance of profits by the branch? For the sale of Austrian real estate, a withholding tax of 30% is levied. There is no such taxation in Austria.

6 Local Branch or Subsidiary? 7 Overseas Profits

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

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

A branch will be taxed as a permanent establishment of the foreign 7.2 Is tax imposed on the receipt of dividends by a local head office, while a subsidiary is a separate taxable entity. The profits company from a non-resident company? (subject to corporate income tax) of a permanent establishment can be remitted to the head office without any tax consequences. In Currently, Austrian legislation grants a participation exemption for contrast, the taxed profits of a subsidiary have to be distributed as the dividends received from a domestic corporation. An exemption a dividend (subject to withholding tax). Besides that, there are no also applies to dividends received from a foreign corporation, as

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well as to capital gains thereof, which are also exempt from taxation (unless the parent company opts for taxation) if the following 7.3 Does your jurisdiction have “controlled foreign conditions are fulfilled: company” rules and, if so, when do these apply? ■ the participation amounts to at least 10%; Currently, there are no statutory CFC rules in Austria. However, the ■ the participation is held uninterruptedly for at least one year; Annual Tax Act 2018 implemented the standards set by the EC Anti- ■ the foreign corporation is comparable to an Austrian Tax Avoidance Directive and introduced CFC rules for “controlled corporation (or an entity enumerated in the Annex to the foreign companies” and permanent establishments. According to EU Parent-Subsidiary Directive, in which case this is met in these new provisions specific non-distributed passive income (e.g. almost all cases); and interest payments, royalty payments, taxable dividend payments

Austria ■ the anti-abuse provision is not applicable. and income from the sale of shares, financial leasing income, and Under the anti-abuse provision, the International Participation activities of insurances and banks) of a controlled foreign subsidiary Exemption regime will not be applicable if there are reasons to is included in the corporate tax base of the Austrian parent company suspect tax avoidance or tax abuse. Subsequently, the “switch-over” by applying the CFC rule. The preconditions for such attribution of clause will be applicable, i.e. the income is fully taxable with a tax income of the foreign company are that the subsidiary: (i) is directly credit for the foreign corporate tax paid by the subsidiary. or indirectly controlled (50% of voting rights or capital or rights Tax avoidance or tax abuse is presumed by law if the following two to profit); (ii) is situated in a low-tax country (meaning thatthe conditions are cumulatively fulfilled: effective corporate tax paid by the subsidiary is lower than 12.5% ■ the foreign subsidiary generates predominantly interest considering the foreign income calculated based on Austrian tax income, income from the letting of moveable tangible or law and the factual paid foreign tax); and (iii) does not carry out intangible assets (e.g. rental income and royalties) and/or any significant economic activity in terms of personnel, equipment, income from the sale of participations (sources of income assets and premises. Low-taxed passive income shall only be referred to as “passive income”); and attributed to the Austrian parent company if it amounts to more ■ the income of the foreign subsidiary is not subject to a tax that than one third of the income of the foreign company. To avoid any is comparable to the Austrian corporate income tax (due to potential double taxation triggered by the CFC rules a tax credit for either a lower applicable tax rate or a reduced tax base (“low actually paid foreign taxes and a reduction of taxable capital gains taxation”)). If the effective tax rate is 15% or lower, low by the amount of profits (forming part of such capital gain) which taxation is deemed to occur. have already been subject to the Austrian tax pursuant to the CFC Furthermore, portfolio dividends (i.e. dividends from a participation rules are provided. under 10%; no minimum percentage or holding period is required) The new CFC rules apply for business years starting 1 January 2019. received from either a foreign corporation listed in the Annex to the EU Parent-Subsidiary Directive, or from a foreign corporation, which is comparable to an Austrian corporation, either resident in 8 Taxation of Commercial Real Estate an EU Member State or resident in a jurisdiction which has a broad exchange of information clause in its double tax treaty with Austria, will be exempt from Austrian income tax as well. It should be noted 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? that this exemption only applies to dividends, thus capital gains from a participation under 10% are always taxable. A non-resident company is taxed on the disposal of real estate The above-mentioned portfolio dividends exemption is denied if located in Austria at a corporate income tax rate of 25%. A non- the distributing corporation is “low-taxed” (i.e. if the effective rate resident individual is taxed on the disposal of real estate located in of corporate income tax paid is below 15%) or if it benefits from Austria at a special tax rate of 30%. substantial tax exemptions. There is no requirement that the foreign corporation earn (active) business rather than passive income, as is the case for the International Participation Exemption. Where 8.2 Does your jurisdiction impose tax on the transfer of income is low-taxed, a “switch-over” clause will be triggered. an indirect interest in commercial real estate in your jurisdiction? The participation exemption will not apply if the dividend distributed to the Austrian company is tax-deductible by the foreign corporation The transfer of an indirect interest in real estate does not trigger in its home jurisdiction. This is now also the standard under the EU (corporate) income tax, but could trigger transfer tax. However, real Parent-Subsidiary Directive. estate transfer tax is triggered if 95% of the shares of a company that As per the Annual Tax Act 2018, the current switchover mechanism directly holds Austrian real estate are consolidated in the hands of one for portfolio participations has been adapted and applies to low- shareholder (Anteilsvereinigung) or a group of shareholders within taxed passive income of qualified international participations and the meaning of the Austrian group taxation regime. Furthermore, if qualified portfolio investments of at least 5%. Following this, the within a period of five years 95% or more of the partnership interests switchover to the credit-method will be triggered if (i) the foreign of a partnership that directly holds real estate are transferred, this subsidiary predominantly achieves low-taxed passive income, and triggers real estate transfer tax (under the scope of this rule, this if (ii) the CFC legislation (see question 7.3) is not applicable. The can include several transactions with different purchasers). In each amended switchover mechanism for portfolio participations applies case, the real estate transfer tax amounts to 0.5% of the fair market for business years starting 1 January 2019. value of the real estate. Shares held by trustees are to be attributed It is worth noting that interest expenses directly related to the to the trustor for the purposes of calculating the 95% threshold. If debt financing of the acquisition of a participation are deductible Austrian real estate is transferred in the course of a reorganisation even if the income is exempt under the participation exemption, if (Umgründung) under the Umgründungssteuergesetz (UmgrStG), applicable. the real estate transfer tax will likewise be 0.5% of the fair market value of the real estate.

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form” principle applies. This is the case if a person is in a position 8.3 Does your jurisdiction have a special tax regime to exercise those rights which are distinctive for ownership such as for Real Estate Investment Trusts (REITs) or their the use, consumption, amendment, pledge and sale of the assets, and equivalent? if such person is simultaneously entitled to exclude any third party on a permanent basis from having an impact on the assets. A REIT that is established based on the Austrian Real Estate Investment Fund Act is subject to a special tax regime. Such special tax regime may also be applicable to REITs established under 9.2 Is there a requirement to make special disclosure of foreign law (Sec 42 of the Austrian Real Estate Investment Fund avoidance schemes? Act). The REIT itself is not treated as a taxable entity. Rather, it is treated as a transparent entity where the income earned is attributed No, currently there is no specific disclosure requirement for Austria to the unit owner, regardless of whether it is distributed or not avoidance schemes. However, the EU Directive of 25 May 2018 (comparable to a partnership). Besides income from the renting amending Directive 2011/16/EU as regards mandatory automatic of property, interest on liquid reserves and profit distributions from exchange of information in the field of taxation in relation to Austrian real estate companies, the profit of an Austrian REIT also reportable cross-border arrangements provides for a reporting includes valuation gains from the annual revaluation of the real obligation in connection with international tax planning models and estate properties of the funds, regardless of whether they are realised has to be implemented by the EU Member States until 31 December or not. Profits from a REIT or from the sale of the REIT certificates 2019. The Directive already provides for a reporting obligation for are generally subject to withholding tax at a rate of 27.5% as of 1 those tax planning models whose first implementation step took January 2016. Please note that several major Austrian real estate place after 25 June 2018. It is therefore to be expected that tax companies are not established as fund-type vehicles based on planning models already initiated in 2018 will also be affected by the Austrian Real Estate Investment Fund Act, but rather as non- the obligation to notify. transparent corporations subject to the ordinary tax regime. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 9 Anti-avoidance and Compliance anyone who promotes, enables or facilitates the tax avoidance?

9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? No, there are no special rules with regard to anyone who promotes, enables or facilitates tax avoidance. However, tax evasion (Abgabenhinterziehung) and tax fraud (Abgabenbetrug) are subject Sec 22 of the Austrian Federal Fiscal Code (Bundesabgabenordnung to criminal prosecution pursuant to the Austrian Fiscal Criminal Act – “BAO”) provides that tax liability cannot be avoided by an abuse (Finanzstrafgesetz). In the course of such criminal proceedings, of legal forms or methods offered by civil law (“abuse of law”). persons who assist tax evasion and tax fraud are also subject to This is assumed in cases where transactions are entered into, or penalties. entities are established, solely for the purpose of obtaining special tax advantages. If such an abuse has been established, the tax authorities may compute the tax as if such abuse had not occurred. 9.4 Does your jurisdiction encourage “co-operative Generally, tax abuse is only assumed in a multi-step situation (i.e. compliance” and, if so, does this provide procedural the taxpayer takes more than one step to avoid or reduce the tax). benefits only or result in a reduction of tax? Furthermore, if a taxpayer can demonstrate substantial business reasons for a structure chosen, tax abuse may be rebutted. No, Austria does not encourage “co-operative compliance” and, The Annual Tax Act 2018 introduced a legal definition of “misuse/ therefore, there are no procedural benefits or reduction of tax abuse” in Sec 22 BAO based on EC Anti-Tax Avoidance Directive. provided. Following this, abuse shall exist “when a legal arrangement, which may include one or more steps, or a sequence of legal arrangements, 10 BEPS and Tax Competition is inappropriate in terms of economic purpose. Inappropriate are those arrangements that, disregarding the associated tax savings, no longer make sense, because the essential purpose or one of the 10.1 Has your jurisdiction introduced any legislation essential purposes is to obtain a tax advantage, which is contrary to in response to the OECD’s project targeting Base the aim or purpose of the applicable tax law. There is no abuse, if Erosion and Profit Shifting (BEPS)? there are valid economic reasons that reflect theeconomic reality”. The new definition of “misuse/abuse” applies to circumstances that As a reaction to the BEPS project, a new provision was introduced will be implemented after 1 January 2019. by the Austrian Tax Amendment Act 2014, stating that interest expenses or royalties are no longer deductible from the tax base of Additionally, Sec 23 BAO provides that an act or transaction not an Austrian corporation in the case that, cumulatively: seriously intended by the parties (“sham transaction”) but performed ■ the interests or royalties are paid to an Austrian company or a only to cover up facts that are relevant for tax purposes will be foreign company that is comparable to an Austrian company; disregarded, and that taxation will be based on the facts the taxpayer sought to conceal. ■ the interests or royalties are paid to a company which is directly or indirectly part of the same group of companies or Furthermore, Sec 24 BAO provides specific provisions in is influenced directly or indirectly by the same shareholder; connection with the attribution of business assets, in particular with and regard to security ownership, trusteeship, beneficial ownership and ■ the interest or royalty payments in the state of residence of joint ownership. This provision says that in general, assets are to the receiving company are: (i) not subject to tax because of be attributed to their beneficial owner. Here the “substance over

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a personal or objective exemption; (ii) subject to tax at a rate lower than 10%; or (iii) subject to an effective tax at a rate 10.3 Does your jurisdiction support public Country-by- lower than 10% due to any available tax reduction. Country Reporting (CBCR)? It is not relevant whether the tax at a rate lower than 10% is based on the domestic law of the state of residence of the receiving company The Austrian legislator adopted the Transfer Pricing Documentation or the applicable double taxation treaty concluded between Austria Act, which includes documentation and reporting obligations for and the respective state of residence. a multinational group of companies (CBCR). These obligations essentially apply for business years starting from 1 January 2016. If the receiving entity is not the beneficial owner, the respective conditions have to be investigated at the level of the beneficial

Austria owner (e.g. in certain back-to-back refinancing scenarios). 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? The new regulation is effective to all payments carried out since 28 February 2014, irrespective of when the corresponding contract was concluded. The Austrian government is of the opinion that the No, there is no preferential tax regime such as a patent box. In existing provisions in connection with interest payments to related this context, however, it should be noted that there are various tax parties is sufficient as national implementation of the EC Anti-Tax incentives for research and development activities. Avoidance Directive. Furthermore, hybrid structures have been substantially limited: the 11 Taxing the Digital Economy participation exemption will not apply if the dividend distributed to the Austrian company is tax-deductible by the foreign corporation in its home jurisdiction. This is now also the standard under the EU 11.1 Has your jurisdiction taken any unilateral action to tax Parent-Subsidiary Directive. digital activities or to expand the tax base to capture digital presence?

10.2 Does your jurisdiction intend to adopt any legislation No, currently there are no defined plans to tax digital activities or to tackle BEPS which goes beyond what is to expand the tax base to capture digital presence. However, in the recommended in the OECD’s BEPS reports? course of the current Austrian EU Council Presidency taxation of digital activities is one of the agenda items. No, currently there are no legislative plans which go beyond what is recommended in the OECD’s BEPS reports besides the new regulations implemented by the Annual Tax Act 2018 (see questions 11.2 Does your jurisdiction support the European 7.2, 7.3 and 9.1). Commission’s interim proposal for a digital services tax?

Yes, Austria’s government supports the European Commission’s interim proposal for a digital services tax.

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Clemens Philipp Schindler Martina Gatterer Schindler Attorneys Schindler Attorneys Kohlmarkt 8–10 Kohlmarkt 8–10 1010 Vienna 1010 Vienna Austria Austria

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

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

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Brazil

Utumi Advogados Ana Claudia Akie Utumi

(in which the representative in Brazil has authority to commit on 1 Tax Treaties and Residence behalf of the foreign entity) are considered tax residents in Brazil.

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

There are 33 tax treaties in force in Brazil. 2.1 Are there any documentary taxes in your jurisdiction?

1.2 Do they generally follow the OECD Model Convention There are no stamp or similar taxes in Brazil. or another model? 2.2 Do you have Value Added Tax (or a similar tax)? If so, Generally, Brazil follows the OECD Model Convention, with few at what rate or rates? adjustments. Yes. VAT corresponds to five different taxes in Brazil: 1.3 Do treaties have to be incorporated into domestic law ■ Two Social Contributions on Gross Revenue – PIS and before they take effect? COFINS, whose rates are generally 1.65% and 9.25%. The import of goods is subject to PIS/COFINS, while export Yes. It is mandatory for treaties to be approved by the Brazilian revenues are exempt. Congress, who issue a Congressional Decree. After this approval, ■ Federal Excise Tax on Manufactured Goods – IPI, whose rates the President is allowed to ratify the treaty and, unless the treaty vary from zero to 300%, depending on the type of product. says otherwise, upon ratification the treaty enters into force in Most products are subject to IPI rates varying from zero to Brazil. After ratifying, the President issues a Presidential Decree to 30%, while beverage and tobacco are subject to higher rates. IPI rates may be reduced or increased by the President. In give notice about the ratification and the date that the treaty entered case of increase, a 90-day waiting period applies. Import of into force. manufactured goods is subject to IPI, while export is exempt. ■ State Value-Added-Tax – ICMS, levied on: (a) sale of goods; 1.4 Do they generally incorporate anti-treaty shopping (b) interstate or intermunicipal transportation services; and rules (or “limitation on benefits” articles)? (c) communication services. ICMS rates rates depend on the type of product or service, origin and destination. In most Most of the tax treaties in force do not contemplate limitation on States, ICMS on goods is generally charged at 17% or 18%, benefits (“LOB”) articles, but solely beneficial owner clauses. on transportation services at 12% and on communication services at 25%. The import of goods is subject to ICMS, while export is exempt. 1.5 Are treaties overridden by any rules of domestic ■ Municipal Services Tax – ISS is levied on all services not law (whether existing when the treaty takes effect or covered by ICMS and is included in the List of Services introduced subsequently)? established by the law. In most cases, ISS is due to the municipality where the services provider is located, but No, tax treaties prevail over existing and subsequently introduced there are some services in which the ISS is charged by the domestic law. municipality where the provider performs the corresponding services. The rates vary from 2% to 5% depending on the city and the type of services. Importation of services is subject to 1.6 What is the test in domestic law for determining the this tax, and export of services is exempt if such services are residence of a company? actually performed outside Brazil.

There are no clear rules in domestic law on permanent establishment. 2.3 Is VAT (or any similar tax) charged on all transactions Based on Brazilian income tax law, residence of a company is or are there any relevant exclusions? determined by its place of incorporation. For purposes of corporate taxes, branches of foreign entities and commissionaire arrangements In addition to the exemption applicable on exports:

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■ Sale of fixed assets is exempt from PIS/COFINS. Brazilian companies may opt to distribute interest on equity, which is ■ Most food products are subject to a zero IPI rate. a deemed interest calculated on certain net equity accounts by using a long-term interest rate (“TJLP”). Interest on equity is deductible for Corporate Income Tax (“IRPJ”) and Social Contribution on 2.4 Is it always fully recoverable by all businesses? If not, Profits (“CSLL”) purposes, up to 50% of taxable profits before what are the relevant restrictions? computing such deduction, and it is subject to WHT at 15% (25% if the beneficiary is resident in a jurisdiction). Interest on PIS/COFINS: If the company is subject to the so-called “non- equity may result in actual reduction of tax burden to the extent that cumulative regime”, this company may take PIS/COFINS credits IRPJ/CSLL are levied at a combined rate of 34% (45% in case of based on amounts paid to suppliers and other providers, observing

financial institutions and insurance companies – this is expected to Brazil specific and detailed rules on how to accrue and use these credits. drop to 40% as of 2019). IPI: Industrial companies and those that are equivalent to industrial companies by IPI law can take credits on IPI paid on industrial inputs 3.2 Would there be any withholding tax on royalties paid (raw materials, intermediary materials and packing materials). by a local company to a non-resident? ICMS: Industrial and commercial companies may take credit of ICMS paid to suppliers of industrial or commercial inputs and fixed Yes. Royalties paid to a non-resident are subject to the following assets (credit acknowledged within four years, at 1/48 per month). taxation: (a) WHT, levied at 15%; 2.5 Does your jurisdiction permit VAT grouping and, if so, (b) withholding service tax if these royalties are viewed as is it “establishment only” VAT grouping, such as that services (trademark licensing is considered service rendering applied by Sweden in the Skandia case? in Brazil), at rates that may vary between 2% and 5%, depending on the municipality and type of service; There is no VAT grouping in Brazil. (c) social contributions on importation of services (“PIS/ COFINS”) if these royalties are viewed as services, levied on the local company at a combined rate of 9.25%; 2.6 Are there any other transaction taxes payable by companies? (d) Special Tax on Royalties and Services (“CIDE/Royalties”), levied on the local company at 10%; and Yes. Transaction taxes that are levied in Brazil are the following: (e) IOF/FX, levied on the local company upon remittance of royalties, at 0.38%. IOF/FX may be changed at any time by (a) Tax on Credit Transactions (“IOF/Credit”), levied on loans the President. granted by Brazilian companies. (b) Tax on Foreign Exchange Transactions (“IOF/FX”), levied on all inflows and outflows of funds. 3.3 Would there be any withholding tax on interest paid (c) Tax on Insurance Transactions (“IOF/Insurance”), levied on by a local company to a non-resident? premium paid in insurance policies. (d) Tax on Bonds and Securities Transactions (“IOF/Securities”), Yes. Interest is subject to 15% WHT (25% if the beneficiary is levied on purchase or sale of bonds and securities. resident in a tax haven jurisdiction). (e) Municipal Tax on Real Estate Transfer (“ITBI”). IOF taxes may have their rates changed at any time by the President. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?

2.7 Are there any other indirect taxes of which we should Yes. Brazilian thin capitalisation rules establish a limit of a 2:1 debt/ be aware? equity ratio, considering all intercompany debts. If the lender is resident in a tax haven jurisdiction or subject to a favourable tax Other indirect taxes may apply depending on the business or type of regime, the applicable ratio is reduced to 0.30:1. product. For example, in telecommunication businesses, there are two other taxes – Fust and Funttel – whose revenues should be used to develop universalisation of communication and telecommunication 3.5 If so, is there a “safe harbour” by reference to which technologies. Another example is the Special Contribution on tax relief is assured? Fuels (“CIDE/Combustíveis”) or Special Contribution on Filming Productions (“CONDECINE”). No, there is no tax relief.

3 Cross-border Payments 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

3.1 Is any withholding tax imposed on dividends paid by Yes. Thin capitalisation rules apply to third-party debts in which any a locally resident company to a non-resident? related party is guarantor, except in case of local debt transactions.

For the time being, distribution of profits is exempt from withholding 3.7 Are there any other restrictions on tax relief for income tax (“WHT”). There are discussions in the Brazilian interest payments by a local company to a non- Congress to reduce corporate taxation and reinstate WHT on resident? dividends. Any changes in income tax law may only be applicable to the following calendar year. Yes, in addition to thin capitalisation rules, financial transfer pricing applies. Based on these rules, interest rate is limited to LIBOR for

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a six-month deposit in USD, plus spread of 3.5%, except in case of requirements: (a) not resident in a tax haven jurisdiction; (b) not prefixed transactions in USD (instead of LIBOR, average interest subject to a favourable tax regime; (c) not subject to sub-taxation rate of Brazilian sovereign bonds issued in USD abroad applies) regime; and (d) income arising from an active business equivalent or prefixed transactions in BRL (average interest rate of Brazilian to more than 80% of the total income. It is possible to consolidate sovereign bonds issued in BRL abroad applies). the results of foreign subsidiaries that comply with the requirements above and calculate corporate income taxes on the consolidated result. 3.8 Is there any withholding tax on property rental payments made to non-residents? Losses accrued by foreign subsidiaries are not deductible for corporate income taxes purposes, but they may be offset against

Brazil Yes, the applicable WHT is 15% (25% if the beneficiary resides in a profits obtained by the same entity in the subsequent four years. tax haven jurisdiction). After this period, losses must be cancelled.

3.9 Does your jurisdiction have transfer pricing rules? 4.5 Do tax losses survive a change of ownership?

Yes, even though Brazilian transfer pricing methods are based on the Generally, yes. Brazilian tax law determines that tax losses accrued so-called “traditional methods” (comparison, resale and cost-plus), locally must be written off if, between the date of accrual and date of the main difference is that, in resale and cost methods, Brazilian offsetting, there is, cumulatively: (a) change of the field of business; law provides for fixed profit margins to determine transfer pricing, and (b) change of control. So, if there is change of ownership which may result in transfer prices different from arm’s length without change of field of business, tax losses survive. prices. Due to Brazil’s request to become OECD member, it is possible that, in the future, Brazilian law may include transactional 4.6 Is tax imposed at a different rate upon distributed, as transfer pricing methods and make more flexible the determination opposed to retained, profits? of profit margins. No, it is not. 4 Tax on Business Operations: General 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 4.1 What is the headline rate of tax on corporate profits? occupation of property?

Taxation on corporate profits comprises two taxes: IRPJ, levied In addition to VAT taxes and corporate taxes on profits, companies at 25% and CSLL, levied at 9% (general rule) or 20% (financial are subject to Social Contribution on Payroll (“INSS”), Tax on Real institutions and insurance companies – this is expected to be reduced Estate Property Ownership (“IPTU”), Tax on Ownership of Motor to 15% as of 2019). Vehicles (“IPVA”), Tax on Rural Land Ownership (“ITR”), CIDE/ Royalties, etc. Other taxes may apply depending on the type of business. 4.2 Is the tax base accounting profit subject to adjustments, or something else? 5 Capital Gains Yes. The law sets forth rules on tax deductibility of costs and expenses. Besides, Brazilian law allows to avoid taxation on IFRS unrealised results, provided that certain conditions are complied 5.1 Is there a special set of rules for taxing capital gains with. Among such conditions, there is an obligation to control and losses? unrealised income or losses/expenses/costs in segregated sub- accounts. Yes. Non-residents are subject to income tax on capital gains, to be withheld by the buyer. WHT on capital gains is levied at rates varying from 15% to 22.5%, depending on the amount of gains, or 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 25% in case of beneficiary residing in a tax haven jurisdiction. The rates apply as follows:

The main adjustments correspond to IFRS unrealised results, non- Amount of Gains Rate deductibility of unnecessary expenses, expenses with bonuses of Up to BRL 5MM 15.0% officers and directors, expenses with accounting provisions (except From BRL 5MM to 10MM 17.5% th provision for employees’ 13 salary and vacations), expenses with From BRL 10MM to 30MM 20.0% defaulted credits (deduction of these credits is subject to a number More than BRL 30MM 22.5% of requirements, including one year or more of default in case of credits exceeding BRL 15,000, and collection lawsuit for credits Losses accrued by non-residents cannot be offset against future or exceeding BRL 100,000). past capital gains.

4.4 Are there any tax grouping rules? Do these allow 5.2 Is there a participation exemption for capital gains? for relief in your jurisdiction for losses of overseas subsidiaries? No, there is not.

No, there is no group , except in relation to subsidiaries outside Brazil that comply with the following

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it is subject to WHT at 15% (25% if the beneficiary is resident in 5.3 Is there any special relief for reinvestment? a tax haven jurisdiction). Interest on equity may result in actual reduction of tax burden to the extent that IRPJ/CSLL are levied at No, there is not. a combined rate of 34% (45% in case of financial institutions and insurance companies – this is expected to drop to 40% as of 2019). 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 7 Overseas Profits

Yes. Direct or indirect sale of local assets/shares are subject to 7.1 Does your jurisdiction tax profits earned in overseas Brazil taxation on capital gains, even if both buyer and seller are located branches? outside Brazil. If the seller and buyer are non-residents, the non- resident buyer is obliged to withhold the corresponding amounts, Yes, both IRPJ and CSLL are levied on profits obtained outside and to have a representative in Brazil to collect such tax. Brazil by means of branches, subsidiaries or controlled companies, on an accrual basis, and on related companies (companies in which the Brazilian corporate shareholder does not hold control) on a cash 6 Local Branch or Subsidiary? basis.

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

Upon formation of subsidiary, transfer of funds into Brazil as capital Yes, in case of investment in a related company. In case of branches, contribution is subject to IOF/FX at 0.38%. IOF/FX rates may be controlled companies or subsidiaries, the taxation occurs on changed at any time by the President. December 31st of each year, in such a way that there is no additional income taxation upon distribution of dividends. 6.2 Is there a difference between the taxation of a local Inflow and outflow of funds in connection to Brazilian investments subsidiary and a local branch of a non-resident abroad are subject to IOF/FX at 0.38%. IOF/FX rates may be company (for example, a branch profits tax)? changed at any time by the President.

For tax purposes, a local subsidiary or a local branch of a non- 7.3 Does your jurisdiction have “controlled foreign resident company are subject to same tax treatments. company” rules and, if so, when do these apply?

6.3 How would the taxable profits of a local branch be Brazil adopts what is normally called a “General CFC Regime”. determined in its jurisdiction? “General” refers to the fact that Brazilian companies are subject to taxation on profits generated by foreign subsidiaries or controlled Taxable profits of a local branch are determined the same way as companies on December 31st of each year, regardless of the actual profits of other Brazilian companies and must reflect activities distribution of such profits. developed from the local presence, i.e. must include all revenues and The only situation in which taxation occurs on a cash basis is if a expenses connected to the businesses developed by such a branch. Brazilian corporate investor does not hold control over the foreign company, and such company is not (a) resident in a tax haven 6.4 Would a branch benefit from double tax relief in its jurisdiction, or (b) subject to a favourable tax regime. In this jurisdiction? situation, the Brazilian company may pay IRPJ/CSLL on cash basis. For controlled foreign companies with at least 80% of active As branches are considered local corporate taxpayers, they may income, IRPJ/CSLL due on the corresponding profits may be paid claim application of double tax treaties whenever negotiating with in instalments, as follows: (a) 12.5% in the first year; (b) according entities located in any of the countries with treaties in force with to distribution of profits in years two to seven; and (c) remaining Brazil. balance of IRPJ/CSLL due at the end of year eight. This instalment is subject to interest, based on LIBOR for a six-month deposit in 6.5 Would any withholding tax or other similar tax be USD. imposed as the result of a remittance of profits by the branch? 8 Taxation of Commercial Real Estate For the time being, distribution of profits is exempt from WHT. There are discussions in the Brazilian Congress to reduce corporate 8.1 Are non-residents taxed on the disposal of taxation and reinstate WHT on dividends. Any changes in income commercial real estate in your jurisdiction? tax law may only be applicable to the following calendar year. Brazilian companies may opt to distribute interest on equity, which is Yes, they are subject to WHT on capital gains, levied at rates varying a deemed interest calculated on certain net equity accounts by using from 15% to 22.5%, depending on the amount of gains, or 25% in TJLP. Interest on equity is deductible for IRPJ/CSLL purposes, on case of beneficiary residing in a tax haven jurisdiction. The rates up to 50% of taxable profits before computing such deduction, and apply as follows:

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Amount of Gains Rate 9.2 Is there a requirement to make special disclosure of Up to BRL 5MM 15.0% avoidance schemes? From BRL 5MM to 10MM 17.5% From BRL 10MM to 30MM 20.0% The Brazilian annual tax return (called “ECF” – “Escrituração More than BRL 30MM 22.5% Contábil-Fiscal”) includes a requirement to inform of any “significant transactions” occurred in a certain calendar year, regardless whether it corresponded to a tax avoidance scheme or not. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your

Brazil jurisdiction? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also Yes. Whenever the transfer involves, directly or indirectly, “assets anyone who promotes, enables or facilitates the tax located in Brazil”, income tax on capital gains applies. If the seller avoidance? and buyer are non-residents, the non-resident buyer is obliged to withhold the corresponding amounts, and to have a representative in Over the last five years, tax authorities have included tax consultants Brazil to collect such tax. and tax lawyers as jointly liable for tax assessments in which they accuse corporate taxpayers of performing abusive transactions that aim at saving taxes. For the time being, the Federal Administrative 8.3 Does your jurisdiction have a special tax regime Court of Tax Appeals has ruled favourably to exclude tax consultants for Real Estate Investment Trusts (REITs) or their and tax lawyers from the dispute, understanding that the responsibility equivalent? may only be imposed on shareholders and officers of a company, and not on third parties that do not have decision-making power. Brazilian law does not provide for REITs, but rather Real Estate Investment Funds (“FII – Fundo de Investimento Imobiliário”), which is formed as closed-end invested condominium, without legal 9.4 Does your jurisdiction encourage “co-operative personality, and divided in quotas. FIIs may invest in real estate compliance” and, if so, does this provide procedural properties or real estate companies. They are exempt from taxation benefits only or result in a reduction of tax? on income arising from real estate activities, and subject to WHT on financial income. WHT levied on portfolio may be offset against Yes. On federal level, compliant companies may obtain benefits to WHT levied upon distributions to quotaholder. The rate applicable speed up customs clearance upon export and import transactions, on the quotaholder is 20% (including in case of sale of quotas) and which may reduce significantly the number of days necessary for on the portfolio may vary between 22.5% to 15% depending on the such clearance. As an example, goods under import “green channel” timing of the investment, as follows: may be released within a week, while goods under “red” or “grey” channels may take up to 40 days to be cleared. Period of Investment Rate Up to 180 days 22.5% From 181 to 360 days 20.0% 10 BEPS and Tax Competition From 360 to 720 days 17.5% More than 720 days 15.0% 10.1 Has your jurisdiction introduced any legislation Resident individuals investing in FIIs with 50 quotaholders or more in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? that comply with other requirements are exempt from WHT on distributions. Yes. Brazil has adopted CBCR, enacted regulations concerning Mutual Agreement Procedures, and issued updates of black and 9 Anti-avoidance and Compliance grey lists.

9.1 Does your jurisdiction have a general anti-avoidance 10.2 Does your jurisdiction intend to adopt any legislation or anti-abuse rule? to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? There is one paragraph that has not yet been regulated that is deemed to be a “general anti-avoidance clause”, however, it is too broad to Instead of enacting GAAR, Brazilian tax authorities have made use be considered a real GAAR. It reads as such: of the concept of “abuse of law” as stated in the Brazilian Civil Code, which is a broad definition and goes beyond OECD BEPS National Tax Code (CTN), Art. 116. (…) recommendation. By using such approach, any reduction of taxes Sole Paragraph. The administrative authority may disregard may be viewed as “abusive” by the tax authorities, increasing the legal acts or transactions practiced with the objective of number of tax disputes considerably. deceiving the occurrence of tax triggering event or the nature of the elements that constitute the tax obligation, observed the procedures to be established in ordinary law. 10.3 Does your jurisdiction support public Country-by- These regulations for this paragraph have never been enacted on a Country Reporting (CBCR)? national level. In June 2018, the State of Rio de Janeiro created a regulation to this paragraph that serves to drive the tax inspections Brazil has started to request CBCR based on December 2016, and and tax assessments related to ICMS and Gift and Estate Tax has committed to exchange CBCR information with other countries. (“ITCD”). For the time being, CBCR information is not available to the public in general.

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10.4 Does your jurisdiction maintain any preferential tax Ana Claudia Akie Utumi regimes such as a patent box? Utumi Advogados Rua Surubim, 504, conj. 62 There is no patent box regime, the preferential tax regimes applicable Cidade Monções, São Paulo SP 04751-050 to non-resident investors are concentrated in financial and capital Brazil markets (“4,373 Regime”), in which there are exemptions of gains accrued on Brazilian exchange or organised over-the-counter Tel: +55 11 4118 2323 Email: [email protected] markets. Other benefits may apply under the 4,373 Regime, such as URL: www.utumilaw.com reduction of WHT on stock funds from 15% to 10%, and from 15% Brazil to zero on Private Equity Funds (“FIP”) in which the non-resident Founding partner of Utumi Advogados, Ana Claudia has more than investor holds less than 40% of the quotas and of the economic 25 years of experience in Tax. She is member of: Practice Council benefit, among other requirements. of the NYU International Tax Program; Board of Directors of the The requirements for non-resident investors to be included in Financial Planning Standards Board – FPSB; and Board of the Fundação Visconde de Porto Seguro. Ana Claudia is also Chair of the 4,373 Regime are the following: (a) do not reside in a tax haven Brazilian branch of STEP, and Director of ABDF/Brazilian International jurisdiction; (b) appoint a Brazilian financial institution as Fiscal Association (“IFA”) Branch. She served as a Member of the representative in Brazil; and (c) register under the 4,373 Regime IFA Permanent Scientific Committee from 2010 to 2017. She isa with the Central Bank and Brazilian SEC. Tax Professor on various postgraduate courses, including MBAs of FIPECAFI Faculty and the LL.M. in International Tax of the University of Zurich, and a Researcher at Fundação Getulio Vargas (“FGV”) Law School. Ana Claudia holds a Ph.D in Financial and Economic 11 Taxing the Digital Economy Law (University of São Paulo – USP), Master in Tax Law (Catholic University of Sao Paulo), MBA in Finance (IBMEC/SP-Insper), and is a graduate of Law (USP) and Business Administration (FGV). 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence?

There have not yet been significant changes to expand the tax base and capture digital presence.

11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax?

For the time being, there has been no official statement from the Brazilian government about this.

Utumi Advogados was born under the leadership of Ana Claudia Utumi, with a team of professionals that are eager to achieve excellence in technical assistance and client attention, with personalised and tireless work. Utumi Advogados is a boutique law firm, fully dedicated to tax consulting and tax litigation to both corporates and individuals, with the work of partners, Camila Tapias and Sabrina Sabaini. With more than 25 years of experience, Ana Claudia accumulated a number of market acknowledgments as one of the leaders of tax law practice in Brazil, in view of her work assisting foreign and Brazilian companies, as well as high-net-worth families. Her practice involves assisting with tax litigation and tax consulting, including taxation on M&A transactions, taxation on financial and capital markets, and taxation of different economic sectors such as: food; beverages; cosmetics; chemicals; pharmaceuticals; heavy industry; technology; and electronics services, among others.

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Chile Jessica Power

Carey Ximena Silberman

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? Stamp Tax is applicable to documents evidencing loans. Chile has 32 tax treaties. Additionally, there are two tax treaties Stamp Tax ranges from 0.066% up to 0.8% on the principal amount, subscribed to by Chile which have not yet entered into force. depending on the maturity date (from one month or less up to 12 months or more). Loans without a maturity date or which are 1.2 Do they generally follow the OECD Model Convention payable on demand are subject to a tax of 0.332%. or another model?

2.2 Do you have Value Added Tax (or a similar tax)? If so, Yes, except for the treaty with the United States of America (not yet at what rate or rates? in force) that follows the US model. Yes, Value Added Tax (“VAT”) exists at a 19% rate. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Once treaties are ratified by the Chilean Congress and published in the Official Gazette, they become effective and enforceable, and are As a general rule, VAT applies on: (i) customary sales of local considered part of the domestic legislation. movable and immovable property (excluding land); (ii) commercial, industrial and intermediary services provided or used in Chile; and 1.4 Do they generally incorporate anti-treaty shopping (iii) special cases (e.g., imports, software licensing, among others). rules (or “limitation on benefits” articles)? Thus, the main exclusions refer to the sale of land and professional services. Yes, most of the tax treaties have anti-treaty shopping rules and Also, imports of working capital assets for the development of recently enacted treaties also have limitation on benefits clauses. specific projects (e.g., mining, industrial, energy, among others); Chile is also a signatory party to the Multilateral Convention to exports; and certain payments for services rendered abroad, are Implement Tax Treaty Related Measures of BEPS Actions (“MLI”). VAT-exempt.

1.5 Are treaties overridden by any rules of domestic 2.4 Is it always fully recoverable by all businesses? If not, law (whether existing when the treaty takes effect or what are the relevant restrictions? introduced subsequently)? VAT taxpayers can offset the VAT surcharged in their own sales (i.e., No. Pursuant to the Political Constitution of Chile and the Vienna “Fiscal Debit”) against the VAT paid for in the acquisition of goods Convention (to which Chile is a signatory party), tax treaties should or services (“Fiscal Credit”). Fiscal Credit balance can be carried not be overridden by Chilean domestic laws, either existing or forward indefinitely. subsequent. Exporters and VAT taxpayers acquiring fixed assets and complementary services are entitled to request a VAT fiscal credit 1.6 What is the test in domestic law for determining the refund. Other taxpayers consider the VAT paid as a cost or as an residence of a company? expense (see question 4.2 below). VAT paid for goods or services used for activities partly subject to The place of incorporation. VAT is proportionally granted as Fiscal Credit.

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VAT paid is not granted as a Fiscal Credit when: (i) acquiring goods designs, patents, use and exploitation of computer programs, among or services not related to taxpayer’s business, or used in activities others). However, if the foreign beneficiary is a resident in a tax- exempted or not subject to VAT; (ii) acquiring or maintaining vehicles, haven jurisdiction, WHT is increased to 30%. station wagons or similar, when not being the main business; and (iii) Royalties paid for the use of standard software are WHT-exempt. the invoice paid is deemed to be false or when issued by taxpayers not Tax treaties can also reduce the WHT applicable on royalties (from performing activities subject to VAT (unless certain formalities are 5% to 15%). taken by the taxpayer when paying the invoice).

3.3 Would there be any withholding tax on interest paid 2.5 Does your jurisdiction permit VAT grouping and, if so,

by a local company to a non-resident? Chile is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? Yes. Interest payments are generally subject to a 35% WHT. A No. Each VAT taxpayer must calculate, declare and pay its Fiscal reduced 4% WHT applies on interest payments to foreign banks or Debit, even when it is part of the same group of related companies. financial institutions. Tax treaties can also reduce the applicable WHT (from 5% to 15%).

2.6 Are there any other transaction taxes payable by companies? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? The transfer of motorised vehicles is subject to a transaction tax of 1.5% on the highest between the sale price and the vehicle’s fiscal Yes. Local Thin-Cap Rules apply to payments subject to reduced valuation. WHT rates made to related parties abroad, when the borrower is in an “excessive indebtedness” situation (i.e., world-wide debt exceeds three times the borrower’s adjusted tax equity). Payments to related 2.7 Are there any other indirect taxes of which we should parties and excessive indebtedness will be proportionally levied be aware? with a 35% sole tax borne by the Chilean debtor, with a credit for the WHT paid. The following indirect taxes should be noted: 1. additional tax of 15% or 50% on the first sale or import, customary or not, of some sumptuary goods (e.g., gold and 3.5 If so, is there a “safe harbour” by reference to which platinum jewels); tax relief is assured? 2. additional tax from 10% to 31.5% on the sale or import, customary or not, of energising, hypertonic or substitutes The 3:1 debt-equity ratio established by the Thin-Cap Rules is drinks; liquors, distilled, whiskies, wines and other alcoholic supposed to be a safe harbour provision for the reduced WHT rate beverages; for interest payments between related parties. 3. additional tax from 52.6% to 62.3% on the sale or import of cigars, cigarettes and tobacco; and 3.6 Would any such rules extend to debt advanced by a 4. additional tax on the first sale or import of gasoline or diesel, third party but guaranteed by a parent company? equal to 1.5 of a Monthly Tax Unit or UTM (approximately USD 72) per cubic metre of diesel, and six UTM per cubic Yes, Thin-Cap Rules apply to third-party debt guaranteed by a metre in case of gasoline, which is also adjusted by adding or related party, including back-to-back structures. deducting a variable component provided in Law No. 20.943.

3.7 Are there any other restrictions on tax relief for 3 Cross-border Payments interest payments by a local company to a non- resident?

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? Tax treaty relief is subject to the usual limitations (i.e., effective beneficiary and compliance requirements) and local formal requirements (i.e., certificate and a sworn statement). Yes. Foreign individuals or entities are subject to a 35% Withholding Tax (“WHT”) on dividends from Chile. The WHT must be withheld, declared and paid by the local payer. The 35% WHT on dividends 3.8 Is there any withholding tax on property rental applies regardless of the existence of a tax treaty by virtue of the payments made to non-residents? “Chile clause”. A tax credit for either 100% or 65% of the Corporate Tax paid by Yes. Rental payments for assets located in Chile are subject to a the local company is granted against such WHT, depending on the 35% WHT. applicable tax regime (see question 4.6 below). A reduced 1.75% WHT applies as a sole tax over the gross amounts paid for by the lease (with or without purchase option) of imported capital goods that fulfil certain requirements. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? Tax treaties may also offer reduced WHT rates.

Yes. Royalties are generally subject to a 30% WHT. A reduced 15% rate applies in some cases (e.g., use of utility models, industrial

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2. Semi-integrated income regime: a 27% Corporate Tax applies 3.9 Does your jurisdiction have transfer pricing rules? at the first level and Final Taxes are triggered upon profits’ effective distribution, only with a credit of 65% of the Corporate Yes. Chilean transfer pricing rules (“TP Rules”) entitle the IRS to Tax (except for dividends remitted to a tax treaty resident where challenge values in cross-border-related transactions when they are a 100% Corporate Tax credit is granted; this also applies to tax not arm’s length. treaties subscribed by Chile but not in force, such as those with the United States of America and Uruguay, until 2021). The total tax burden for foreign owners under this regime is 44.45%. 4 Tax on Business Operations: General A tax reform bill was recently submitted before the Chilean rd Chile Congress in August 23 , 2018 for its discussion (the “Tax Reform”). 4.1 What is the headline rate of tax on corporate profits? The Tax Reform intends to re-establish a single fully integrated tax regime (i.e., Final Taxes triggered upon distribution and Corporate Tax fully creditable). At the Chilean company level, the Corporate Tax rate is 25% or 27% depending on the company’s income tax regime (see question 4.6 below), calculated annually on its worldwide taxable income on a 4.7 Are companies subject to any significant taxes not cash or accrual basis. covered elsewhere in this chapter – e.g. tax on the occupation of property?

4.2 Is the tax base accounting profit subject to Commercial, investment and industrial activities are generally adjustments, or something else? subject to an annual municipal licence tax at rates ranging from 0.25% to 0.5%, applied through the company’s adjusted tax equity, In general, the net taxable income must be determined according to capped at approximately USD 600,000 per year. full accounting records, and it is equal to the accrued and received income-less costs and expenses, and subject to certain adjustments. Expenses are tax deductible if certain legal requirements are met 5 Capital Gains (i.e., necessary to generate the taxable income of the period, accrued or paid, not deducted as cost, from the corresponding exercise and 5.1 Is there a special set of rules for taxing capital gains evidenced to the IRS). and losses?

4.3 If the tax base is accounting profit subject to Capital gains are subject to the general tax regime (i.e., Corporate adjustments, what are the main adjustments? Tax plus Final Taxes). The same applies to capital losses, which are tax-deductible provided that certain requirements are met. The main adjustments refer to monetary correction of the assets and However, special rules apply for individuals in case of capital gains liabilities generally under local inflation and exceptionally under US arising from the sale of shares, real estate, mining property, water dollar denomination. rights, bonds, intellectual property and industrial property, among others. 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 5.2 Is there a participation exemption for capital gains? subsidiaries?

Capital gains derived from the sale of shares by individuals not keeping No. However, taxpayers must recognise in Chile the tax result of full accounting records, are considered non-taxable income provided foreign permanent establishments (“PE”) including tax losses. that: (i) the buyer is not a related party to the seller; and (ii) the gains do not exceed 10 Annual Tax Units (UTA, approx. USD 8,700). 4.5 Do tax losses survive a change of ownership? Capital gains resulting from a non-habitual and non-related sale of shares acquired before January 31st, 1984 are considered non- Under a change of ownership (i.e., owners acquiring or completing taxable income. Also, a full tax-exemption applies on the sale of directly or indirectly at least 50% of the shares or rights to the profits shares of publicly listed stock corporations that are regularly traded of the company), the company’s losses can be used provided that and provided specific requirements are met. certain requirements are met regarding the operational company’s business and assets. 5.3 Is there any special relief for reinvestment?

4.6 Is tax imposed at a different rate upon distributed, as Some companies have the option to reduce its taxable income up opposed to retained, profits? to an amount of 50% of the reinvested taxable income, if certain requirements are met and with a cap of 4,000 indexed units (“UF”). The Chilean income tax system is a two-level integrated system. Corporate Tax paid by the company at the first level can be totally or partially credited against owners’ income taxes (“Final Taxes”): 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 1. Income-attribution regime: a 25% Corporate Tax applies at the assets/shares? first level and the income is attributed to the owners who pay Final Taxes, regardless if it is distributed or not, and Corporate Tax is fully granted as a credit. In general, 35% WHT applies on capital gains derived from the The total tax burden for foreign owners under this regime is direct transfer of Chilean assets and shares of local companies. 35%.

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The indirect transfer of Chilean assets and shares through the sale of above). Distributions of exempt or non-taxable income and capital foreign shares, equity rights, quotas, bonds or other titles or rights, reductions could be WHT-exempt. may be taxed if: a) the foreign titles represent 10% or more of the offshore entity and the underlying Chilean assets: (a) proportionally 7 Overseas Profits amounts to equal or higher than UTA 210,000 (approx. USD 180 million); or (b) represent 20% or more of the fair market 7.1 Does your jurisdiction tax profits earned in overseas value of the ownership in the offshore company; or branches? b) if the sold foreign entity is domiciled or incorporated in a tax-

haven jurisdiction, unless certain requirements are met and Chile Yes. As a general rule, foreign-source income is recognised in Chile evidenced before the IRS. on a cash basis, except in the case of foreign branches or other PEs, Exceptionally, indirect taxation does not apply in case of business where the PE’s income is taxed on an accrual basis. reorganisations, provided certain requirements are met.

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

Yes, as ordinary income (i.e., Corporate Tax and Final Taxes upon 6.1 What taxes (e.g. capital duty) would be imposed upon distribution). the formation of a subsidiary? A foreign tax credit is granted for the taxes paid abroad on such No Chilean tax levies the incorporation of an entity. dividends, with certain limitations and requirements. However, the development of investment, commercial and industrial activities, among others, is subject to the municipal licence tax (see 7.3 Does your jurisdiction have “controlled foreign question 4.7 above). company” rules and, if so, when do these apply?

Yes. Under local CFC rules, foreign passive income of a controlled 6.2 Is there a difference between the taxation of a local entity is recognised in Chile on an accrual basis. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? A foreign entity is deemed to be controlled if the taxpayer: (i) holds 50% or more of its equity, profits or voting rights; (ii) has the As a general rule, Chilean branches are subject to the same income authority to appoint the majority of its board; and/or (iii) is entitled taxation as subsidiaries (i.e., two-level system with Corporate Tax to amend its bylaws unilaterally. Additionally, entities located in a and Final Taxes on taxable distributions). preferential tax regime’s jurisdiction are presumed to be controlled. However, subsidiaries are subject to Corporate Tax on their worldwide income, whereas branches and other PEs are subject to 8 Taxation of Commercial Real Estate taxation on results attributable to them.

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

Yes. Non-residents are subject to ordinary income taxation for Results attributable to PEs must consider income, cost and expenses capital gains arising from the sale of any kind of real estate located originated from (a) the PE’s activities in Chile and abroad, and (b) in Chile (i.e., Corporate Tax and WHT). assets allocated in or used by the PE, whether located in Chile or abroad. However, individuals who do not keep full accounting records are not subject to income taxes up to 8,000 indexed units (UF, approx. However, if the books of the PE are not sufficient to determine its USD 332,000), provided that certain requirements are met. On the effective income, the IRS is empowered to assess such net taxable excess, a 35% WHT applies. This benefit is not capped at UF 8,000 income as a percentage of the PE’s gross income or total assets, in for these sellers in case of real estate acquired before January 1st, relation to those of the parent company. 2004.

6.4 Would a branch benefit from double tax relief in its 8.2 Does your jurisdiction impose tax on the transfer of jurisdiction? an indirect interest in commercial real estate in your jurisdiction? No, because a branch is not considered a tax resident in Chile. The ITL taxes the indirect transfer of real estate when the indirect 6.5 Would any withholding tax or other similar tax be transfer thresholds are met (see question 5.4 above). imposed as the result of a remittance of profits by the branch? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their Distributions of taxable profits by a branch or PE have the same equivalent? tax treatment as distributions made by Chilean companies. Hence, they are subject to a 35% WHT with a total or partial Currently, there is no special tax regime for REITs. credit for the Corporate Tax paid by the PE (see question 4.6

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Also, Chile is a signatory party to the MLI and to the CBCR 9 Anti-avoidance and Compliance Multilateral Competent Authority Agreement. Moreover, the Tax Reform bill proposes a “digital tax” on new 9.1 Does your jurisdiction have a general anti-avoidance digital business models (see question 11.1 below). or anti-abuse rule?

10.2 Does your jurisdiction intend to adopt any legislation Domestic law contains a general overreaching anti-avoidance rule to tackle BEPS which goes beyond what is (“GAAR”), which is a substance-over-form control rule under recommended in the OECD’s BEPS reports? which the IRS is entitled to challenge the tax consequences derived Chile from legal forms when there is abuse or simulation. Chile is currently complying with the BEPS agenda following the OECD’s recommendations (see question 10.1 above). 9.2 Is there a requirement to make special disclosure of avoidance schemes? 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? There is not a general requirement to disclose avoidance schemes. However, taxpayers are required by the IRS to permanently provide Yes. The CBCR must be submitted annually by the local controller information by means of filing sworn affidavits. or parent company of a multinational group, in case (i) the group’s consolidated income is equal or higher than EUR 750 million, or 9.3 Does your jurisdiction have rules which target not (ii) the Chilean company has been designated by the controller or only taxpayers engaging in tax avoidance but also parent company as its substitute to submit the CBCR in its country anyone who promotes, enables or facilitates the tax of tax residence. avoidance?

10.4 Does your jurisdiction maintain any preferential tax Individuals or legal entities involved in the design or plan of acts, regimes such as a patent box? contracts or businesses deemed to be abusive or simulated may be subject to a fine of up to 100% of the avoided taxes. There is no patent box regime in Chile for revenue deriving from Persons facilitating false tax documentation can also be subject to intellectual property licensing. fines and criminal sanctions. However, certain transfers of intellectual property can be income- tax exempted (see question 5.1 above). 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 11 Taxing the Digital Economy

Chilean domestic law does not contemplate general “co-operative 11.1 Has your jurisdiction taken any unilateral action to tax compliance” programmes. digital activities or to expand the tax base to capture Regarding the matter of TP, advance pricing agreements (“APAs”) digital presence? between the taxpayer and the IRS could be agreed. Additionally, taxpayers may request tax rulings from the IRS to give No. certainty regarding specific transactions or structures. However, the Tax Reform includes a new 10% sole Also, the IRS is prevented from retroactively assessing taxes when a on gross amounts paid for digital services provided by foreign taxpayer has relied, in good faith, on a criterion set forth in a ruling individuals or entities and used in Chile by individuals. or other official document (while the IRS does not issue a new ruling stating a different criterion). 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 10 BEPS and Tax Competition Chile does not follow the European Commission’s interim proposal 10.1 Has your jurisdiction introduced any legislation in this regard (see question 11.1 above). in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)?

The most important amendments to tackle BEPS Actions up to this date are: TP rules; GAAR (see section 9 above); CFC rules (see question 7.3 above); and Sworn Statements regarding CBCR (see question 10.3 below) and global tax characterisation, among others.

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Jessica Power Ximena Silberman Carey Carey Isidora Goyenechea 2800 Isidora Goyenechea 2800 43rd Floor, Las Condes 43rd Floor, Las Condes Santiago Santiago Chile Chile

Tel: +56 2 2928 2214 Tel: +56 2 2928 2214 Email: [email protected] Email: [email protected] URL: www.carey.cl URL: www.carey.cl Chile

Jessica Power is partner and co-head of Carey’s Tax Group. Her Ximena Silberman is an associate at Carey’s Tax Group. She advises practice focuses on advising domestic and foreign clients on personal clients in personal and corporate tax planning, local and international and corporate tax planning, local and international tax consulting, tax consulting and tax litigation. She graduated Summa Cum Laude mergers and acquisitions and foreign investment transactions. from Universidad de Chile, and received the Carey Award as the best Tax Law student of her class, Universidad de Chile (2010). Jessica has been widely recognised by international publications such as Chambers and Partners, International Tax Review, The Legal 500, Best Lawyers, and Latin Lawyer, among others. She is a member of the board of International Fiscal Association Chilean Branch, and a member of the Chilean Bar Association. Jessica graduated Summa Cum Laude from Universidad de Chile and has a Degree in Tax Law from Universidad de Chile.

Carey is Chile’s largest law firm, with more than 270 legal professionals. We are a full-service firm. Our various corporate, litigation and regulatory groups include highly-specialised attorneys and practice areas covering all areas of law. Our clients include some of the world’s largest multinationals, international organisations, and some of the most important local companies and institutions. Our lawyers have graduated from the best law schools in Chile and most of our mid- and senior-level associates have graduate degrees from some of the world’s most prominent universities. Several are also currently university professors. We are an effective bridge between legal systems. Most of our partners and senior associates have worked in North America, Asia, and Europe, as foreign or regular associates with leading international law firms, or as in-house counsel for major corporations or international institutions.

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China

Rui Bai Law Firm Wen Qin

domestic tax law, a corporation which is not incorporated/registered 1 Tax Treaties and Residence in China is treated as a Chinese corporation (having a corporate residence in China) if such corporation has its principal office in 1.1 How many income tax treaties are currently in force in China. your jurisdiction? 2 Transaction Taxes China has signed 105 tax treaties and 100 of them have come into force as of September 2018. In addition, there are tax arrangements between Mainland China and Hong Kong, Macao, and Taiwan, 2.1 Are there any documentary taxes in your jurisdiction? respectively. Yes. China has Stamp Duty, which is imposed on certain categories 1.2 Do they generally follow the OECD Model Convention of documents that are exhaustively listed in the “Interim Regulations or another model? of the People’s Republic of China on Stamp Tax”, including, for example: Yes. Most of the income tax treaties currently in force in China (1) contracts or vouchers of the nature of a contract with regard to generally follow the OECD Model Convention with certain purchases and sales, processing, contracting of construction deviations. China signed the Multilateral Convention to Implement projects, property leasing, cargo transportation, warehousing Tax Treaty Related Measures to Prevent Base Erosion and Profit storage, loans, property insurance, or technology; Shifting (“MLI”) on June 7, 2017, together with over 67 jurisdictions. (2) documents for transfer of property rights; (3) business account books; 1.3 Do treaties have to be incorporated into domestic law (4) certificates for rights or licences; and before they take effect? (5) other vouchers that are taxable as determined by the Ministry of Finance. No. The treaties have to be ratified by the Standing Committee of the National People’s Congress before taking effect. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? Yes, China has Value Added Tax. There are currently several different tax rates from 6% to 16%. The main three tax rates are 6%, Some of the treaties have anti-treaty shopping rules or similar rules 10% and 16% for various services and sales of goods. Besides that, to that effect, such as the treaties with the US, Mexico, Ecuador and there are two types of taxpayers: general taxpayers; and small-scale Russia. taxpayers. The applicable tax rate for the small-scale taxpayers is 3%.

1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or 2.3 Is VAT (or any similar tax) charged on all transactions introduced subsequently)? or are there any relevant exclusions?

No. It is a well-established constitutional principle in China that no VAT is generally charged on all transactions, while there are treaty is overridden by any rule of domestic law (whether existing at certain exclusions. Certain specified categories of transactions, the time the treaty takes effect or enacted subsequently). such as: agricultural products produced and sold by agricultural producers themselves; birth control drugs and devices; antique books; imported instruments and equipment to be directly used in 1.6 What is the test in domestic law for determining the residence of a company? scientific research, scientific experiments and teaching; materials and equipment imported by foreign governments and international organisations for gratis aid; products exclusively for the disabled The applicable test is the “the principal office” test. Under Chinese directly imported by organisations for the disabled; and sales of

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goods used by sellers themselves. No government agencies except State Council may decide exempted or deductible items. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident?

2.4 Is it always fully recoverable by all businesses? If not, Generally, yes. Interest on corporate bonds issued by a Chinese what are the relevant restrictions? company that is paid to a non-resident bondholder (either a non- resident company or a non-resident individual) is generally subject Generally, yes. At present, VAT that is charged on taxable to Chinese withholding tax at the rate of 10%. transactions and incurred by a business enterprise is generally recoverable by way of a tax credit or refund.

3.4 Would relief for interest so paid be restricted by China reference to “thin capitalisation” rules? 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that The company made the interest payment may be denied a deduction applied by Sweden in the Skandia case? of the interest for its own corporation income tax purposes due to the application of the “thin capitalisation” rules under Chinese domestic No, this is not permitted. tax law. The Chinese thin capitalisation rules deny deductibility of interest when such company’s annual average ratio of debt to 2.6 Are there any other transaction taxes payable by equity exceeds 5:1 for financial enterprises and 2:1 for other types companies? of enterprises.

Yes. There are some transaction taxes in China, including, but not 3.5 If so, is there a “safe harbour” by reference to which limited to, , Real Property Acquisition Tax and tax relief is assured? Automobile Acquisition Tax. This is not applicable. 2.7 Are there any other indirect taxes of which we should be aware? 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? Yes. There are various indirect taxes in China such as Consumption Tax, Customs Duty, Land Value Increment Tax and Stamp Duty. Yes. Under the thin capitalisation rules in China, debt advanced by a third party and guaranteed by a parent company would generally be 3 Cross-border Payments treated as related party debt, subject to the thin capitalisation rules.

3.7 Are there any other restrictions on tax relief for 3.1 Is any withholding tax imposed on dividends paid by interest payments by a local company to a non- a locally resident company to a non-resident? resident?

Generally, yes. Under Chinese tax law, a non-resident shareholder This is not applicable. (either a non-resident company or a non-resident individual) of a Chinese company is subject to Chinese withholding tax with respect to dividends it receives from such Chinese company at the 3.8 Is there any withholding tax on property rental rate of 10% for a company shareholder and 20% for an individual payments made to non-residents? shareholder; however, if the Chinese company paying the dividends to a non-resident shareholder is a listed company, this withholding Generally, yes. Rental fees for leasing real property or rights to tax rate is reduced to 10% for the individual shareholder. real property located within China and paid by a Chinese company However, most of the income tax treaties currently in force in China to a non-resident (either a non-resident company or a non-resident generally provide that the reduced treaty rate of 5% for parent and individual) are subject to Chinese withholding tax at the rate of other certain benefit owners, and the incomes gained by individual 10%, subject to certain exemptions. foreigners from dividends and bonuses of enterprise with foreign investment, are exempt from individual income tax for the time 3.9 Does your jurisdiction have transfer pricing rules? being. Yes. Chinese transfer pricing rules are applicable to both a Chinese 3.2 Would there be any withholding tax on royalties paid company and a Chinese branch of a non-resident company if either of by a local company to a non-resident? them engage in transactions with any of their “foreign-related parties”.

Generally, yes. Under Chinese tax law, royalties relating to patents, 4 Tax on Business Operations: General trademarks, design, know-how with respect to technology, and copyrights used for any Chinese company’s business carried on in China and paid by the Chinese company to a non-resident licensor 4.1 What is the headline rate of tax on corporate profits? (either a non-resident company or a non-resident individual) are subject to Chinese withholding tax at the rate of 10%, with certain The rate of corporate income tax shall be 25%. exemptions. In respect of non-resident enterprises that meet certain requirements, the applicable tax rate shall be 20% with a 50% reduction.

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4.2 Is the tax base accounting profit subject to 5.2 Is there a participation exemption for capital gains? adjustments, or something else? There is no participation exemption for taxation on capital gains. But Yes. The tax base for corporation tax is the net taxable income; if there is a tax treaty between both parties in different jurisdictions, such net taxable income is calculated based on the results reflected the company can apply for a lower tax rate according to the relevant in the taxpayer company’s profit and loss statements, prepared in tax treaty. accordance with Chinese generally accepted accounting principles.

5.3 Is there any special relief for reinvestment?

China 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? Yes, where an overseas investor makes an investment directly with the profits it obtains from a Chinese resident enterprise in an The main adjustments include, but are not limited to, the treatment investment project under the encouraged category, the tax deferral of donations and entertainment expenses, welfare, employee policy shall apply provided that certain requirements are fulfilled, education fund, and so on. For example, donations, including which means that the withholding tax is not levied temporarily. any kind of economic benefit granted for no or unreasonably low consideration, are generally deductible only up to a certain limited amount and through qualified charitable institution. The deductibility 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local of entertainment expenses is subject to certain qualifications and a assets/shares? certain ceiling.

Yes, non-resident enterprises that have not set up institutions 4.4 Are there any tax grouping rules? Do these allow or establishments in China, or have set up institutions or for relief in your jurisdiction for losses of overseas establishments but the income obtained by the said enterprises has subsidiaries? no actual connection with such institutions or establishments, shall pay enterprise income tax in relation to their income originating There are consolidated tax return rules for the head office and branch from China. Besides that, according to the Announcement of office; however, neither the consolidation rules nor group taxation the State Administration of Taxation [2015] No.7, where a non- rules allow for relief for losses of overseas subsidiaries. resident enterprise indirectly transfers equities and other properties of a Chinese resident enterprise to evade its obligation of paying 4.5 Do tax losses survive a change of ownership? corporate income tax by implementing arrangements that are not for bona fide commercial purpose, such indirect transfer shall, Generally, yes. A change of ownership does not restrict a corporation in accordance with the provisions of Article 47 of the Corporate from utilising its accumulated tax losses that the corporation Income Tax Law, be re-identified and recognised as a direct transfer incurred in prior years, usually within five years from the date of of equities and other properties of the Chinese resident enterprise. the ownership change. 6 Local Branch or Subsidiary? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Tax is generally imposed at the same rate upon all corporate taxable profits regardless of whether such profits are distributed or retained. In order to form a Chinese subsidiary, the accounting book of such subsidiary must be prepared, which is subject to Stamp Duty, 4.7 Are companies subject to any significant taxes not accounting books for capitals, 0.05% of the sum of the original covered elsewhere in this chapter – e.g. tax on the value of the fixed assets and the self-owned current funds; for other occupation of property? accounting books, it is CNY5 for each document.

Yes. Among local taxes, other than those already mentioned above, Vehicle and Vessel Tax, Tax on Vehicle purchase and Automobile 6.2 Is there a difference between the taxation of a local Tax may be of general application to the business operations in subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? general of a company in China.

If a foreign company forms a Chinese subsidiary which is a 5 Capital Gains corporation, such Chinese subsidiary will be treated as a resident corporation and will be subject to Chinese corporate income tax on its worldwide income in the same manner as any other domestic 5.1 Is there a special set of rules for taxing capital gains Chinese corporation, the only difference is that the branch which is a and losses? non-independent accounting unit will merge its financial statements to its head office, and pay the corporate income tax due to allocation Generally, no. For purposes of income taxes imposed on a company proportion ratified by the local in-charge tax bureau. (not an individual) in China, generally all of the taxable income of a company is aggregated, regardless of whether such income is classified as capital gains or ordinary/business profits.

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6.3 How would the taxable profits of a local branch be 8 Taxation of Commercial Real Estate determined in its jurisdiction?

8.1 Are non-residents taxed on the disposal of As mentioned at question 6.2, where the corporation is a non- commercial real estate in your jurisdiction? independent accounting unit (if it is an independent corporation) the treatment is same with any other domestic Chinese corporation. Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise, 6.4 Would a branch benefit from double tax relief in its which is located within China is transferred by a non-resident (either

jurisdiction? a non-resident individual or a non-resident company), the gross China amount of the consideration received by such non-resident from A branch of a company which is a resident in such treaty country can such transfer is subject to Chinese withholding tax at the rate of benefit from the treaty provisions to some extent. 10% if it is paid.

6.5 Would any withholding tax or other similar tax be 8.2 Does your jurisdiction impose tax on the transfer of imposed as the result of a remittance of profits by the an indirect interest in commercial real estate in your branch? jurisdiction?

Generally, no. Yes, it does.

7 Overseas Profits 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 7.1 Does your jurisdiction tax profits earned in overseas branches? This is not applicable.

Yes, resident enterprises shall pay enterprise income tax in relation to their income originating both within and outside 9 Anti-avoidance and Compliance China. Non-resident enterprises that have set up institutions or establishments in China shall pay enterprise income tax in relation 9.1 Does your jurisdiction have a general anti-avoidance to income originating from China obtained by such institutions or or anti-abuse rule? establishments, and income occurring outside China but having an actual connection with such institutions or establishments. Yes, Chinese tax law does have a general anti-avoidance rule. According to Administrative Measures for the General Anti- 7.2 Is tax imposed on the receipt of dividends by a local Avoidance Rule (for Trial Implementation), a tax avoidance company from a non-resident company? arrangement has the following features: (1) taking acquisition of tax benefits as the sole purpose or main Yes, but the tax paid can be deducted in the tax annual filing within purpose; and a certain limit. According to the Chinese Corporate Income Tax (2) acquiring tax benefits by using a tax avoidance arrangement Law: “the income tax that has been paid outside the jurisdiction for whose form is permitted in accordance with the tax laws but the following income obtained by enterprises may be offset from is not consistent with its economic substance. the payable tax of the current period. The offset limit is the payable Tax authorities shall make the special tax adjustment by referring to tax calculated in accordance with provisions of this Law in respect other similar arrangements with reasonable commercial purpose and of the income of such item. The portion in excess of the offset limit economic substance and based on the principle of substance over may be made up by the balance of the offset amount of the current form. The adjustment methods include: year out of the annual offset limit within the next five years: (1) re-determining the nature of all or part of the transactions (1) the taxable income originating outside China by resident under the arrangement; enterprises; and (2) denying the existence of a party to the transaction for taxation (2) the taxable income obtained outside China by non-resident purpose, or deeming such party and the other transaction enterprises but having an actual connection with the parties as the same entity; institutions or establishments set up by such non-resident enterprises within China”. (3) re-determining the nature of the relevant income, deduction, tax incentives, overseas tax credits and others, or reallocating the split among the transaction parties; or 7.3 Does your jurisdiction have “controlled foreign (4) any other reasonable method. company” rules and, if so, when do these apply?

Yes. China has its own “controlled foreign company” (CFC) 9.2 Is there a requirement to make special disclosure of avoidance schemes? rules and if such CFC rules are applied to any particular overseas subsidiary, such CFC subsidiary’s net profits (but not its net losses) shall be deemed to constitute the Chinese parent company’s taxable No. Chinese tax law does not have a disclosure rule that imposes a income in proportion to their shareholding percentages, regardless requirement to disclose avoidance schemes. of whether or not such profits are distributed to the parent company.

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(3) The amount of intangible assets ownership transfer exceeds 9.3 Does your jurisdiction have rules which target not CNY100 million. only taxpayers engaging in tax avoidance but also (4) The aggregated amount of other related-party transactions anyone who promotes, enables or facilitates the tax exceeds CNY40 million. avoidance? In the master file, a taxpayer is required to report the items as No, it does not. described in Annex I to Chapter 5 of the revised OECD Guidelines, which includes a description of the businesses of the MNE, the MNE’s intangibles, the MNE’s intercompany financial activities, 9.4 Does your jurisdiction encourage “co-operative and the MNE’s financial and tax positions. In the country-by- compliance” and, if so, does this provide procedural China country report, a taxpayer is required to report the items as described benefits only or result in a reduction of tax? in Annex III to Chapter 5 of the revised OECD Guidelines, which includes an overview of allocation of income, taxes and business Yes. The Chinese tax authorities encourage corporations to activities by tax jurisdiction, and a list of all the constituent entities cooperate with the tax authorities and to voluntarily disclose certain of the MNE group included in each aggregation per tax jurisdiction. information for compliance purposes. However, it will not reduce In the local file, a taxpayer is required to report the items as described any tax. in Annex II to Chapter 5 of the revised OECD Guidelines, which includes a description of the local entity, a description of controlled 10 BEPS and Tax Competition transactions, and financial information. The new rules for the master file (to be filed within one year of the last fiscal day of the ultimate parent) and country-by-country report 10.1 Has your jurisdiction introduced any legislation (to be filed by the time of filing the Annual Report on the Related- in response to the OECD’s project targeting Base party Transactions) are applicable for fiscal years beginning on or Erosion and Profit Shifting (BEPS)? after January 1, 2016. The local file shall be prepared before June 30 of the year following the year when the related-party transaction Yes, China has introduced legislation in response to Action 13, occurs and on which the new rule will be effective for corporation “Guidance on Transfer Pricing Documentation and Country-by- tax in fiscal years beginning on or after January 1, 2016. Country Reporting”, the Chinese government introduced new legislation to adopt the three-tiered documentation approach consisting of a country-by-country report, a master file and a local 10.4 Does your jurisdiction maintain any preferential tax file, which is applicable to any fiscal year beginning on orafter regimes such as a patent box? January 1, 2016. Please see question 10.3. No, China does not maintain any preferential tax regimes such as a patent box. Chinese tax law does, however, provide for special tax 10.2 Does your jurisdiction intend to adopt any legislation credits and deductions on certain research and development costs. to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? 11 Taxing the Digital Economy No, it does not.

11.1 Has your jurisdiction taken any unilateral action to tax 10.3 Does your jurisdiction support public Country-by- digital activities or to expand the tax base to capture Country Reporting (CBCR)? digital presence?

In line with BEPS Action 13, in 2016, the Chinese government This is not applicable. introduced new legislation in which it adopted the three-tiered documentation approach, under which a separate “master file” and a “local file”, as well as a “country-by-country report” are required. 11.2 Does your jurisdiction support the European Any Chinese corporation which is an ultimate holding entity of a Commission’s interim proposal for a digital services tax? multinational enterprise (“MNE”) group with total consolidated revenues of CNY5.5 billion or more in the previous fiscal year must file a country-by-country report, and a corporation with total related This is not applicable. revenues of CNY1 billion or more must file a master file with the tax authority online. Note The local file is mandated to be prepared simultaneously with the The information contained in this document is of a general nature filing of the relevant corporation tax return for transactions with a only. It is not meant to be comprehensive and does not constitute the certain foreign-affiliated person, with whom: rendering of legal, tax or other professional advice or service by Rui (1) The amount of tangible assets ownership transfer (in case of Bai Law Firm or its partners and lawyers. Rui Bai Law Firm or its toll processing activities, the amount shall be calculated on partners and lawyers have no obligation to update the information the basis of customs clearance price for annual import and as law and practices change. The application and impact of laws export) exceeds CNY200 million. can vary widely based on the specific facts involved. Before taking (2) The amount of financial assets transfer exceeds CNY100 any action, please ensure that you obtain advice specific to your million. circumstances from your usual contact or your other advisers.

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Wen Qin Rui Bai Law Firm Unit 01, 6/F Fortune Financial Center 5 Dongsanhuan Zhong Road Chaoyang District Beijing 10020 China

Tel: +86 10 8540 4653 Email: [email protected] URL: www.ruibailaw.com China

Wen is a Partner from Rui Bai Law Firm, which is an independent law firm and a member of the PwC global network of firms. Prior to joining Rui Bai Law Firm, Wen was a partner of a local law firm in Beijing. He specialises in employment law, tax law, dispute resolution and general corporate law. Wen obtained a Master of Law degree from China University of Political Science and Law. Wen is a native Chinese speaker and is fluent in English. As a legal counsel to foreign investment enterprises, Wen’s services have been praised by clients. As a result, he has been continuously recommended as one of the leading lawyers by the well-known ranking and recognition organisations in the legal profession, such as Chambers and Partners, The Legal 500 and Asialaw Leading Lawyers. In 2015, he was ranked as one of the “Eminent Practitioners” by Chambers and Partners. Chambers and Partners also quotes one of his clients saying that “he has a sound understanding of the PRC and global aspects of a case”.

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Our people Our legal team delivers commercially focused solutions to help you navigate through today’s complex legal requirements and meet your broader business needs. Integrated legal advice Our clients seek practical, holistic solutions and so we frequently collaborate with market-leading experts in tax, financial diligence, corporate finance, risk assurance, human resources and other disciplines. Our wide range of experience, personalities and backgrounds create a compelling combination of technical excellence and commercial application. We are able to deliver integrated and innovative solutions in the most challenging business endeavours. Working across borders: right expertise to solve your business needs Our dedication to offering quality legal services is backed by excellence within our very own team. Our lawyers combine local market knowledge and international experiences into unique skillset.

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Cyprus Petros Rialas

Totalserve Management Limited Marios Yenagrites

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

1.1 How many income tax treaties are currently in force in your jurisdiction? The residence of the company is determined by the place where the management and control is situated/exercised from. There are currently 64 bilateral double tax agreements, out of which The term “management and control” is not specifically defined in the 62 treaties have been ratified and entered into force. The treaties legislation, but, in practice, it generally follows OECD guidelines in with the USSR, the Socialist Federal Republic of Yugoslavia and relation to the “effective” place of management and control. the Czechoslovak Socialist Republic are still in force with regards to some of their former constituent states. It is noted that Cyprus is considered to have one of the most attractive tax treaties with certain 2 Transaction Taxes non-EU countries like Russia, Ukraine, India and South Africa. 2.1 Are there any documentary taxes in your jurisdiction? 1.2 Do they generally follow the OECD Model Convention or another model? Stamp duty is imposed on documents (contracts, written agreements) relating to assets located in Cyprus and/or things or matters taking Cyprus treaties have always followed the OECD Model Convention. place in Cyprus. Stamp duty is imposed on the value of the Older treaties are continuously being updated to come in line with agreement at rates between 0.15% and 0.20%, with the first €5,000 the latest OECD treaty model and guidelines. document value being exempt, and with a maximum cap of €20,000 stamp duty per stampable agreement.

1.3 Do treaties have to be incorporated into domestic law The person legally liable to pay stamp duty is the purchaser. The before they take effect? due date for payment is within 30 days from the day of signing the agreement. Penalties are imposed for late payment, but the non- Yes, treaties must first be incorporated into domestic law by way stamping of a stampable document does not render invalid the legal/ of ratification. In any case, it is noted that in accordance with commercial validity of the document. the Cyprus domestic legislation, there is no withholding tax on payments of dividend, interest or royalty (provided the related rights 2.2 Do you have Value Added Tax (or a similar tax)? If so, are used outside Cyprus) towards non-Cyprus residents (individuals at what rate or rates? or companies). Cyprus VAT follows and complies with the EU VAT Directive. 1.4 Do they generally incorporate anti-treaty shopping VAT is imposed on the provision of goods and services in Cyprus, rules (or “limitation on benefits” articles)? as well as on the acquisition of goods from the European Union and the importation of goods into Cyprus. Taxable persons charge VAT Generally, no. Nevertheless, certain treaties do contain limitation on their taxable supplies (output tax) and are charged VAT on goods of benefits articles; specifically, the treaties with Belgium, Canada, and services they receive (input VAT). the Czech Republic, France, Germany, the Russian Federation, the The standard VAT rate is 19%. Certain supplies are subject to the United Kingdom and the United States. reduced rates of 5% or 9%, some are zero-rated, and some are exempt. Generally, if the value of annual taxable supplies exceeds or is 1.5 Are treaties overridden by any rules of domestic expected to exceed €15,600, registration is compulsory. The option law (whether existing when the treaty takes effect or of voluntary registration exists in case of taxable supplies below introduced subsequently)? €15,600. VAT returns are submitted quarterly, and payment of VAT must be No. Treaties take precedence over domestic law. made by the tenth day of the second month following the month in which the tax period ends.

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non-residents (individuals or companies) are not subject to 2.3 Is VAT (or any similar tax) charged on all transactions withholding tax in Cyprus. This is a specific provision contained or are there any relevant exclusions? within the domestic legislation.

Certain supplies are zero-rated, for instance the exportation of goods, the supply/chartering/hiring/repair/maintenance of sea-going 3.2 Would there be any withholding tax on royalties paid vessels and of aircraft, the supply of services to meet the direct by a local company to a non-resident? needs of sea-going vessels and aircraft, and the transportation of passengers from Cyprus to other countries and vice versa. Royalties paid by a local company to a non-resident are exempt from withholding tax, provided that the royalties are earned on Further, certain supplies are exempt from the scope of VAT, for instance the leasing of immovable property (under conditions; rights that are used outside Cyprus. If the rights are used within Cyprus see below), most banking, financial and insurance services, most Cyprus, tax is withheld at 10%, except on cinematographic rights, hospitals, medical and dental care services, certain cultural, where the rate is 5%. educational and sports activities, etc. The difference between zero-rated and exempt supplies is that 3.3 Would there be any withholding tax on interest paid businesses making exempt supplies are not entitled to recover the by a local company to a non-resident? VAT charged on the purchases, expenses or imports. As of 13 November 2017, the leasing or rental of immovable Outbound interest paid by a Cypriot resident company to a non- property to a taxable person for the purpose of carrying out taxable resident is not subject to withholding tax in Cyprus. business activities is subject to VAT at the standard rate of 19%, with the exception of buildings used for residential purposes. Moreover, 3.4 Would relief for interest so paid be restricted by as of 2 January 2018, the sale of undeveloped building land by a reference to “thin capitalisation” rules? person, intended for the erection of one or more fixed structures, is subject to VAT at the standard rate of 19%, when the supply is This is not applicable, as Cyprus does not have thin capitalisation carried out as part of that person’s economic activities. rules.

2.4 Is it always fully recoverable by all businesses? If not, 3.5 If so, is there a “safe harbour” by reference to which what are the relevant restrictions? tax relief is assured?

Generally, yes. It should be noted that input VAT cannot be This is not applicable. recovered in the following cases: ■ Acquisitions used for making exempt supplies. ■ Purchase, import or hire of saloon cars. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? ■ Entertainment expenses (except for staff entertainment). ■ Housing expenses of directors. This is not applicable.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.7 Are there any other restrictions on tax relief for is it “establishment only” VAT grouping, such as that interest payments by a local company to a non- applied by Sweden in the Skandia case? resident?

VAT grouping is possible, on an optional basis. The wording of Interest expense incurred by a Cypriot company, whether payable to Article 32 of the VAT Law was amended during 2012 to include a resident or a non-resident, is tax deductible to the extent that it is the exact wording of Article 11 of the EU VAT Directive. Certain incurred for income-generating purposes. criteria need to be met, to prove the existence of a group for VAT grouping purposes. If the interest expense relates to the acquisition of non-business assets which do not produce taxable income, then such interest expense is restricted for tax purposes accordingly. There is a specific 2.6 Are there any other transaction taxes payable by exception where such interest can be tax allowable if it relates to the companies? acquisition of shares in a 100% subsidiary whose assets are used for business purposes. No transaction taxes are payable by companies. In cases of related-party financing/loans, the transaction (e.g. interest charged) must be made on an arm’s-length basis. Otherwise, the 2.7 Are there any other indirect taxes of which we should Cyprus tax authorities reserve the right to impose tax adjustments be aware? in order to reflect the deviation from the arm’s-length principle. Usually, this is done in the form of notional interest and/or No other indirect taxes. disallowance of certain related interest expense.

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

3.1 Is any withholding tax imposed on dividends paid by Outbound rental payments made by a Cypriot resident company to a a locally resident company to a non-resident? non-resident are not subject to withholding tax in Cyprus. However, Cyprus sourced rental income is taxable in Cyprus accordingly. Outbound dividends paid by a Cypriot resident company towards

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reference rate based on the interest rate of the 10-year government 3.9 Does your jurisdiction have transfer pricing rules? bond of the country in which the new equity is invested, or the equivalent Cyprus bond rate (whichever is the highest), increased Article 33 of the Cyprus Income Tax Law provides that transactions by 3%. Benefit is restricted to 80% of the taxable profit before the between related parties need to be carried out at arm’s-length terms deduction of the NID. Anti-avoidance provisions apply. and conditions. For companies falling within the new intellectual property (IP) In addition, the Ministry of Finance has issued an interpretative regime, 80% of the qualifying profit earned from qualifying assets Circular in June 2017, providing guidance on the tax treatment of is allowed as a tax-deductible expense (refer to question 10.4 for intra-group back-to-back financing arrangements. In brief, such more details). arrangements should comply with the arm’s-length principle, Cyprus Expenses of private motor vehicles (saloon cars) are not allowed, and should be supported by an appropriate transfer pricing study. irrespective of whether the motor vehicles are used in the business Simplification measures are provided for companies which carry out or not. a purely intermediary activity (i.e. granting loans to related parties Business entertainment expenses are restricted if in excess of 1% which are refinanced by loans from related entities). of turnover, or if they are in excess of €17,086 (whichever is the lowest). 4 Tax on Business Operations: General 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 4.1 What is the headline rate of tax on corporate profits? subsidiaries?

Tax on corporate profits is charged at a uniform rate of 12.5%. Companies which belong to the same “group” for tax purposes However, the effective Cyprus tax may be much lower or even zero may utilise group loss relief. The tax loss of one company (the due to certain tax exemptions. Refer to question 4.3 below. “surrendering company”) for a particular tax year can be claimed by another company of the group (the “claimant company”) and set off 4.2 Is the tax base accounting profit subject to against the taxable profits of that company for that particular year. adjustments, or something else? Tax losses brought forward from previous years are not taken into account for group relief purposes. Adjustments may be imposed on the tax base accounting profit. Two companies are deemed to be part of a group for loss relief purposes if one is a 75% subsidiary of the other, or if both are 75% subsidiaries of a third company, either directly or indirectly. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? As of 2015, an entity which is tax resident in another EU Member State is also eligible to surrender tax losses to a Cypriot group Incomes company, provided that the surrendering EU company has exhausted all available means for set-off or carry forward of its losses in its Certain types of income are exempt from Corporation Tax, such as: own state of tax residence or in another Member State where an ■ Dividend income, subject to easy-to-meet conditions (unless intermediary holding company is located. claimed as tax deductible by the foreign paying company – e.g. in the case of certain hybrid instruments). Group loss relief is allowed when both the surrendering company ■ Profit from sale of shares and other qualifying “titles” (e.g. and the claimant company are part of the same group for the whole options, debentures, bonds). year of the assessment. In case of a newly incorporated company during the year of assessment, such a company is considered to be ■ Interest not arising from the ordinary activities or closely related to the ordinary activities of the company – e.g. bank part of the group for the whole year of the assessment. deposit interest (although such interest is subject to Special Defence Contribution (SDC) at a rate of 30%). 4.5 Do tax losses survive a change of ownership? ■ Profits from an overseas Permanent Establishment (PE) (under conditions, and subject to clawback rules). Yes, and can be carried forward and utilised against the taxable ■ Foreign exchange gains, with the exception of gains from profits of the next five years, except for the following cases: trading in foreign currencies and related derivatives. a) within any three-year period there is a change in the ownership ■ Double tax relief by way of credit is unilaterally allowable, of the shares of the company and a substantial change in the whereby foreign tax can be deducted from Cyprus tax nature of the business of the company; or resulting from the same income. b) at any time since the scale of the company’s activities Expenses has diminished or has become negligible and before any Any expenses which have not been incurred wholly and exclusively substantial reactivation of the business there is a change in for the production of (taxable) income are disallowed for the purpose the ownership of the company’s shares. of calculating a company’s taxable profit. If any of the above two cases applies, then no loss which has been Interest expense incurred for acquisition of non-business assets incurred before the change in the ownership of the shares of the (which do not generate taxable income) is restricted for tax purposes company shall be carried forward in the years subsequent to such – with the exception of the acquiring of a 100% subsidiary (under change. conditions). A notional interest deduction (NID) in the form of a notional expense 4.6 Is tax imposed at a different rate upon distributed, as is allowed annually on new equity introduced in the business as of opposed to retained, profits? 1 January 2015. This is calculated by applying on the new equity a To the extent that the ultimate beneficial owner is non-resident or

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Cyprus resident but non-domiciled for Cyprus tax purposes, then there is no tax on actually distributed dividends and the below-stated 5.3 Is there any special relief for reinvestment? deemed dividend distribution provisions do not apply. Actual dividends distributed to Cyprus resident and domiciled No, there is no special relief for reinvestment. individuals are subject to 17% Cyprus tax (SDC). This tax is paid at source when the dividend is paid by a Cyprus company and 5.4 Does your jurisdiction impose withholding tax on the in cases where it is paid by a foreign company then the physical proceeds of selling a direct or indirect interest in local shareholder has the obligation to declare the dividend and account assets/shares? for the relevant tax.

At the same time, to the extent that the ultimate beneficial owner No, there is no such withholding tax. Cyprus of a Cyprus resident company is a Cyprus tax resident individual and domiciled in Cyprus for tax purposes, a Cypriot company with 6 Local Branch or Subsidiary? Cyprus resident beneficial shareholders (company or individual) is deemed to have distributed 70% of its after-tax profits, in the form of dividends to its shareholders, within two years from the end of 6.1 What taxes (e.g. capital duty) would be imposed upon the year of assessment, reduced by any relevant actual dividend the formation of a subsidiary? payments made during this period. Such deemed dividend is subject to the same aforementioned 17% defence tax. Upon registration of a Cypriot company, a fixed amount of €105 is Anti-avoidance provisions apply. payable, irrespective of the amount of share capital. In addition, capital duty of 0.6% is imposed on the authorised share 4.7 Are companies subject to any significant taxes not capital, but only on the nominal value (not on the premium). covered elsewhere in this chapter – e.g. tax on the In case the shares are issued at a premium, a fixed duty of €20 is occupation of property? also payable.

SDC is imposed on passive interest income, (e.g. interest income 6.2 Is there a difference between the taxation of a local from bank deposit accounts) at a rate of 30%. SDC also applies on subsidiary and a local branch of a non-resident rental income at an effective rate of 2.25% (rental income is also company (for example, a branch profits tax)? subject to Corporation Tax at 12.5%). In principle, there is no difference. They would be taxed in the same 5 Capital Gains manner.

6.3 How would the taxable profits of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses?

In Cyprus, the local branch of a foreign company will be taxed Capital Gains Tax (CGT) is imposed on gains from disposal of in the same manner as if it were a company. In the jurisdiction immovable property situated in Cyprus, at a rate of 20%, after of the foreign company, one would need to look at the applicable indexation allowance. However, in case of companies whose relevant provisions and in most cases any resulting Cyprus tax could primary activity is real estate, gains from disposal of immovable be available (e.g. if provided by the relevant double tax treaty) for property are treated as normal business profits and are subject to double tax relief in that foreign jurisdiction. Corporation Tax at 12.5%. CGT is also imposed on the gains from disposal of shares in companies which hold immovable property in Cyprus. 6.4 Would a branch benefit from double tax relief in its jurisdiction? In addition, as of 17 December 2015, CGT is also imposed on the disposal of shares in companies which hold, directly or indirectly, Yes, if so provided by the double tax treaty between Cyprus and that shares in companies which have own immovable property in Cyprus particular jurisdiction. and at least 50% of the market value of their shares emanates from the market value of that immovable property. 6.5 Would any withholding tax or other similar tax be Notwithstanding the above, in case of immovable property that has imposed as the result of a remittance of profits by the been acquired between 16 July 2015 and 31 December 2016, the branch? gain from the subsequent sale of such property shall be exempt from the imposition of CGT. There is no such withholding tax.

5.2 Is there a participation exemption for capital gains? 7 Overseas Profits The gains from the disposal of shares are specifically tax-exempt, except in the case where the company whose shares are being 7.1 Does your jurisdiction tax profits earned in overseas disposed owns immovable property situated in Cyprus (certain branches? exceptions apply, e.g. in the case of a publicly listed company) – also refer to question 5.1 above. Profits of a Cypriot tax resident company which derive from a PE situated outside Cyprus are exempt from tax in Cyprus, provided that either of the following two conditions is met:

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a) the PE directly or indirectly engages less than 50% in the Commissioner reserves the right to disregard any non-genuine activities which lead to investment income; or or fictitious transactions whose sole purpose is the reduction of the b) the foreign tax burden on the income of the PE is not substantially tax base, and to impose tax on the correct amount of taxable income, lower than the tax burden in Cyprus (in practice, an effective tax usually in the form of relevant tax adjustments. rate of at least 6.25% is deemed to satisfy this condition).

The exemption of PE profits is subject to clawback rules, i.e. if 9.2 Is there a requirement to make special disclosure of deductions for tax losses of the PE have been allowed in previous avoidance schemes? years, then an amount of profits equal to the tax losses so allowed shall be included in the chargeable income. There is no such requirement. Cyprus

7.2 Is tax imposed on the receipt of dividends by a local 9.3 Does your jurisdiction have rules which target not company from a non-resident company? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Dividend income received by a Cyprus tax resident company from avoidance? a foreign subsidiary is exempt from Corporation Tax. It is also exempt from SDC if either of the following two conditions apply: This is indirectly covered in the Anti-Money Laundering Law, under a) the foreign company paying the dividend directly or indirectly “predicate offences”. engages less than 50% in activities which lead to investment income; or 9.4 Does your jurisdiction encourage “co-operative b) the foreign tax burden on the income of the foreign entity compliance” and, if so, does this provide procedural is not substantially lower than the tax burden in Cyprus (in benefits only or result in a reduction of tax? practice, an effective tax rate of at least 6.25% is deemed to satisfy this condition). This is not applicable in Cyprus. If neither of the above conditions is met, dividend income received by the Cypriot entity is subject to SDC at 17%. 10 BEPS and Tax Competition 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base There are no “controlled foreign company” rules in Cyprus. Erosion and Profit Shifting (BEPS)?

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

10.2 Does your jurisdiction intend to adopt any legislation 9 Anti-avoidance and Compliance to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? Cyprus follows the recommendations of the OECD, as per the BEPS Action Plan. According to Section 33 of the Assessments and Collections Law,

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10.3 Does your jurisdiction support public Country-by- 11 Taxing the Digital Economy Country Reporting (CBCR)?

11.1 Has your jurisdiction taken any unilateral action to tax Cyprus has adopted and issued the relevant Decree in relation to digital activities or to expand the tax base to capture CBCR, in accordance with the relevant EU Directive. digital presence?

10.4 Does your jurisdiction maintain any preferential tax No such action, noting that income resulting from digital activities regimes such as a patent box? is, in principle, taxed as income of a revenue nature, unless it falls under a specifically aforementioned exempt category. Cyprus Cyprus has an IP box regime, which has been amended during 2016, in order to be in line with the recommendations of Action 5 of the 11.2 Does your jurisdiction support the European BEPS Action Plan. Commission’s interim proposal for a digital services Grandfathering provisions exist up to June 2021 for IP assets that tax? have already qualified under the previous IP box regime. In brief, an amount equal to 80% of the qualifying profits earned Without any official position yet, Cyprus generally supports and from qualifying intangible assets is allowed as a tax-deductible follows any proposals which aim at addressing BEPS issues, such expense. A modified nexus approach is followed, whereby for an as the taxing of the digital economy. intangible asset to qualify for the benefits of the regime, there needs to be a direct link between the qualifying income and the taxpayer’s own qualifying expenses contributing to that income.

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

Tel: +357 25 866 000 Tel: +357 25 866 000 Email: [email protected] Email: [email protected] URL: www.totalserve.eu URL: www.totalserve.eu Cyprus Petros Rialas is a Director and the Head of the International Tax Marios Yenagrites is a graduate of the London School of Economics, Planning Department of Totalserve Management Limited. He is a from which he holds an M.Sc. degree in Accounting and Finance. He Fellow Chartered Certified Accountant with many years of experience is a Fellow Chartered Accountant (FCA) and a Member of the Institute in international tax planning, corporate taxation and trusts. His of Certified Public Accountants of Cyprus (ICPAC). He has also academic background includes a Degree from the University of served as Secretary of ICPAC’s Corporate Governance, Internal Audit Manchester and a Master’s Degree from City University of London. and Risk Management Committee. He is a member of the Society of Trust and Estate Practitioners (STEP) Prior to joining Totalserve Management Limited, Marios worked in and the International Tax Planning Association (ITPA). His vocational the tax departments of two Big Four accounting firms for a number background includes a two-year employment in the auditing line of of years, thereby gaining a solid background and experience in all service in London, and five years in the tax services division of a Big matters relating to Cyprus taxation. Four firm in Cyprus. In his current position, Marios is involved in providing tax consultancy Petros is a regular contributor of technical articles to local and foreign services to a wide array of clients, as well as undertaking tax planning industry publications, and has been a frequent speaker at various and tax structuring projects. conferences and seminars in Cyprus and abroad.

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

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Finland Niklas Thibblin

Waselius & Wist Mona Numminen

be resident in Finland. Unlike in some jurisdictions, a company 1 Tax Treaties and Residence incorporated outside Finland may not be considered resident in Finland by applying the concept of effective place of management 1.1 How many income tax treaties are currently in force in (although it could create a permanent establishment in Finland). your jurisdiction? 2 Transaction Taxes Finland has a fairly extensive treaty network, with approximately 74 income tax treaties currently in force. 2.1 Are there any documentary taxes in your jurisdiction? 1.2 Do they generally follow the OECD Model Convention or another model? Please see question 2.6 below regarding transfer tax.

Finnish tax treaties generally follow the OECD model, with some 2.2 Do you have Value Added Tax (or a similar tax)? If so, inevitable variation from one treaty to the next. at what rate or rates?

1.3 Do treaties have to be incorporated into domestic law Finnish VAT legislation gives effect to the relevant EC Directives. before they take effect? There are three rates of VAT: ■ the standard rate of VAT is 24% and applies to any supply Yes. A tax treaty must be incorporated into Finnish law and this is of goods or services which is not exempt or subject to the done by way of a statutory instrument by Parliament. reduced rate of VAT; ■ the reduced rates of VAT are 14% (e.g. foodstuff and 1.4 Do they generally incorporate anti-treaty shopping restaurant and catering services); and rules (or “limitation on benefits” articles)? ■ 10% (e.g. passenger transportation, hotel services, theatre, sporting events, medicine and books). In general, Finnish tax treaties do not incorporate anti-treaty shopping rules. However, the treaty with the US contains a 2.3 Is VAT (or any similar tax) charged on all transactions “limitation of benefits” clause and the treaties with the UK and or are there any relevant exclusions? Ireland contain a “limitation of relief” clause. Pursuant to case law, domestic anti-avoidance rules can be applied in case of artificial The exclusions from VAT are as permitted or required by the cross-border arrangements. Directive on the Common System of VAT (2006/112EC) (as amended), and some examples of exempt supplies are: 1.5 Are treaties overridden by any rules of domestic ■ the sale and letting of real estate (however, a lessor of real law (whether existing when the treaty takes effect or estate may opt for VAT); introduced subsequently)? ■ medical services; ■ educational services; No, but the Finnish general and special anti-avoidance rules (the ■ insurance services; and “GAAR” and the “SAARs”, discussed in question 9.1 below) can, in principle, apply if there are abusive arrangements seeking to exploit ■ banking and other financial services. particular provisions in a double tax treaty, or the way in which such provisions interact with other provisions of Finnish tax law. 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions?

1.6 What is the test in domestic law for determining the residence of a company? When goods and services are supplied for a business subject to VAT, input VAT is fully recoverable. If only a part of business is subject A company which is incorporated in Finland will automatically to VAT, only the VAT related to this business is recoverable. Certain

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goods or services used for entertainment purposes are, however, excluded from the general right of deduction. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident?

2.5 Does your jurisdiction permit VAT grouping and, if so, Royalties paid to a non-resident are subject to a withholding tax is it “establishment only” VAT grouping, such as that at the rate of either 20% or 30%, unless tax treaty provisions or applied by Sweden in the Skandia case? the EC Interest and Royalty Directive (2003/49/EC) reduce or prevent . Royalties paid to a Finnish permanent Yes. Finance and insurance companies may opt for VAT grouping. establishment of a non-resident company are taxed as income of the The registration is made in the name of the “representative permanent establishment and no withholding tax is levied. member”, who is responsible for completing and submitting a single Finland VAT return and making VAT payments or receiving VAT refunds on behalf of the group. All members of the group remain jointly 3.3 Would there be any withholding tax on interest paid and severally liable for any VAT debts of the group. A Finnish by a local company to a non-resident? branch must generally treat its supplies to the overseas head office as taxable supplies in circumstances where the overseas head office According to domestic Finnish tax laws, interest payments to a non- is VAT-grouped in its jurisdiction and the branch does not belong to resident are normally exempt from tax in Finland. the VAT group. 3.4 Would relief for interest so paid be restricted by 2.6 Are there any other transaction taxes payable by reference to “thin capitalisation” rules? companies? Finland has no thin capitalisation rules, but currently the deductibility Transfer of shares in Finnish companies and real property located of interest expenses between related parties is limited under a in Finland is subject to transfer tax. The rate of transfer tax is 4% separate regime. Under the interest limitation regime, interest of the purchase price of real property, 1.6% of the purchase price expenses are fully deductible against any interest income. The of the shares in an ordinary limited liability company and 2% of potential restriction of any interest exceeding the interest income the purchase price of the shares in a real estate company (including (i.e. net interest expenses) depends on three tests that are applied on real estate holding companies and housing companies). The transfer a stand-alone Finnish company level: tax base also includes any debt or liabilities of the acquired entity 1. Net interest expenses may be fully deducted if the total (towards the seller or a third party) assumed by the buyer based on amount of net interest expenses does not exceed EUR the transfer agreement, provided that the assumption of such debt or 500,000 during the fiscal year. liabilities accrues to the benefit of the seller. 2. Where the above limit is exceeded, net interest may only be deducted up to an amount equal to 25% of the taxable business profits before interests and depreciations. Received 2.7 Are there any other indirect taxes of which we should and paid group contributions are taken into account in the be aware? calculation of the taxable business profits. Any amount of interest so restricted may be carried forward indefinitely and Customs duties are generally payable on goods imported from deducted against unused capacity in later years. outside the EU. Excise duties are levied on particular classes 3. To the extent that interest is paid to a non-related party, it of goods (e.g. alcohol, tobacco, electricity and fuel). Insurance can be deducted even when exceeding the above limits. premium tax is charged on the receipt of a premium by an insurer However, interest expenses paid to a non-related party are under a taxable insurance contract. taken into account when calculating the above EUR 500,000 and 25% limits. Therefore, interest expenses paid to a non- related party are considered first and, provided that the 3 Cross-border Payments deduction capacity under the 25% rule is not exhausted, the remaining amount can be used to deduct interest expenses paid to a related party. 3.1 Is any withholding tax imposed on dividends paid by Please note that the Finnish interest limitation rules shall be a locally resident company to a non-resident? amended, effective as of 1 January 2019. Pursuant to a very recent Government Bill, the Finnish interest limitation rules will be Dividends paid by a Finnish company to non-residents are, in extended to also cover third-party debt – subject, however, to a EUR principle, subject to Finnish withholding tax of either 20% or 30%. 3,000,000 threshold that would always be deductible. However, in reality, such withholding is prevented or reduced by the provisions of the EC Parent-Subsidiary Directive (90/435/EEC) or an applicable tax treaty. Under most tax treaties, the withholding 3.5 If so, is there a “safe harbour” by reference to which tax rate is usually reduced to 0–15% on dividends paid to persons tax relief is assured? entitled to the treaty benefits. At the moment, yes. The so-called “safe harbour” rule stipulates Further, dividends paid to a recipient residing in an EEA Member that the restrictions on interest deductibility are not applied if the State are also exempt from tax to the extent that a Finnish recipient borrower company’s equity ratio (equity vs total balance) is equal to would, under corresponding circumstances, be partly or fully or higher than the same ratio calculated on the basis of a consolidated exempt from tax. This can grant an exemption from withholding group of balance sheets of the ultimate parent (“balance sheet test”). tax (for example, for certain foreign investment funds or charitable The balance sheet test can only be applied to consolidated balance entities). The withholding tax relief is based on EU law and may sheets that have been prepared in an EU or EEA Member State or a give foreign investors the right to a retroactive claim. state with which Finland has concluded a tax treaty.

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establishments are deductible, provided that certain preconditions 3.6 Would any such rules extend to debt advanced by a are met. A group contribution is similarly taxable income for the third party but guaranteed by a parent company? receiving entity. The group contribution regime does not allow cross-border loss relief. Yes. Third-party debt may be reclassified as a related-party debt; for instance, in circumstances where the third-party debt is secured by a receivable of a related party. 4.5 Do tax losses survive a change of ownership?

When more than 50% of shares in a company or its immediate parent 3.7 Are there any other restrictions on tax relief for company change ownership during a tax year, the right to carry interest payments by a local company to a non- forward tax losses from that year and previous years is forfeited. Finland resident? The tax authorities may grant a dispensation to allow the utilisation of forfeited tax losses. In addition to general transfer pricing rules (see question 3.9 below), the Finnish GAAR may be applied in respect of arrangements that do not correspond to their actual purpose and meaning, which have 4.6 Is tax imposed at a different rate upon distributed, as as their main purpose the securing of a tax advantage. opposed to retained, profits?

No, it is not. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.7 Are companies subject to any significant taxes not Rents paid to a non-resident are considered Finnish-source income covered elsewhere in this chapter – e.g. tax on the and such income must normally be declared in Finland in accordance occupation of property? with the ordinary tax assessment procedure (and taxed accordingly). The owner of real estate is required to pay real estate tax equal to a fixed percentage of the calculated value of real estate (i.e. the 3.9 Does your jurisdiction have transfer pricing rules? land area) and the buildings located thereon. The real estate tax value differs, as such, from the tax base value, the book value and Yes. Finnish transfer pricing rules apply to both cross-border and the market value of the real estate and the buildings. The rate of domestic transactions between related parties. If the Finnish tax real estate tax is set by the municipality in which the real estate is authorities do not accept that pricing is at arm’s length, the applied located. However, the minimum and maximum statutory tax rates pricing can be challenged under transfer pricing adjustment rules. that the municipalities may apply vary between 0.41% and 6%.

4 Tax on Business Operations: General 5 Capital Gains

4.1 What is the headline rate of tax on corporate profits? 5.1 Is there a special set of rules for taxing capital gains and losses? The corporate income tax rate is currently 20%. There are no planned reductions at the moment, although Finland will closely Corporation tax is chargeable on “profits”, which includes both monitor the changes in other developed and neighbouring countries. regular business income and capital gains. There is, however, a separate regime for computing certain capital gains. In circumstances where the participation exemption does not apply, 4.2 Is the tax base accounting profit subject to adjustments, or something else? capital losses can only be used against capital gains and not against regular business income. In general terms, tax follows the commercial accounts subject to adjustments. 5.2 Is there a participation exemption for capital gains?

4.3 If the tax base is accounting profit subject to Yes. The participation exemption regime allows business-conducting adjustments, what are the main adjustments? companies to dispose of certain shares without a Finnish tax charge. Capital gains realised by a Finnish company on the sale of shares are Certain expenses are not deductible for tax purposes and there are tax-exempt provided that: certain differences between the depreciation of assets for accounting (i) the shares belong to the selling company’s fixed assets and and tax purposes; for instance, concerning machinery and buildings. the shareholding is deemed to be a part of the seller’s business income source (in comparison to the general income source); There are also some tax-free income items such as tax-free capital gains (see question 5.2 below) and dividends. (ii) the selling company owns at least 10% of the capital of the company being sold; (iii) the selling company has held such participation for at least 4.4 Are there any tax grouping rules? Do these allow one year; and for relief in your jurisdiction for losses of overseas (iv) the disposed shares are not shares in a housing or real estate subsidiaries? company.

The concept of consolidated income tax returns is unknown in The company whose shares are sold must, furthermore, reside in Finland. However, under the group contribution regime, group Finland, in another EU Member State or in a country with which contributions between two Finnish-resident companies or permanent Finland has concluded a tax treaty. Further, private equity investors

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may not benefit from the participation exemption. Where the participation exemption regime applies, any losses incurred from 7 Overseas Profits the disposal are non-deductible. 7.1 Does your jurisdiction tax profits earned in overseas branches? 5.3 Is there any special relief for reinvestment?

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

Finland years, or (ii) sold business premises if new premises are acquired 7.2 Is tax imposed on the receipt of dividends by a local within two years. company from a non-resident company?

Foreign dividends and Finnish dividends are treated in the same 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local way. Dividends from foreign subsidiaries are generally exempt assets/shares? in the hands of a Finnish parent company, whereas portfolio dividends from listed companies are fully taxable if the recipient No withholding tax is imposed. However, please see question 8.1 has an ownership stake of less than 10% in the paying listed entity. below. Dividends derived from non-tax-treaty countries outside the EU are, however, fully taxable in Finland.

6 Local Branch or Subsidiary? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Under the Finnish CFC rules, the CFC’s income tax is taxable, as the shareholders’ income and actual distributions are exempted. There are no taxes imposed on the formation of a subsidiary. A non-resident company controlled by a Finnish tax resident may generally be regarded as a CFC, if the CFC is liable to income tax in its domicile at a rate less than 60% of the effective Finnish corporate 6.2 Is there a difference between the taxation of a local income tax rate (meaning generally that the corporate income tax subsidiary and a local branch of a non-resident rate applicable to a CFC should currently be 12% or less). The CFC company (for example, a branch profits tax)? regime does not apply to income of a CFC originating mainly from industrial production or shipping if that activity has occurred in the A Finnish-resident subsidiary would pay corporate tax on its CFC’s country of origin. In addition, an exemption applies to CFCs worldwide income and gains, whereas a Finnish branch (permanent in tax treaty countries (subject to certain conditions) and where it is establishment) would be liable to corporation tax only on the net proven, on the basis of objective factors, that despite the existence profit attributable to the branch. There is no separate branch profit of a tax motive, the CFC is actually established in an EEA country tax. and carries out genuine economic activities there. Please note that the Finnish Ministry of Finance has proposed 6.3 How would the taxable profits of a local branch be changes to the Finnish CFC legislation taking effect on 1 January determined in its jurisdiction? 2019. According to the proposal the industry exception and the tax treaty country exception would be abolished and certain other Assuming that the local branch of a non-resident company is within amendments would be made. However, at the date of submitting the Finnish statutory definition of a “permanent establishment” this chapter, the contents of the amendments are not entirely clear. (which, in most circumstances, will be decided by the provisions in an applicable tax treaty), it will, at the outset, be treated for tax purposes as though it were a distinct and separate entity dealing 8 Taxation of Commercial Real Estate independently with the non-resident company. Generally, all branches (permanent establishments) are required to arrange bookkeeping in accordance with Finnish GAAP and are taxed 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? accordingly (subject to certain adjustments).

Capital gains derived from the sale of real property (whether 6.4 Would a branch benefit from double tax relief in its commercial or private) located in Finland, as well as gains derived jurisdiction? from the sale of shares in Finnish real estate and housing companies and Finnish limited liability companies, more than 50% of whose No, apart from non-discriminatory rules (in the case that the branch assets consist of real estate in Finland, are generally subject to tax in forms a permanent establishment). Finland. Tax treaty exemptions may apply to certain share disposals.

6.5 Would any withholding tax or other similar tax be 8.2 Does your jurisdiction impose tax on the transfer of imposed as the result of a remittance of profits by the an indirect interest in commercial real estate in your branch? jurisdiction?

No, it would not. Yes, please see question 8.1 above.

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group. Preliminary discussions should be carried out prior to any 8.3 Does your jurisdiction have a special tax regime transaction, and the advice given in such discussions is generally for Real Estate Investment Trusts (REITs) or their binding on the tax authorities. The preliminary discussions do not equivalent? result in a reduction of tax, but may provide indirect procedural benefits through the “protection of trust” principle. However, if the Yes. However, the Finnish REIT scheme remains limited to subject matter is complex or subject to interpretation, there is a lack residential housing only. Under the REIT scheme, to benefit of case law, or the parties disagree with respect to the tax treatment from corporate , REITs (i.e. Finnish limited liability of the transaction, the taxpayer is normally, in the preliminary companies) must be listed on a public stock exchange or a multi- discussions, advised to apply for an advance tax ruling from the lateral trading facility (“MTF”) within the EEA, with no single Finnish Tax Administration. shareholder owning, directly or indirectly, more than 9.99% Finland of the share capital. At least 80% of the value of the assets of a REIT must also consist of real estate that is used primarily for 10 BEPS and Tax Competition residential purposes, and the activities of the REIT must be limited to the letting of properties (or activities closely related thereto). The capital structure of a REIT must furthermore be such that its 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base potential debt financing does not exceed 80% of its balance sheet Erosion and Profit Shifting (BEPS)? total. Moreover, the REIT must distribute at least 90% of its annual profits to shareholders as dividends. Yes. An updated provision regarding the contents of transfer pricing documentation and CBCR requirements (see question 10.3) have 9 Anti-avoidance and Compliance been introduced. Prior to the introduction of the BEPS project, Finland had already introduced interest deduction limitation rules similar to those in BEPS Action 4 (see questions 3.4, 3.5 and 3.6). 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is Yes. If a transaction has been given a legal form that does not recommended in the OECD’s BEPS reports? correspond with its actual nature or meaning or if the legal form of the transaction does not correspond to the actual behaviour of the In general, no. taxpayer, the GAAR or SAARs may be applied and taxes can be reassessed as if the actual form of the transaction had been used. Case law on the application of the GAAR and SAARs has, in several 10.3 Does your jurisdiction support public Country-by- instances, covered scenarios where a series of transactions have Country Reporting (CBCR)? been subject to re-characterisation, especially where no adequate commercial reasons have been shown for the transaction. Yes. The Finnish CBCR legislation requires multinational enterprises (“MNEs”) to prepare: a master file containing information on all group companies; a local file on material transactions of the Finnish 9.2 Is there a requirement to make special disclosure of avoidance schemes? taxpayer; and a CBCR report on, among others, the global allocation of an MNE’s income and taxes. There is no such requirement at the moment. However, the Ministry of Finance is currently preparing a proposal on the implementation 10.4 Does your jurisdiction maintain any preferential tax of the EU Directive 2018/822/EU under which certain arrangements regimes such as a patent box? would be reportable. No such regimes currently exist.

9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 11 Taxing the Digital Economy anyone who promotes, enables or facilitates the tax avoidance? 11.1 Has your jurisdiction taken any unilateral action to tax There are no specific rules. However, the Finnish Penal Code digital activities or to expand the tax base to capture includes provisions regarding tax crimes that are also applicable to digital presence? parties promoting or facilitating tax crime. Mere tax avoidance does not, as such, constitute a tax crime. No, it has not.

9.4 Does your jurisdiction encourage “co-operative 11.2 Does your jurisdiction support the European compliance” and, if so, does this provide procedural Commission’s interim proposal for a digital services benefits only or result in a reduction of tax? tax?

The Finnish Tax Administration has recently promoted the use of As a starting point, no. However, global solutions (for example on so-called “preliminary discussions” for the clients of the Large the OECD level) concerning taxation of digital services are regarded Taxpayers’ Office, i.e. mainly companies belonging to a larger as a positive thing.

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

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

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

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France

Tirard, Naudin Maryse Naudin

law authorising the ratification of the MLI by the French Parliament 1 Tax Treaties and Residence was published. The MLI should enter into force in France in 2019 depending on the date of the ratification of the instrument by the 1.1 How many income tax treaties are currently in force in French Parliament. your jurisdiction? The MLI will affect the interpretation of bilateral tax treaties signed by France and therefore further cross-border transactions. France benefits from an impressive tax treaties network which applies to corporate tax, but also (depending on each treaty) to 1.5 Are treaties overridden by any rules of domestic individual income tax, wealth taxes (ISF and IFI), gift and/or law (whether existing when the treaty takes effect or as well as other French taxes. Approximately 130 introduced subsequently)? bilateral income tax treaties are currently in force. Bilateral tax treaties override domestic law. 1.2 Do they generally follow the OECD Model Convention or another model? 1.6 What is the test in domestic law for determining the residence of a company? Bilateral tax treaties signed by France follow, as a general rule, the OECD model. Variations of this model allow France to apply the Article 209-1 of the French Tax Code (“FTC”) provides that French specificities of French internal law. As an example, the concept of or foreign resident companies are taxable in France on all profits “société à prépondérance immobilière” (real estate company) is made on business carried out in France under the territoriality very often developed. The more recently negotiated amendments or principle. The concept of “business carried out in France” is not tax treaties are more sophisticated than the previous ones and allow defined in the legislation. Cases have, however, held that the France to apply its extensive tax scope. requirement is established when there is a routine commercial activity carried out in a place of business or through a representative 1.3 Do treaties have to be incorporated into domestic law or by operations comprising “cycle commercial complet d’activité”. before they take effect? This concept is very close to the definition of a permanent establishment provided by the OECD model. Tax treaties enter into force after the ratification process has been Under the French principle of restricted territoriality, profits (or duly accomplished by each contracting state. losses) realised by a French company from business carried out outside France are not subject to French corporate tax. 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2 Transaction Taxes The most recently negotiated tax treaties or amendments of existing tax treaties state that anti-treaty shopping rules apply, for example, 2.1 Are there any documentary taxes in your jurisdiction? to dividends and interest. France also signed, on 7 June 2017, the multilateral instrument No documentary taxes exist per se in France. However, the sale (“MLI”) covering 83 jurisdictions. Among others, MLI’s main of shares of French companies and of French or foreign companies purposes are to limit base erosion profit shifting (“BEPS”) qualifying as sociétés à prépondérance immobilière are subject to through treaty abuse (Action 6 of the BEPS project), improve transfer duties under certain conditions. Transfer of goodwill is also dispute resolution, prevent the artificial avoidance of permanent subject to transfer duties. establishment status and neutralise the effects of hybrid mismatch arrangements. 2.2 Do you have Value Added Tax (or a similar tax)? If so, The MLI entered into force on 1 July 2018 in five countries: at what rate or rates? Slovenia; Austria; Isle of Man; Jersey; and Poland. The MLI will enter into force on 1 October 2018 in four other countries: United European VAT rules apply in France, which is a member of the Kingdom; Sweden; Serbia; and New Zealand. On 12 July 2018, the European Union. The standard VAT rate applicable amounts to

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20%. Three other rates may apply depending on the nature of goods or services (10%, 5.5% and 2.1%). 3 Cross-border Payments

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

All European exclusions apply in France. Some activities are Unless tax treaties state otherwise, dividends are subject to a French excluded from the VAT scope such as, for example, certain banking withholding tax at the rate of: and financial transactions, as well as insurance and reinsurance ■ 12.8% when paid to non-resident individuals;

France activities. The renting out and sale of residential real estate are also ■ 30% when paid to non-resident companies; and excluded from the VAT scope under certain conditions. ■ 75% when paid to residents of a non-cooperative state (i.e. a state which has not signed an exchange of information treaty with France). 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? However, most tax treaties signed by France provide either a reduced rate or a withholding tax exemption. A taxpayer may recover VAT charged on goods and services used Under Directive 90/435/EEC relating to parent and subsidiary to realise the turnover, subject to VAT. The main exception to this companies (“EU Parent-Subsidiary Directive”), dividends are principle is VAT on cars. exempt from withholding tax if the recipient is a company resident in an EU country and has held at least 5% of the shares of the French 2.5 Does your jurisdiction permit VAT grouping and, if so, subsidiary for at least two years. However, as from 1 January 2016, is it “establishment only” VAT grouping, such as that the EU Directive 2015/121 adopted on 27 January 2015 added an applied by Sweden in the Skandia case? anti-abuse provision to the EU Parent-Subsidiary Directive. Under this new provision, withholding tax exemption only applies if the The concept of VAT grouping does not exist in France. Under certain main motivation of the ownership structure was not to benefit from conditions, companies in the same group may elect to centralise the such an exemption. As a result, ownership structures considered payment of VAT. Among other conditions, the “head” company artificial will no longer benefit from the EU Parent-Subsidiary should hold at least 50% of the share capital of its subsidiaries and Directive. all companies within the group should have the same tax year period. Finally, the French Administrative Supreme Court recently stated that tax treaty provisions only apply assuming the resident of the other contracting state is effectively taxed in his country of residence. 2.6 Are there any other transaction taxes payable by companies? As a consequence, a person exempted in his country of residence by reason of his legal status or activities may no longer benefit from the Registration duties are due on the transfer of real estate, “fonds de provisions of a double tax treaty signed with France. commerce” (goodwill) or clientele and company shares. This recent interpretation of the tax treaties by the French (The sale price of commercial property and/or clientele is subject to Administrative Supreme Court entails many difficulties, in the registration duties at a rate of 3% for amounts between €23,000 and opinion of the authors. The French tax authorities will systematically €200,000, and 5% for greater amounts.) refuse to apply tax treaties, while the other contracting states allow their residents “tax incentives” in comparison to the French tax Purchases of French real estate are subject to registration duties at treatment suffered by French residents. rates which may vary depending on the location of the real estate. A French notary should be appointed. Registration duties, including the notary’s fees, may reach 7%. 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? The rate of registration duties applicable to the company’s shares varies depending on the nature of the shares transferred: Unless tax treaties state otherwise, royalties are, as a general ■ transfers of shares of a “société par actions simplifiée” rule, subject to a 33.33% withholding tax. When the recipient is (“SAS”) or a “société anonyme” running an industrial or resident in a non-cooperative country, royalties are subject to a 75% commercial activity are subject to transfer duties at a rate of 0.1%; withholding tax. ■ transfers of shares of a “société à responsabilité limitée” (“SARL”) running an industrial or commercial activity are 3.3 Would there be any withholding tax on interest paid subject to transfer duties at a rate of 3%; and by a local company to a non-resident? ■ transfers of shares of any company (French or foreign) whose assets are mainly composed of real estate property located As a general rule, no withholding tax is levied on interest paid by a in France (that is more than 50% of their market value) are French company, except of course when the recipient is resident in subject to transfer duties at a rate of 5%. a non-cooperative country.

2.7 Are there any other indirect taxes of which we should 3.4 Would relief for interest so paid be restricted by be aware? reference to “thin capitalisation” rules?

France is the kingdom of indirect taxes. Like many other countries, France has legislation providing for Numerous indirect taxes apply to goods such as wines and alcoholic certain limitations on the deduction of interest expenses, including beverages, hydrocarbons, cigarettes, sugar, oils, etc. thin capitalisation rules. However, as these different limitation rules apply altogether, their articulation may be difficult to deal with.

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French companies liable for corporate tax can only deduct from their annual taxable basis 75% of the net interest expenses occurring 3.6 Would any such rules extend to debt advanced by a during the same year, unless the interest amount does not exceed €3 third party but guaranteed by a parent company? million (“General interest deductibility limitation”). Thin capitalisation rules also apply in this case; see our answer to In addition, the deduction of interest on loans granted by related question 3.4. parties is disallowed when the lender is liable to tax on the interest received from the borrowing company up to an amount which is less than a quarter of the French tax burden it would have been subject 3.7 Are there any other restrictions on tax relief for to corresponding to: interest payments by a local company to a non- resident? ■ 8.33% for fiscal years starting 1 January 2018; France ■ 7.75% for fiscal years starting 1 January 2019; All general anti-avoidance rules aimed at preventing internal and/ ■ 7% for fiscal years starting 1 January 2020; or international tax evasion may also apply (see our answer to ■ 6.63% for fiscal years starting 1 January 2021; and question 9.1). ■ 6.25% for fiscal years starting 1 January 2022.

Interest paid by a French borrowing company can be disallowed for 3.8 Is there any withholding tax on property rental French corporate tax purposes if its amount exceeds, cumulatively, payments made to non-residents? the following three ratios: ■ 1.5 times the company’s share capital (debt-equity ratio); No withholding tax applies on property rental payments. Non- ■ 25% of the company’s earnings results before tax (interest resident companies owning real estate properties located in France coverage ratio); and should comply with French accounting obligations and file an ■ the amount of interest received from affiliates (net paid annual corporate tax return. interest). Once the ratios have been met, the portion of interest which exceeds 3.9 Does your jurisdiction have transfer pricing rules? the highest of those is not deductible from the taxable results unless either of the following applies: France has developed transfer pricing legislation, which states that ■ it does not exceed €150,000 per year; or the correct transfer price for a particular transaction between related ■ the borrowing company can prove that the overall debt-equity parties must be that which the parties would have agreed at arm’s ratio of the group to which it belongs exceeds or equals its length. own debt-equity ratio. In order to determine the tax owed by companies that depend on or Subject to restrictions, the portion of non-deductible interest from control enterprises outside France, any profits transferred to those a year’s taxable results can be deducted from the following fiscal enterprises indirectly through increases or decreases in purchase year’s results at a 5% reduction per financial year as from the second or selling prices or by any other means must be added back into year. the taxable income shown in the companies’ accounts. The same The deductible interest rate paid to an affiliate company cannot procedure applies to companies that depend on an enterprise or a exceed a certain percentage, which is published every year (1.67% group that also controls enterprises outside France. for fiscal years ended between 31 December 2017 and 30 January To enforce article 57 of the FTC, the French tax authorities must 2018). prove both that a dependent relationship existed between the parties Finally, within a French tax consolidation group, the deduction of a involved in the transaction under review, and that a transfer of portion of interest paid by a tax group is disallowed and added back profits occurred. into the global taxable income when a member company acquires French legislation also requires certain companies to provide the shares of either of the following: significant documentation to theFrench tax authorities in relation ■ a “head” company controlling, directly or indirectly, the to transfer pricing. purchasing company; that is, the acquiring company and the purchased company become members of the same group; or ■ a company controlled directly or indirectly by the “head” 4 Tax on Business Operations: General company. France, as an EU Member State, will have to implement in its 4.1 What is the headline rate of tax on corporate profits? domestic legislation provisions complying with the Anti-Tax Avoidance Directive (“ATA Directive”) by 31 December 2018. As The standard corporate tax rate is 33.33%. However, there is an a consequence, the general limitation of the deduction of interests exception for companies having an annual turnover inferior to paid by taxpayers (i.e. 30% of the taxpayers’ EBITDA) provided by €7.63 million and fulfilling certain conditions, which are subject to the ATA Directive will affect or replace the French General interest a corporate income tax (“CIT”) rate of 15% for the fraction of their deductibility limitation. net profit lower than or equal to €38,120. Small and medium-sized enterprises (“SMEs”) starting their fiscal 3.5 If so, is there a “safe harbour” by reference to which year on or after 1 January 2017, benefit from a reduced CIT of 28% tax relief is assured? on the fraction of their net profit which does not exceed €75,000. Companies eligible for the 15% rate of CIT continue to benefit from Assuming the borrowing company demonstrates that its debt-equity this reduced rate, and will be subject to the 28% rate only on the ratio does not exceed the debt-equity ratio of its group, the thin fraction of their net profit exceeding €38,120 and lower or equal to capitalisation rules described below do not apply. €75,000.

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For fiscal years starting on or after 1 January 2018, a 28% CIT rate applies on the first €500,000 of taxable profit of all companies. 4.2 Is the tax base accounting profit subject to Taxable profit in excess of €500,000 are subject to a 33.33% CIT adjustments, or something else? rate. The determination of the taxable income is based on the company’s For fiscal years starting on or after 1 January 2019, a 28% CIT rate accounting year, corrected to specific tax adjustments. will apply on the first €500,000 of taxable profit of all companies. Taxable profit in excess of €500,000 will be subject to a 31% CIT rate. 4.3 If the tax base is accounting profit subject to For fiscal years starting on or after 1 January 2020, a 28% CIT rate adjustments, what are the main adjustments?

France will apply for all companies. The income of companies taxable under corporate tax law is For fiscal years starting on or after 1 January 2021, a 26.5% CIT rate determined by adjusting accounting profits and losses in conformity will apply for all companies. with specific tax regulations. For fiscal years starting on or after 1 January 2022, a 25% CIT rate The major adjustments involved are the reintegration in the taxable will apply for all companies. income of the corporate tax itself and certain expenses considered Moreover, companies subject to CIT with turnover exceeding €1 unnecessary or extraneous to the purposes of the company, such as billion would be subject to a 15% exceptional contribution on their grants and subsidies granted to other companies. Some income, CIT and companies subject to CIT with turnover exceeding €3 however, is subject to special tax provisions (notably, certain long- billion would be subject to a 15% additional contribution on their term capital gains, industrial property and trademarks, and income CIT. from subsidiaries). However, these contributions are temporary and will only apply for the financial years ended between 31 December 2017 and 30 4.4 Are there any tax grouping rules? Do these allow December 2018. for relief in your jurisdiction for losses of overseas French corporate tax is established on a strict territorial basis; that subsidiaries? is, it is assessed on French source income and not on a worldwide basis. French tax law provides for a tax consolidation regime, allowing Double tax treaties may, however, allow France, under specific a parent company to be liable for corporate tax (plus an additional circumstances, to tax certain foreign source income. contribution) on behalf of its whole group. The consolidated group includes French subsidiaries (foreign subsidiaries are excluded) As regards the taxation of distributed income, two co-existing which are liable to corporate tax and have a share capital 95% of parent-subsidiary regimes are applicable, based, respectively, on which is held (directly or indirectly) by the parent company. A French domestic tax law and on EU regulations. subsidiary can also be a part of a consolidated group when more than These regimes allow a qualifying parent company to benefit from 95% of its share capital is held indirectly by a foreign EU company. reduced taxation on certain transactions on capital gains realised Under the tax consolidation regime, profits and losses incurred by the parent company on the sale of participations and dividends by all companies of the group are aggregated to determine a tax- received from its subsidiaries. consolidated net result. Intra-group transactions are neutralised. French tax law also provides a tax consolidation regime As explained in questions 1.6 and 4.2 above, French corporate tax (“intégration fiscale”); see our answer to question 4.4. is applied on a strict territorial basis, under which neither losses Large companies subject to corporate tax may also be liable to incurred abroad by a company running a business in France nor an additional contribution at the rate of 3.3%, assessed on the losses incurred by its overseas subsidiaries can be offset against amount of corporation tax due exceeding €763,000. The additional profits realised in France. contribution does not apply to companies whose annual turnover does not exceed €7.63 million, provided that at least 75% of the company is owned by individuals or by companies that themselves 4.5 Do tax losses survive a change of ownership? fulfil these conditions. A consolidated group (see our answer to question 4.4) is liable to pay this additional contribution if its global For French tax purposes, a change of ownership does not alter the turnover exceeds €7.63 million. carrying forward of tax losses, except if the activity of the company is substantially modified. See also our answer to question 4.6 relating to profits distributed by a French company to its shareholders. French corporate tax is pre-paid in four instalments (in March, 4.6 Is tax imposed at a different rate upon distributed, as June, September and December). Please note in this respect that a opposed to retained, profits? fifth instalment was added for certain companies through the 2017 Finance Bill. The debit/credit of corporate tax is due/refunded by The validity of the additional 3% contribution applied on profits 15 May the following year. distributed by French companies has been considered by the European Court of Justice as contrary to EU law. The Finance Bill Losses incurred by a company subject to corporation tax can be for 2018 suppresses the 3% contribution for dividend payments carried forward without time limits. However, the offsetting of made on or after 1 January 2018. losses is limited to 50% of the current year’s profits insofar as the profits exceed €1 million. Any unused losses remain carried forward to the following years.

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4.7 Are companies subject to any significant taxes not 5.2 Is there a participation exemption for capital gains? covered elsewhere in this chapter – e.g. tax on the occupation of property? Sale of companies’ shares benefits from a partial exemption (amounting to 88%) if, among other conditions, the shares have France applies a lot of indirect taxes. Among others, the territorial been held for more than two years. economic contribution (“TEC”) and the annual 3% tax should be noted. 5.3 Is there any special relief for reinvestment? The TEC replaced the former business tax (“taxe professionnelle”) in 2010. This is a local tax levied by the French departments and No special relief for reinvestment applies in France at the moment. France regions, made up of the following components: ■ the “cotisation foncière des entreprises”, which is based on the rental value of the real estate property used for the 5.4 Does your jurisdiction impose withholding tax on the company’s business; and proceeds of selling a direct or indirect interest in local ■ the “cotisation sur la valeur ajoutée des entreprises”, which assets/shares? is based on the added value by the business on a yearly basis. Unless tax treaties provide otherwise, withholding taxes are levied The overall amount of TEC due by the company cannot exceed 3% in France either in the case of the sale of a real estate property of the annual “added value” produced by the company. located in France by a foreign company, or in the case of the sale of The annual 3% tax is due by French and foreign companies owning company shares (French or foreign), as described below. (directly or indirectly) one or more real estate properties located in The sale of a real estate property located in France by a foreign France, the market value of which exceeds that of all other French company is subject to a withholding tax amounting to 33.33%. movable/financial assets owned by the same company. In practice, Depending on the seller’s country of residence, the taxable basis of because there are many legal exemptions, this tax is only due when this withholding tax may vary. the real estate located in France is not used for business and the identity of the ultimate owners has not been disclosed to the French Assuming the seller is a company resident in a Member State of tax authorities, or one of the intermediary companies involved in the the EEA, the 33.33% withholding tax is levied on the difference ownership structure is based in a country which has not signed an between the sale price and net book value of the real estate property. exchange of information treaty with France, or reporting obligations Assuming the seller is a company resident in a state which is not a have not been completed. member of the EEA, the 33.33% withholding tax is levied on the French tax law also provides that companies which are not subject to difference between the sale price and the purchase price of the real VAT on less than 10% of their preceding year’s turnover are subject estate, less an amount corresponding to 2% of the purchase value of to a tax on salaries (“taxe sur les salaires”), based on wages paid on the real estate per year of ownership of the sold real estate property. a progressive scale ranging between 4.25% and 20%. We are convinced that this rule restricts the free movement of capital, as does the obligation to appoint a French tax representative. A withholding tax is also levied in case of sale of shares by a foreign 5 Capital Gains company, which varies depending on the quality of the company sold and on the quality of the seller. 5.1 Is there a special set of rules for taxing capital gains Assuming the company (French or foreign) sold qualifies as a and losses? real estate company (“société à prépondérance immobilière”), the withholding tax is levied at the rate of 33.33% on the difference Capital gains are, as a general rule, included in the corporate tax between the sale price and the purchase price if the seller is a foreign basis and then subject to corporate tax as explained in question 4.1. company. However, specific provisions allow one to apply a more favourable If the seller is subject to CIT, the withholding tax levied at the time tax regime to capital gains on certain assets. of the sale of the French real estate or of the shares of the real estate Capital gains on the sale of shares qualifying as a “participation company (“société à preponderance immobilière”) is a prepayment exemption” may benefit from a partial exemption (see our answer of corporate tax (at the standard rate of 33.33%), which is computed to question 5.2). at the end of the fiscal year during which the real estate is sold. Assuming the 33.33% withholding tax exceeds the corporate tax Capital gains on the sale of intellectual property, patents and due at standard rates (see question 4.1.), the excess can be refunded assimilated assets are, under certain conditions, subject to corporate by a claim filed to the French tax authorities. tax at a reduced rate of 15%. Assuming the French company sold does not qualify as a real estate Capital gains realised on the sale of listed shares of real estate company and that more than 25% of its share capital is held by a companies (“sociétés à prépondérance immobilière”) are subject to foreign company at the time of the sale or at any time during the five a 19% reduced corporate tax. Shares of real estate companies which years preceding the sale, a 33.33% withholding tax applies which are not listed are still subject to corporate tax at standard rates (see is a final payment. If the shares of the company are owned and question 4.1) sold by an individual a withholding tax of 12.80% is levied. The Finally, capital gains on certain qualifying venture capital, mutual withholding tax paid is also considered as a final payment of income funds and investment companies, may, under certain conditions tax. (they should be owned for more than five years, among other Assuming the seller is resident in a non-cooperative state or conditions), benefit either from a reduced rate of taxation of 15% or territory, the withholding tax is increased to 75% on the capital gain from a full exemption. amount. We are convinced that this rule restricts the free movement of capital.

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However, according to the French parent-subsidiary tax regime, 6 Local Branch or Subsidiary? assuming the French company owns more than 5% of the shares of the distributing company for more than two years, dividends benefit 6.1 What taxes (e.g. capital duty) would be imposed upon from a 95% exemption for corporate tax purposes. This favourable the formation of a subsidiary? regime does not apply when the subsidiary is resident in a non- cooperative state or territory. No tax would be imposed upon the formation of a French subsidiary by a foreign company. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply?

France 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Article 209 B of the FTC provides that when a French company, company (for example, a branch profits tax)? subject to corporate tax, either realises a business enterprise in a low-tax jurisdiction or controls directly or indirectly (for more than As a general rule, there are very few differences between the 5% if the company is listed; 50% in other cases) the capital of a taxation of a locally formed subsidiary and a local branch set up by company located in a low-tax jurisdiction, profits realised by such a a non-resident company. company are subject to corporate tax in France even if they have not Because a branch (as opposed to a subsidiary) does not benefit from been distributed to the French shareholder. a legal personality different to that of its head office, interest, as well as royalties paid by a French branch to its foreign head office, is not 8 Taxation of Commercial Real Estate deductible for French tax purposes. Unless a treaty applies, corporate tax profits transferred by a French branch to its foreign head office are subject to a 30% withholding tax. 8.1 Are non-residents taxed on the disposal of A 75% withholding tax applies when the non-resident company is commercial real estate in your jurisdiction? resident in a non-cooperative state or territory. Once again, we are convinced that this rule restricts the free movement of capital. Foreign companies selling real estate located in France are subject to a 33.33% withholding tax, as explained in question 5.4 above.

6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? The French branch would only be subject to French corporate tax on profits realised in France, just as a French subsidiary would have been (see our answer to question 4.1). Unless tax treaties provide otherwise, foreign companies are subject to a 33.33% withholding tax on the sale of shares of companies (French or foreign) owning (directly or indirectly) 6.4 Would a branch benefit from double tax relief in its real estate properties located in France and having a fair market jurisdiction? value exceeding the fair market value of other assets they own, as explained in question 5.4. Branches of foreign companies are not considered resident for the application of tax treaties, and therefore cannot benefit from their provisions. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the France does not recognise the concept of REITs. However, branch? French tax law provides for a specific optional regime applying, under certain conditions, to listed real estate companies (“sociétés Please see our answer to question 6.3. d’investissements cotées”). A French corporate tax exemption is granted provided that the major part of their results are distributed to their shareholders, corresponding to 95% of their rental income, 7 Overseas Profits 60% of their capital gains and 100% of dividends received from their subsidiaries. 7.1 Does your jurisdiction tax profits earned in overseas branches? 9 Anti-avoidance and Compliance As explained above, according to the strict territorial regime of French corporate tax, profits realised by overseas branches ofa 9.1 Does your jurisdiction have a general anti-avoidance French company are not taxable in France. or anti-abuse rule?

7.2 Is tax imposed on the receipt of dividends by a local The FTC provides numerous anti-avoidance or anti-abuse of law company from a non-resident company? rules. Some of them have a very wide scope and may function to prevent As a general rule, dividends from abroad received by a French internal and international tax avoidance (the theory of “abus de company are subject to French corporate tax. droit” or “acte anormal de gestion”). Others are specifically dedicated to preventing international tax evasion.

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The French tax authorities may use the theory of abuse of law (“abus Moreover, a draft law is being discussed in French Parliament, of de droit”) provided by article L64 of the Tax Procedure Handbook which the purpose is to strengthen the sentences against fraudsters (“livre des procédures fiscales”) to challenge an operation (or a who violate the principles of equality in relation to public burdens series of operations) which allow the taxpayer to avoid, reduce or and of free consent to taxation. One of the main provisions of postpone a French tax. this bill is the creation of administrative sanctions against third An abuse of law may be characterised when either the operation parties facilitating tax and social fraud in order to punish not only or the scheme used is fictitious or the taxpayer researched a literal the perpetrators of the fraud, but also its “engineers”, who spread application of a provision or decision that is contrary to the intention fraudulent schemes. of the lawmaker and was motivated only by the intention of avoiding or reducing its tax burden. A penalty at the rate of either 40% or 9.4 Does your jurisdiction encourage “co-operative France 80% applies when an abuse of law is deemed to have occurred. compliance” and, if so, does this provide procedural The theory of abnormal management act (“acte anormal de benefits only or result in a reduction of tax? gestion”) allows the French tax authorities to disregard an operation which has not been realised in the best interest of the company. The sentences provided for by article 1741 of the FTC can be halved if the perpetrator or an accomplice in the abovementioned offences These general provisions may be difficult to apply because the enables the French tax or judicial authorities to identify other French tax authorities may conclude that an “abus de droit” or “acte participants in the same offences. anormal de gestion” exists. Article 109 of the Finance Bill for 2017 also introduced, temporarily, This is the reason why specific anti-avoidance provisions have the possibility for the FTA to compensate individuals providing been introduced in the FTC which presume the existence of tax information on existing “infringements” of the provisions of the avoidance. Then the taxpayer should (sometimes) prove the absence FTC (i.e. absence of reporting, tax avoidance arrangements, etc.). of the intention of avoidance in order to escape the application of the This provision entered into force on 1 January 2017, and the system presumption imposed by the law. is supposed to be tested for two years. This is the case for: article 57 of the FTC (see our answer to question 3.9); article 209 B of the FTC (see our answer to question 7.3); article 238 A of the FTC; and article 155 A of the FTC. 10 BEPS and Tax Competition According to article 238 A of the FTC, any payments made by a French company benefitting a company located in a low-tax country 10.1 Has your jurisdiction introduced any legislation are not deductible for French tax purposes. in response to the OECD’s project targeting Base According to article 155 A of the FTC, payments received by a non- Erosion and Profit Shifting (BEPS)? resident (individual or company) corresponding to the remuneration of services rendered by a French taxpayer are, under certain France has already introduced legislation in response to the OECD’s conditions, taxable in France. project targeting BEPS, as a specific mechanism which aims to Finally, as explained before, any dividends, royalties, capital gains strive against the effects of hybrid mismatch arrangements. Within or income from a French source are subject to a 75% withholding the scope of this legislation, when a company which is subject to tax when paid to a resident in a non-cooperative state or territory. CIT is bonded to another company, wherever it is located in France or in a foreign country, the loan’s interests are deductible only if the As explained in question 3.4, as an EU Member State, France borrowing company shows that the lending company is subject to will have to implement in its domestic legislation ATA Directive- income tax on the same interests. compliant provisions by 31 December 2018 (with the provisions applying from 1 January 2019). On 7 June 2017, France signed the MLI to amend its tax treaties in line with the OECD BEPS principles. On 12 July 2018, the law authorising the ratification of the MLI by the French Parliament 9.2 Is there a requirement to make special disclosure of was published. The MLI should enter into force in France in 2019 avoidance schemes? depending on the date of the ratification of the instrument by the French Parliament. The MLI provides notably for substance-over- The requirement to make special disclosure of avoidance schemes form and anti-treaty shopping provisions that are mandatory for all has not yet been introduced into French tax law. signatory States.

9.3 Does your jurisdiction have rules which target not 10.2 Does your jurisdiction intend to adopt any legislation only taxpayers engaging in tax avoidance but also to tackle BEPS which goes beyond what is anyone who promotes, enables or facilitates the tax recommended in the OECD’s BEPS reports? avoidance?

France largely follows the recommendations of the OECD’s Article 1741 of the FTC provides that the voluntary fraudulent BEPS reports. Sometimes, it requires more transparency in regard avoidance of taxation can give rise to a penalty amounting to to transfer pricing. Companies, when they are controlled by tax €500,000 and an imprisonment sentence of five years. Under certain authorities, have to provide the French tax authorities with a copy of aggravating circumstances, the fine can be increased to €2 million and the rulings from which they benefit in other countries, in addition to the imprisonment sentence to seven years. other reporting obligations provided by the OECD’s transfer pricing Article 1742 of the FTC, in combination with articles 121-6 and recommendations. 121-7 of the French Criminal Code, provides that anyone facilitating the fraudulent avoidance of taxation by assisting or advising the perpetrators of such offence can also be sentenced.

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However the Constitutional Court (“Conseil Constitutionnel”) has 10.3 Does your jurisdiction support public Country-by- repealed this disposition before it was enacted. Thus, France has Country Reporting (CBCR)? not yet taken unilateral action to tax digital activities or to expand the tax base to capture digital presence. However, France is acting At the beginning of 2016, the European Commission published a at the EU level for such a legislation to be implemented as explained draft directive to fight against fiscal fraud, including a country-by- in question 11.2 below. country reporting mechanism. This draft was adopted on 25 May 2016, amending Directive 2011/16/EU as regards the mandatory automatic exchange of information in the field of taxation. The 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services Member States have to apply their rules no later than 5 June 2017.

France tax? However, the French Parliament took the lead and from 1 January 2016 imposed an obligation to report accounting and taxable results France’s Minister for the Economy and Finance, Bruno Le Maire, country-by-country. Companies which hold foreign subsidiaries has welcomed the European Commission’s draft directives in a 21 or branches, establish consolidated accountings and realise a March 2018 joint statement with Finance ministers from Germany, consolidated turnover of over €750 million, are subject to this Italy, Spain and the United Kingdom. specific reporting obligation. The France Country-by-Country The Digital Services Tax (“DST”) should apply to revenues created report shall be filed at the latest on 31 December 2018 for the fiscal from activities where users play a major role in value creation such year closing 31 December 2017. as those revenues created from: ■ selling online advertising space; 10.4 Does your jurisdiction maintain any preferential tax ■ digital intermediary activities; and regimes such as a patent box? ■ the sale of data generated from user-provided information. French legislation provides for multiple grants and tax incentives The DST should only be levied on companies which totalise: to attract new investors. They take the form of tax credits and ■ annual worldwide revenues of €750 million or more; and exemptions at both a national and regional level. Investors must ■ annual EU revenues of €50 million or more. meet strict criteria to apply for these. The rate of the DST is proposed to be 3%. The main incentive provided by French tax legislation is the “R&D The DST proposal indicated that Member States shall adopt and tax credit” (“credit d’impôt recherche”), which is a corporate tax publish by 31 December 2019 at the latest, the laws, regulations and incentive based on the research and development expenditure administrative provisions necessary to comply with this Directive incurred by any trading company located in France, regardless of and that they shall apply those provisions from 1 January 2020. sector and size. This mechanism allows all companies to benefit from a 30% (under €100 million) or 5% (exceeding €100 million) However, this measure is only a proposal which will require the partial refund (either by way of tax reduction or tax reimbursement). unanimous agreement of the Member States to be adopted. This mechanism was extended to innovation expenditures incurred by SMEs, offering a yearly tax credit of 20% for up to €400,000 of expenses (that is, a yearly tax credit of €80,000).

11 Taxing the Digital Economy

11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence?

The French Government has already tried to introduce what was commonly called the “Google Tax” in the 2017 Finance Bill.

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

Tel: +33 1 53 57 36 00 Email: [email protected] URL: www.tirard-naudin.com France Maryse Naudin began her career in the tax department of one of the major accounting firms, where she was in charge of the real estate practice and the South East Asia region, prior to co-founding Tirard, Naudin. She now has more than 35 years’ experience in advising and defending varied clientele, from multinational corporations to high- net-worth individuals, in relation to cross-border tax issues. She has a particular expertise in advising foreign investors acquiring French real estate property, as well as French clients with foreign interests. Ms. Naudin also has a wealth of expertise in matters relating to trust aspects in a civil law environment, European taxation and, in particular, tax litigation with respect to community freedoms. She is the co- founder and former secretary of the French branch of STEP, and a former chairman of the International Estate Planning Commission of the Union Internationale des Avocats. She is a member of the international Academy of Estate and Trust Law.

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

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Germany Dr. Martin Haisch

Noerr LLP Dr. Carsten Heinz

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Under the Corporate Income Tax Act, corporate bodies, including companies, are tax-resident in Germany if they either have their effective place of management or their registered seat in Germany. On 1 January 2018, there were 96 income tax treaties between Germany and other countries in force. 2 Transaction Taxes 1.2 Do they generally follow the OECD Model Convention or another model? 2.1 Are there any documentary taxes in your jurisdiction? German income tax treaties generally follow the OECD Model Convention(s). In addition, the Federal Ministry of Finance Currently, there are no documentary taxes in Germany. has developed a specimen tax convention which is the basis for negotiating all new treaties. Again, this specimen generally follows 2.2 Do you have Value Added Tax (or a similar tax)? If so, the OECD Model Convention but also contains certain deviations at what rate or rates? from it. Germany has a Value Added Tax (VAT) that is based on the 1.3 Do treaties have to be incorporated into domestic law European common system of VAT. The VAT standard rate is 19%. before they take effect? A reduced rate of 7% applies to certain goods and services (e.g., books, food, passenger transport and accommodation in hotels). Treaties have to be incorporated into domestic law by adoption by the German Parliament and the German Federal Council and by 2.3 Is VAT (or any similar tax) charged on all transactions ratification by the German Federal President before they take effect. or are there any relevant exclusions?

1.4 Do they generally incorporate anti-treaty shopping The delivery of goods and the supply of services by an entrepreneur, rules (or “limitation on benefits” articles)? whose turnover plus applicable tax in the previous calendar year did not exceed EUR 17,500 and is not expected to exceed EUR 50,000 Germany generally incorporates the entirety of treaties into its in the current calendar year, are exempt from VAT. In addition, there domestic law, including anti-treaty shopping rules and limitation on are certain deliveries or supplies – mainly in the financial sector – benefits articles. that are exempt from VAT.

1.5 Are treaties overridden by any rules of domestic 2.4 Is it always fully recoverable by all businesses? If not, law (whether existing when the treaty takes effect or what are the relevant restrictions? introduced subsequently)? Input VAT on deliveries or supplies is fully recoverable by an Pursuant to § 2 of the General Tax Code, treaties take precedence entrepreneur if the deliveries or supplies are entirely used to render over domestic tax laws if the treaties have been incorporated into taxable deliveries or supplies that are not exempt from VAT. By way German law. Notwithstanding, domestic laws override treaty of contrast, as a general rule input VAT on deliveries or supplies that provision if they are more specific (special law repeals general laws) are used to make tax-exempt deliveries or supplies is not deductible. or if they have been introduced subsequently to the treaty rule (later law repeals earlier laws). Such treaty overrides constitute a breach of the treaty but are regarded to be constitutional in Germany.

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2.5 Does your jurisdiction permit VAT grouping and, if so, 3.3 Would there be any withholding tax on interest paid is it “establishment only” VAT grouping, such as that by a local company to a non-resident? applied by Sweden in the Skandia case? Interest paid to a non-resident is generally not subject to withholding Germany allows VAT grouping. The VAT group can affect only tax. Exceptions apply to interest on shareholder loans that are not those parts of companies, which are located in Germany. The at arm’s length and to interest on certain hybrid instruments from impact of the Skandia case on the German VAT grouping has not yet German issuers (e.g., profit participating loans, silent participations, been finally settled by German case law. convertible bonds, jouissance right).

2.6 Are there any other transaction taxes payable by 3.4 Would relief for interest so paid be restricted by Germany companies? reference to “thin capitalisation” rules?

Real estate transfer tax is levied on certain direct and indirect Already in 2008, Germany introduced a general limitation on the transfers of domestic real estate. E.g., the sale or other transfer deduction of interest payments (so-called interest barrier). The (e.g., by way of reorganisation) of legal title in German real estate interest barrier applies to shareholder, related-party, as well as is subject to this transfer tax but also the direct and indirect change third-party debt irrespectively. As a general rule, the deduction of of at least 95% ownership in a partnership that holds domestic real the annual net-interest expenses (i.e., interest expenses after full estate as well as the direct and indirect “unification” of at least deduction of interest income) is capped at 30% of the entrepreneur’s 95% of the share in a corporation that holds domestic real estate. taxable earnings before interest, taxes, depreciation and amortisation There are also plans to reduce the 95% threshold. Depending on the (EBITDA) per annum. However, net-interest expenses that are not federal state, the tax rate is between 3.5% and 6.5% of the purchase deductible under this 30%-rule are carried forward for an unlimited price or the real estate value. German real estate transfer tax applies period of time and may be deductible in future tax periods. irrespectively of the tax-residency of the person or entity subject to the tax. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 2.7 Are there any other indirect taxes of which we should be aware? There are three exceptions to the 30%-rule: (i) the annual net- interest expenses are less than EUR 3 million; (ii) the entrepreneur German Insurance Tax applies to the insurance premiums on does not belong to a group of companies; and (iii) the equity ratio of insurance contracts that have a certain link to Germany (e.g., the the entrepreneur is equal or higher than the equity ratio of the entire insured party is resident in Germany, the insured object is located in group. However, the exceptions under (ii) and (iii) are not available Germany or the insurer is resident in Germany) at a standard rate of if so-called “harmful shareholder financing” exists. 19% (other rates exist). In addition, there is energy tax, tobacco tax, electricity tax, beer tax, coffee tax, alcoholic beverage tax, spirits 3.6 Would any such rules extend to debt advanced by a tax, sparkling wine tax as well as racing bet and lottery tax, etc. third party but guaranteed by a parent company?

3 Cross-border Payments Yes, the interest barrier applies to shareholder debt as well as third-party debt. The “back to back” financing could even qualify as “harmful shareholder financing” with the consequence that the 3.1 Is any withholding tax imposed on dividends paid by abovementioned two exceptions to the 30%-rule would not be a locally resident company to a non-resident? applicable.

Dividends paid to a non-resident are subject to a withholding tax at a total rate of 26.375%. A reduction or relief from withholding 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- tax might be available based on the EU Parent-Subsidiary Directive resident? or on a tax treaty. However, to be able to rely on the EU Parent- Subsidiary Directive or a tax treaty the dividend receiving In addition to the interest barrier, which applies to interest corporation has to meet certain substance requirements (§ 50d (3) payments to German-residents and non-residents irrespectively, of the Income Tax Act; so-called anti-directive or treaty shopping there are currently no further restrictions on the tax relief of interest rule). deductions, besides from the dealing-at-arm’s-length principle.

3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? 3.8 Is there any withholding tax on property rental payments made to non-residents?

Certain royalties paid to a non-resident are subject to a withholding Currently, there is no mandatory withholding tax on property tax at a total rate of 15.825%. A reduction or relief from withholding rental payments made to non-residents. However, the German tax tax might be available based on the EC Interest and Royalties authorities may order tax to be withheld on rentals paid to non- Directive 2003/49/EC or on a tax treaty. Again, to be able to benefit residents on a case-by-case basis if this is appropriate for securing from the EC Interest and Royalties Directive 2003/49/EC or a the taxation of such income. tax treaty the royalties receiving corporation have to meet certain substance requirements (see question 3.1 above).

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3.9 Does your jurisdiction have transfer pricing rules? 4.5 Do tax losses survive a change of ownership?

German corporations must comply with the dealing-at-arm’s-length Tax losses carried forward and current year losses expire if a single principle. This is the main principle for related party transactions. (direct or indirect) shareholder acquires more than 50% of the issued The prices for those transactions have to be settled on these grounds capital (i.e., voting rights) within a five-year period; an acquisition applying the traditional transfer pricing methods. In addition, of more than 25% and up to 50% leads to a pro-rated expiry of said there is further legislation spread throughout different acts and tax losses (so-called “harmful acquisitions”). regulations. These forfeiture rules do not apply (i) to “harmful acquisitions” as part of certain intra-group reorganisations, or (ii) to the extent Germany 4 Tax on Business Operations: General the tax losses are covered by uncrystallised/unrealised profits in the corporation’s assets that would result in German taxation upon realisation. 4.1 What is the headline rate of tax on corporate profits? In relation to “harmful acquisitions” occurring after 31 December 2015, tax losses may not expire upon special application where the German corporations are subject to the Corporate Income Tax corporation has maintained exclusively the same business during and Trade Tax on their corporate profits. The Corporate Income a specified observation period and during this period no “harmful Tax amounts to a total of 15.825% (including a 5.5% solidarity event” has occurred. In this context, “harmful events” include the surcharge on the 15% Corporate Income Tax rate). The Trade Tax discontinuance of the business, the commencement of an additional rate depends on in which municipality the corporation is effectively business and a change in activity/business sector. managed and ranges from 7% up to 17% in large cities. This results in a combined headline tax rate for corporations of at least 22.835% 4.6 Is tax imposed at a different rate upon distributed, as up to 32.975%. opposed to retained, profits?

4.2 Is the tax base accounting profit subject to No, retained and distributed profits are taxed at the same rate at the adjustments, or something else? level of the corporation.

The tax bases for corporations are generally based on the accounting 4.7 Are companies subject to any significant taxes not P&L statement. However, there are important adjustments for tax covered elsewhere in this chapter – e.g. tax on the purposes. occupation of property?

4.3 If the tax base is accounting profit subject to In Germany real estate tax (Grundsteuer) is levied on the ownership adjustments, what are the main adjustments? of real estate as well as building rights on land and its development. To the contrary, a general wealth tax (Vermögenssteuer) is currently There are two types of adjustments: (i) accounting positions are not at not applied. all recognised for tax purposes; and (ii) accounting items are valued differently for tax purposes. In the first category fall, for example, the prohibition to record liabilities that are contingent on earnings 5 Capital Gains or profits (§ 5 (2a) of the Income Tax Act) and the prohibition to show provision for impending losses (§ 5 (4a) of the Income Tax 5.1 Is there a special set of rules for taxing capital gains Act). Tax rules that provided for a valuation that deviates from the and losses? accounting provisions have become quite abundant in recent years, namely for pension liabilities (§ 6a of the Income Tax Act) and For corporations, capital gains and losses are treated and taxed deprecations (§§ 7 et seqq. of the Income Tax Act). equally to ordinary/on-going income.

4.4 Are there any tax grouping rules? Do these allow 5.2 Is there a participation exemption for capital gains? for relief in your jurisdiction for losses of overseas subsidiaries? Germany provides for an effective 95% tax-exemption for capital gains resulting from the sale or disposal of shares in German or There are grouping rules in Germany that allow for tax groups foreign corporations. The tax-exemption applies regardless of a for Corporate Income and Trade Tax purpose (in addition to VAT minimum holding quote and period. On the contrary, capital losses grouping, see question 2.5 above). To enter into such a tax group, resulting from the sale or disposal of shares in German or foreign the parent corporation must have a majority shareholding in the corporations are not deductible for German tax purposes. These corporate subsidiary (i.e., more than 50% of the voting rights) and rules do not apply to certain shareholdings of banks, financial concluded a profit and loss absorption agreement for a period of service institutions or life and health insurance companies. at least five years. Furthermore, the parent corporation must have a German permanent establishment and the effective place of management of the corporate subsidiary has to be in Germany. The 5.3 Is there any special relief for reinvestment? latter generally excludes a German tax group with subsidiaries tax- resident overseas. There is a relief for reinvestment if capital gains from the disposal of certain assets are reinvested in equivalent assets within a period of four years (§ 6b of the Income Tax Act).

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5.4 Does your jurisdiction impose withholding tax on the 6.5 Would any withholding tax or other similar tax be proceeds of selling a direct or indirect interest in local imposed as the result of a remittance of profits by the assets/shares? branch?

As a general rule, there is no German withholding tax on the There is no withholding tax for the remittance of profits by a proceeds of selling a direct or indirect interest in local assets/ German branch. shares. The main exception to this rule is where a German tax- resident private individual sells capital investments (including shareholdings of less than 1% in the capital of the issuer but not 7 Overseas Profits interest in partnerships). In such cases, generally the German bank, Germany where the capital investments are held in custody, has to collect 7.1 Does your jurisdiction tax profits earned in overseas withholding tax at a total rate of 26.375% on the capital gains or – if branches? the acquisition costs are not know to the bank – the sales proceeds. Since Germany follows the world income principle, profits earned 6 Local Branch or Subsidiary? in an overseas branch are subject to German Corporate Income Tax but are not included in the tax basis for German Trade Tax purposes due to its territorial limitation. However, such profits are 6.1 What taxes (e.g. capital duty) would be imposed upon generally exempt from German income taxation based on applicable the formation of a subsidiary? tax treaties. In case the foreign branch is “low taxed” within the meaning of the German CFC rules (see question 7.3 below), The formation of a subsidiary in Germany is not subject to any tax, Germany does deny the application of the exemption method and in particular, there is no capital duty. only allows foreign tax credits (so-called switch over).

6.2 Is there a difference between the taxation of a local 7.2 Is tax imposed on the receipt of dividends by a local subsidiary and a local branch of a non-resident company from a non-resident company? company (for example, a branch profits tax)? The 95% participation exemption (see question 5.2 above) also A German corporate subsidiary is fully subject to German Corporate applies to dividends from a local company received by a non- Income and Trade Tax. In addition, dividends paid from the German resident company subject to the general 10% holding requirement. subsidiary to the non-resident company are also generally subject to German withholding tax. In contrast, in case of a German 7.3 Does your jurisdiction have “controlled foreign permanent establishment/branch of a non-resident company, the company” rules and, if so, when do these apply? company is subject to German Corporate Income Tax with the profits of the branch and the branch itself is subject to Trade Tax. Yes, Germany has “controlled foreign company” rules (“CFC There is, however, no branch profits tax. rules”). These apply in relation to foreign corporate bodies that are subject to low taxation (i.e., an (effective) tax rate of less than 6.3 How would the taxable profits of a local branch be 25%) and which are held by German shareholders to more than determined in its jurisdiction? 50% (for detrimental capital investment income (e.g., interest) the participation threshold is lowered to 1%). As a result, income For tax purposes, a branch is treated as a functionally separate earned by the foreign corporation is treated as taxable income of entity following the Authorised OECD Approach. Specifically, the the German shareholders. These rules are not applied to controlled allocation of profits between headquarter and branch are determined foreign companies that are residents of the EU/EEA Member States by a so-called “two steps approach” pursuant to § 1 (5) of the and have sufficient substance (“Cadbury-Schweppes” test). Foreign Tax Act: ■ In the first step, the personnel functions of the headquarter and the branch have to be identified and allocated. Based 8 Taxation of Commercial Real Estate on the allocated functions, the assets and liabilities required to perform these functions have to be allocated. Further, the risks and awards associated with the functions, assets and 8.1 Are non-residents taxed on the disposal of liabilities so distributed have to be allocated accordingly. commercial real estate in your jurisdiction? Finally, the capital required to perform the relevant functions must be allocated to the branch. Non-residents are subject to (corporate) income tax with capital ■ On the basis of this allocation, the second step is to determine gains from the sale or disposal of German real estate whether the type of business relationship between the headquarter commercial or residential. As an exception, such gain might not be and its branch and the transfer prices for these business subject to tax if the real estate has been held by a private individual relationships. for more than 10 years prior to the sales or disposal. Irrespective of any holding period, a sale or disposal will trigger German real estate transfer in the hands of the non-resident. 6.4 Would a branch benefit from double tax relief in its jurisdiction?

A branch itself generally does not benefit from tax treaties because it is legally part of its corporate headquarters and therefore not a resident for tax treaty purposes.

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8.2 Does your jurisdiction impose tax on the transfer of 10 BEPS and Tax Competition an indirect interest in commercial real estate in your jurisdiction? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Currently, non-residents are not subject to (corporate) income tax Erosion and Profit Shifting (BEPS)? with capital gains from the sale or disposal or shares in (foreign) corporations holding German real estate. However, there are plans Germany has already had anti-treaty shopping rules, CFC to make such indirect transfers taxable. For German real estate legislation and some anti-hybrid rules with a correspondence transfer tax purposes though, the direct and indirect change of at principle for dividends and expenses of a partnership member least 95% ownership in a partnership that holds domestic real estate Germany regarding their interest in the partnership prior to BEPS. In as well as the direct and indirect “unification” of at least 95% of the addition, a so-called licence barrier was introduced as of 1 January share in a corporation that holds domestic real estate, are taxable 2018. These rules limit the deductibility of licence fees or royalty also for non-residents. payments to related parties that benefit from preferential tax regimes that are incompatible with the OECD Nexus Approach. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? Germany introduced a Real Estate Investment Trust (REIT) in 2007. It benefits from a special tax regime (i.e., exemption from Germany has published an “Action Plan against Tax Fraud, Tax Corporate Income and Trade Tax) if certain preconditions are met Avoidance Schemes and Money Laundering” on the back of which (e.g., distribution of at least 90% of the net profits). Distributions a transparency register has been introduced. from a REIT are then taxed exclusively at investor level.

10.3 Does your jurisdiction support public Country-by- 9 Anti-avoidance and Compliance Country Reporting (CBCR)?

The German jurisdiction does support the CBCR and has 9.1 Does your jurisdiction have a general anti-avoidance implemented it into domestic law (§ 117 of the General Tax Code). or anti-abuse rule?

§ 42 of the General Tax Code provides for a general anti-avoidance 10.4 Does your jurisdiction maintain any preferential tax rule for taxes in general. regimes such as a patent box?

No, there is no preferential tax regime such as a patent box. 9.2 Is there a requirement to make special disclosure of avoidance schemes? 11 Taxing the Digital Economy Currently, there is no disclosure regime for avoidance schemes. However, as of 1 January 2019, Germany has to implement such a regime based on the Anti-Tax Avoidance Directive (draft of § 138d 11.1 Has your jurisdiction taken any unilateral action to tax of the General Tax Code). digital activities or to expand the tax base to capture digital presence?

9.3 Does your jurisdiction have rules which target not No, there are no unilateral actions to tax digital activities in Germany only taxpayers engaging in tax avoidance but also yet. anyone who promotes, enables or facilitates the tax avoidance? 11.2 Does your jurisdiction support the European No, there are no such rules yet. The draft of § 138d of the General Commission’s interim proposal for a digital services Tax Code does, however, also include those parties. tax?

No, the German Ministry of Finance does not agree with the 9.4 Does your jurisdiction encourage “co-operative European Commission’s interim proposal for a digital services tax. compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? However, the German Ministry of Finance supports the general idea of expanding the tax base concerning a digital presence. No, German jurisdiction does generally not encourage “co-operative compliance”.

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Dr. Martin Haisch Dr. Carsten Heinz Noerr LLP Noerr LLP Boersenstraße 1 Brienner Straße 28 60313, Frankfurt am Main 80333, München Germany Germany

Tel: +49 69 97147 7221 Tel: +49 89 28628 550 Email: [email protected] Email: [email protected] URL: www.noerr.com URL: www.noerr.com

Dr. Martin Haisch is tax partner at Noerr and specialises in tax and Dr. Carsten Heinz heads Noerr’s Tax Department. His practice area is Germany regulatory law, particularly with regard to financial products and domestic and cross-border tax planning for mid-sized or multinational transactions, funds, and structured finance. Furthermore, he advises companies as well as for international funds. He specialises in on restructuring and M&A and real estate transactions and assists developing tax-optimised structures and advises his clients on tax- clients during tax audits and in proceedings before fiscal courts. optimised financing, group restructuring, real estate transactions and His clients include financial institutions, fund houses and investors M&A. His clients are from the automotive, the road construction, the of all kinds. Martin Haisch is the co-editor of “Rechtshandbuch financial, the private equity or the insurance sectors. He is a lecturer Finanzinstrumente”, a legal handbook on financial instruments for reorganisation tax at the Freie Universität Berlin. published by Beck, and “Recht der Finanzinstrumente”, a legal magazine on financial instruments published by dfv Mediengruppe. He regularly publishes and speaks on tax and regulatory matters, especially with regard to financial products and funds.

Noerr stands for excellence and an entrepreneurial approach. With highly experienced teams of strong characters, Noerr devises and implements solutions for the most complex and sophisticated legal challenges. United by a set of shared values, the firm’s 500+ professionals are driven by one goal: our client’s success. Listed groups and multinational companies, large- and medium-sized family businesses as well as financial institutions and international investors all call on the firm. The Noerr tax team consists of over 60 professionals throughout Europe and advises and assists banks, funds, private equity houses, investors, corporates and entrepreneurs alike in almost all domestic and international tax issues – be it on a project basis or handling on-going matters. Our experts combine specialisation with an interdisciplinary approach and deliver practicable and commercial advice taking into account the interdependence between law, tax and audit as well as industry specifics. We also help our clients to master tax audits and win tax litigation against the revenue.

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Greece Ioannis Stavropoulos

Stavropoulos & Partners Law Office Aimilia Stavropoulou

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

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

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

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

The Greek Value Added Tax Code is based on EC Directive 1. Customs duties are imposed on imports from non-EU 2006/112/EC, i.e. on the common system of Value Added Tax (the Member States, as prescribed by the Community Customs former Sixth EC Directive). The standard VAT rate is 24%. Two Code and the Common Customs . other rates may apply depending on the nature of goods or services 2. Excise duties on coffee, tobacco products, alcohol and (13% and 6%). VAT rates reduced by 30%, namely to 17%, 9% and alcoholic drinks, and fuels (heating and transportation) are 4%, apply in certain Greek islands (e.g. Lesvos, Chios, Samos, etc.). imposed in line with EU law. Such reduced-rate status shall remain until 31 December 2018. 3. A special luxury tax is levied on certain categories of goods Greece considered “luxury goods”, such as leather goods, jewellery and precious stones, precious metals, aircraft, seaplanes and 2.3 Is VAT (or any similar tax) charged on all transactions helicopters of private use. or are there any relevant exclusions? 4. As of 1 June 2016, cars, motorcycles and trucks that enter Greek territory are subject to registration duty at new rates VAT applies to all stages of production and distribution of goods, varying from 4% to 32% on their retail sale price (before provision of services and intra-community acquisitions or imports taxes), regardless of their cylinder capacity. Ηybrid cars, of goods from abroad, against a consideration. previously exempted, are also burdened with 50% of the applicable registration duty. However, VAT exemptions are applicable which either: (i) preclude the recovery of input VAT (e.g. provision of services of a social 5. Insurance tax applies on the amount of premiums and related or cultural nature, such as medical services, educational services, costs charged by insurance companies, and is borne by the customer. The rates vary from 4% to 20% depending on insurance services and most banking services); or (ii) do not, in the type of insurance. Life insurance premiums paid in the which case the supplies are treated as zero-rated (e.g. exports, intra- context of contracts with a duration of at least 10 years are community supplies, international transit of goods and transactions exempted. related to shipping and the aircraft sector). 6. An annual contribution of 0.6% is imposed on the average outstanding monthly balance of each loan granted by a bank 2.4 Is it always fully recoverable by all businesses? If not, operating in Greece or abroad. Certain exceptions apply with what are the relevant restrictions? regard to loans between banks, loans to the Greek State, loans funded by the European Investment Bank, etc. Taxable persons are entitled to deduct input VAT from output VAT, as long as the goods and services are wholly used in taxable 3 Cross-border Payments transactions within the same tax period or in exempt transactions but with retention of the right to deduct VAT. However, input VAT on supplies that are used to render tax-exempt supplies without 3.1 Is any withholding tax imposed on dividends paid by retention of the right to deduct VAT is, in principle, not deductible. a locally resident company to a non-resident? If taxable persons render both taxable and tax-exempt services, input VAT on supplies for both has to be split up according to the Dividends or profits distributed by a locally resident company to a respective percentage of taxable supplies to determine the deductible non-resident are subject to (final) withholding tax at a rate of 15%. part of input VAT. Profits deriving from a branch of a foreign company are not subject to any withholding tax on distribution. If input tax is higher than output tax at the end of the tax year, such difference may be either carried forward or refunded, if certain Dividend income may be subject to a lower withholding tax rate, conditions are met. provided the recipient of the dividend income is resident in a state with which Greece has concluded a tax treaty which provides for a Lastly, there are a number of expenditures for which input VAT is more favourable tax treatment. No withholding tax applies if the not deductible, e.g. hotel accommodation, food, drink and tobacco. conditions of the EU Parent-Subsidiary Directive (2011/96/EU) are satisfied (i.e. a 10% minimum shareholding for an uninterrupted 2.5 Does your jurisdiction permit VAT grouping and, if so, period of at least 24 months), subject to the provisions of the recently is it “establishment only” VAT grouping, such as that enacted anti-abuse rules concerning hybrid mismatch arrangements applied by Sweden in the Skandia case? and tax avoidance arrangements without economic and business substance that are solely aimed at obtaining a tax benefit. No, it does not.

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

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or states with a preferential tax regime (i.e. states where there is 3.3 Would there be any withholding tax on interest paid no taxation or de facto taxation, or where profits, income or capital by a local company to a non-resident? are taxed at a rate equal to or lower than 50% of the corresponding Greek tax rate) are not tax-deductible, unless the taxpayer proves Interest payments effected to a non-resident are subject to a 15% that these expenses relate to real and ordinary transactions and do (final) withholding tax, subject to a reduced rate under an applicable not result in transfer of profits, income or capital for tax avoidance tax treaty or the application of the EU Interest and Royalties or evasion. Exceptionally, deduction of interest expenses paid to a Directive (i.e. a 25% minimum shareholding for an uninterrupted tax resident in an EU/EEA Member State is not precluded, if a legal period of at least 24 months). It is to be noted that interest received basis for exchange of information between Greece and the Member from Greek government bonds and treasury bills by legal entities that State in question exists. Greece are not tax-resident in Greece and that do not maintain a permanent establishment in Greece are not subject to withholding tax. 3.8 Is there any withholding tax on property rental payments made to non-residents? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? No, there is not.

Pursuant to the Greek “thin capitalisation” rules, interest costs are not recognised as deductible business expenses if: a) they exceed 3.9 Does your jurisdiction have transfer pricing rules? the amount of EUR 3 million per year; and b) they exceed interest income and that excess interest expenditure exceeds 30% of A general provision sets out the “arm’s length” principle by stating taxable earnings before interest, tax, depreciation and amortisation that any profit not realised by a domestic legal person or legal entity (EBITDA). Any interest cost that is thus not deductible may be due to economic or commercial terms in transactions with associated carried forward indefinitely to future years and will be deductible persons different from the terms that would apply between non- in future years to the extent that those future years indicate an associated persons (independent businesses) or between associated uncovered EBITDA amount. persons and third parties, increases the taxable base of the domestic legal person or legal entity by following the OECD’s general principles and guidelines for intercompany transactions. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? “Associated person(s)” means: a) any person who directly or indirectly owns shares, parts or participation equity in another person of at least 33% in value or number, or rights to profits, or There is no safe harbour. However, it should be noted that the voting rights; b) two or more persons, if a third person owns directly aforementioned “thin capitalisation” rules do not apply to credit or indirectly shares, parts, voting rights or participation equity in institutions, leasing companies, and factoring companies that are such persons of at least 33% in value or number, or rights to profits, licensed by the Bank of Greece or respective regulatory authorities or voting rights; or c) any person with whom there is a direct or of other EU Member States. indirect relationship of substantial management dependence or control, or who exercises decisive influence or has the ability to 3.6 Would any such rules extend to debt advanced by a exercise decisive influence over another person, or if both persons third party but guaranteed by a parent company? have a direct or indirect relationship of substantial management dependence or control or the ability to exercise decisive influence Yes, interest from loans guaranteed by a parent company is through a third party. deductible, on the conditions prescribed under the aforementioned Specific rules exist for the transfer pricing documentation file, as “thin capitalisation” rules. well as the procedure for an Advance Pricing Arrangement (APA) related to transfer pricing methodology. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 4 Tax on Business Operations: General

Interest expenses on loans received from third parties, to the extent 4.1 What is the headline rate of tax on corporate profits? that they exceed the interest that would arise if the interest rate was equal to the interest rate of loans on open deposit/withdrawal The headline rate of tax on corporate profits is 29%. accounts provided to non-financial corporations, as indicated in the Statistical Bulletin of the Central Bank of Greece for the nearest By virtue of Law 4472/2017, published on 19 May 2017, any period preceding the date of borrowing, are not tax-deductible. The business income realised by legal persons/legal entities as of 1 above interest deductibility restrictions do not apply to inter-bank January 2019 shall be taxed at a rate of 26%, with the exemption loans, bonds, and inter-company loans issued by sociétés anonymes. of credit institutions, for which the currently applicable rate of 29% shall continue to be applicable. The reduction of the In addition, interest payments to tax residents in non-cooperative corporate income tax rate from 29% to 26% shall be applicable, states (i.e. non-EU Member States which: have not concluded on the condition that there is no divergence from the medium-term and do not apply a convention on administrative assistance in tax budgetary objectives set in the Economic Adjustment Program matters with respect to Greece; have not received at least a largely- following an assessment of the International Monetary Fund and the compliant rating from the OECD on transparency and exchange of European Commission in collaboration with the European Central information standards; and have not committed to the exchange of Bank, the European Stability Mechanism, and the Greek authorities. financial account information under the OECD Common Reporting Standard by the end of 2018, as well as at least 12 other countries)

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4.2 Is the tax base accounting profit subject to 4.7 Are companies subject to any significant taxes not adjustments, or something else? covered elsewhere in this chapter – e.g. tax on the occupation of property? Taxable business profit occurs after deduction, from the entire business income, of the business expenses, the depreciation and the The ownership of real estate property/property rights in Greece provisions for bad debts. Business income includes the revenues is subject to the Uniform Tax on the Ownership of Real Estate from sale of assets as well as the liquidation proceeds. Taxable Property (ENFIA), which consists of a principal tax imposed profit is determined each tax year, as set out in the entity’s P&L on each real estate property and a supplementary tax imposed on account, according to the Greek Accounting Standards or the the total value of the property rights on real estate property of the International Accounting Standards (IAS), after adjustment for taxpayer subject to tax. Greece income tax purposes. Said tax is not imposed on the objective value of real estate property, but is determined on the basis of various factors, according to the 4.3 If the tax base is accounting profit subject to final registration of the property at the land registry or the ownership adjustments, what are the main adjustments? title. In addition, a special real estate tax is imposed on companies which Deduction of expenses is subject to the following conditions they: have ownership or usufruct on real estate located in Greece at the (i) are incurred in the interest of the business or in the ordinary rate of 15%. However, exemptions are provided by law, e.g. listed course of the business; (ii) correspond to an actual transaction and companies, companies with gross revenues from other activities the value of the transaction is not deemed lower or higher than the higher than those revenues derived from the exploitation of real market value, based on elements available to the tax administration; estate in Greece, sociétés anonymes with registered shares up to the and (iii) are entered in books where transactions are recorded for the level of individual shareholder(s) or which declare their ultimate period in which they are incurred and are supported by appropriate individual shareholders with a Greek tax registration number, etc. documentation. In addition, specifically prescribed expenses are not deductible, e.g. interest on loans received from third parties, except for bank loans, interbank loans and bond loans issued by 5 Capital Gains corporations, to the extent that they exceed the interest that would arise if the interest rate was equal to the rate of overdraft account 5.1 Is there a special set of rules for taxing capital gains loans to non-financial corporations, as indicated in the Statistical and losses? Bulletin of the Bank of Greece for the nearest period preceding the date of borrowing; any expense related to a purchase of goods or In general, capital gains derived by a Greek company are taxed as services, of more than EUR 500, where partial or total payment was business profits and are, thus, included in the taxable profits of the not made via a bank payment instrument; fines and penalties, etc. company and taxed at the standard corporate income tax rate of 29%. 4.4 Are there any tax grouping rules? Do these allow The income derived from the goodwill arising upon the transfer of for relief in your jurisdiction for losses of overseas Greek government bonds or Greek treasury bills that are acquired subsidiaries? by legal entities that do not qualify as Greek tax residents and do not maintain a permanent establishment in Greece, is tax-exempt. Νο, there are not.

5.2 Is there a participation exemption for capital gains? 4.5 Do tax losses survive a change of ownership? No, there is not. If, during a tax year, direct or indirect participation or the voting rights of a company have changed by more than 33% and, in parallel, during the same and/or the following tax year the business 5.3 Is there any special relief for reinvestment? of the company representing at least 50% of the company’s turnover has changed as compared to the preceding tax year, the right to carry No, there is not. forward tax losses ceases to apply. 5.4 Does your jurisdiction impose withholding tax on the 4.6 Is tax imposed at a different rate upon distributed, as proceeds of selling a direct or indirect interest in local opposed to retained, profits? assets/shares?

Tax is not imposed at a different rate to distributed and retained No, it does not. profits. However, in the case of capitalisation or distribution of profits 6 Local Branch or Subsidiary? which have not been subjected to any corporate income tax (e.g. untaxed reserves), the capitalised or distributed amount is, in any case, subject to corporate income tax. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary?

The issuance of share capital upon formation of a company is exempt from capital duty. A 0.1% surcharge for the benefit of the

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competition committee applies on the contribution of capital to a Greek tax legislation for the first time pursuant to Law 4172/2013 société anonyme upon its formation or any increase. (effective as of 1 January 2014). According to these rules, the taxable income of a taxpayer with tax 6.2 Is there a difference between the taxation of a local residence in Greece includes undistributed income of a legal person subsidiary and a local branch of a non-resident or legal entity with tax residence in another country, under the company (for example, a branch profits tax)? following conditions: ■ the taxpayer, alone or together with affiliated persons, directly No, there is not. or indirectly owns shares, parts, voting rights, or participation in equity in excess of 50% or is entitled to receive more than 50% of the profits of that legal person or legal entity; Greece 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? ■ the above legal person or legal entity is subject to taxation in a non-cooperative state or in a state with a preferential tax regime; A branch located in Greece is treated, according to the so-called ■ more than 30% of the net income before taxes earned by Authorised OECD Approach (AOA), as a functionally separate a legal person or legal entity derives from interest or other entity, although it is legally a part of the parent company. Its profits income generated from financial assets, dividends, royalties are determined by taking into account the functions performed, or capital gains, income from movable or immovable assets used and risks assumed by the enterprise through the branch. property, or income from insurance, banking, or other The Greek branch of a foreign head office is subject to Greek financial activities; corporate income tax as if it were a Greek corporation. ■ more than 50% of the corresponding source of income, as illustrated above, of the legal person or entity arises from transactions with the taxpayer or with its affiliates; and 6.4 Would a branch benefit from double tax relief in its ■ the legal person or entity is not a company whose principal jurisdiction? class of shares is subject to trading on a regulated market.

The head office, but not the branch itself, is entitled to treaty benefits The above do not apply to legal persons or legal entities with tax because a branch is legally a part of its head office and not a resident residence in an EU or EEA Member State, unless the establishment for tax treaty purposes. However, the non-discrimination clauses or the financial activity of such legal entity constitutes a fictitious in the tax treaties that Greece has signed are applicable. For EU situation with a view to avoiding taxation. Member States, discrimination of branches would also be prohibited by freedom of establishment. 8 Taxation of Commercial Real Estate

6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the 8.1 Are non-residents taxed on the disposal of branch? commercial real estate in your jurisdiction?

No, it would not. Legal entities which are non-resident or do not maintain a permanent establishment in Greece are not subject to Greek corporate income tax. Therefore, capital gains from the disposal 7 Overseas Profits of commercial real estate located in Greece by a non-resident legal entity are not subject to tax in Greece.

7.1 Does your jurisdiction tax profits earned in overseas branches? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? Resident companies are taxed on their worldwide income. Therefore, profits earned in foreign branches are included inthe Greek corporate income tax base of the Greek corporations. Capital gains earned by individuals that arise from the transfer of participations which attract more than 50% of their value directly or indirectly from real estate and do not constitute income from 7.2 Is tax imposed on the receipt of dividends by a local business operations, are taxed at a rate of 15%. The effect of the company from a non-resident company? above provision is postponed until December 31 2018 by virtue of L. 4509/2017. If the aforementioned income constitutes business A participation exemption regime applies to intra-group dividends income, it is taxed at the ordinary corporate income tax rate of 29%. received by a local company from a non-resident company which has its legal seat in another EU Member State, subject to the provisions of the EU Parent-Subsidiary Directive (2011/96/EU). 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their Dividends received by other non-resident companies are subject to equivalent? the normal tax rate, subject to any foreign tax credit or exemption, if provided by any applicable tax treaty or the domestic legislation. Yes. Real Estate Investment Companies (REICs), which can be considered the equivalent of REITs in Greece, benefit from several 7.3 Does your jurisdiction have “controlled foreign tax exemptions. The main exceptions are: company” rules and, if so, when do these apply? ■ Exemption from corporate income tax with the exception of dividends acquired in Greece, as L. 4389/2016 provides. “Controlled foreign company” rules were introduced into the

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■ Exemption from Real Estate Transfer Tax in case of acquisition of real estate property by REICs. 10 BEPS and Tax Competition ■ Exemption from any tax on Capital Gains deriving from: a) the transfer of real estate property; and b) the transfer of 10.1 Has your jurisdiction introduced any legislation shares. in response to the OECD’s project targeting Base ■ Dividends distributed by a REIC are exempt from income Erosion and Profit Shifting (BEPS)? tax. REICs are subject to tax with a rate set at 10% of the applicable Greece has already implemented into domestic law the EU VAT European Central Bank intervention rate (Interest Reference Directive regarding the VAT on B2C digital services and the anti- avoidance measures included in the EU Parent-Subsidiary Directive. rate) increased by one point and calculated on the average of the Greece investments, plus any available funds, at their current value. The existing transfer pricing rules refer to the OECD guidelines, At investor level, there is no further income tax liability for which are, thus, immediately effective. shareholders (exhausted at REIC level) and dividends received by Greece has signed a multilateral competent authority agreement shareholders are exempt from Greek Withholding Tax. for the automatic exchange of CBC reports and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. 9 Anti-avoidance and Compliance A mutual administrative procedure provision has been included in the Greek Code of Tax Procedures. 9.1 Does your jurisdiction have a general anti-avoidance Greece is required to implement into domestic law the two EU or anti-abuse rule? Anti-Tax Avoidance Directives (ATAD and ATAD 2) which provide for controlled foreign company, anti-hybrid and interest limitation A general anti-avoidance rule was first introduced with the Greek rules. Code of Tax Procedures (Law 4174/2013). Under this rule, the tax administration may disregard any artificial arrangement or series of arrangements that aim at the evasion of taxation and 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is lead to a tax advantage. An arrangement is considered artificial recommended in the OECD’s BEPS reports? if it lacks commercial substance and is aimed at the evasion of taxation or towards a tax benefit. To determine if an arrangement Greece is expected to follow the OECD recommendations for is artificial, various characteristics are examined. For the purposes tackling BEPS. of this measure, the goal of an arrangement is to avoid taxation if, regardless of the subjective intention of the taxpayer, it is contrary to the object, spirit and purpose of the tax provisions that would apply 10.3 Does your jurisdiction support public Country-by- in other cases. To determine the tax advantage, the amount of tax Country Reporting (CBCR)? due after taking into consideration such arrangements is compared to the tax that would be payable by the taxpayer under the same Please refer to our answer to question 10.1. conditions in the absence of such an arrangement.

10.4 Does your jurisdiction maintain any preferential tax 9.2 Is there a requirement to make special disclosure of regimes such as a patent box? avoidance schemes? There is a preferential tax regime for shipping companies. No, there is not. 11 Taxing the Digital Economy 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax 11.1 Has your jurisdiction taken any unilateral action to tax avoidance? digital activities or to expand the tax base to capture digital presence? A person who assists or instigates another person or collaborates with another person in the commitment of tax avoidance is liable for Yes. the same penalties as the taxpayer. In the course of OECD BEPS Action 1 and in compliance to In addition, a person who by any means knowingly collaborates or the provisions of the VAT Directive 2006/112/EC, Greece has offers immediate assistance in committing tax evasion is punishable established a “use and enjoyment rule” applicable to broadcasting, as a primary accessory in the crime. telecommunications and electronic services provided to non-VAT taxable persons. Specifically, if the place of supply of the above services (i.e. where the recipient is located or has his permanent/ 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural habitual residence) is a non-EU country but the service is used and benefits only or result in a reduction of tax? enjoyed in Greece, in the sense that the customer is in Greece at the time of supply, it will be taxable in Greece. Subject to certain No. However, tax amnesty schemes and voluntary disclosure conditions laid down in article 22 of the Greek VAT Code, the programmes are occasionally introduced, providing for tax/penalty provision of e-learning and e-gambling services may be exempt reductions or other procedural benefits. from the above rule.

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According to L. 4002/2011 as in force, profits deriving from Specifically, if no additional services are provided by the lessor (e.g. e-gambling activities are taxed according to the general provisions cleaning, change of bedsits and towels), the income derived from of the Greek Income Tax Code. In addition to this, the Greek State the lease is taxed as income from immovable property at a tax rate participates in the gross profits from this source at a rate of 35%. ranging from 15% to 45% as provided in article 40 of the Greek In compliance with article 12 of the OECD Model Tax Convention Income Tax Code. Alternatively, such income is taxed at a tax rate and in accordance with the reservation expressed on the application ranging from 22% to 45% as provided in article 29 of the Greek of article 12 from Greece, article 38 of the Greek Income Tax Code Income Tax Code. covers in the definition of royalties, among others, the right to use software for commercial exploitation and personal use as well as 11.2 Does your jurisdiction support the European

Greece the payment for advisory services provided electronically through Commission’s interim proposal for a digital services a problem solving database. Royalties are taxed at a rate of 20% tax? according to article 40 of the Greek Income Tax Code. Unilateral action has been taken in the field of Airbnb platforms as Yes, in fact Greece was one of the Member States that signed a well. The taxation of renting services through the Airbnb platform letter asking the European Commission to develop a proposal to is regulated under article 39A of the Greek Income Tax Code. target the digital economy.

Ioannis Stavropoulos Aimilia Stavropoulou Stavropoulos & Partners Law Office Stavropoulos & Partners Law Office 58 Kifissias Avenue 58 Kifissias Avenue 151 25 Maroussi 151 25 Maroussi Athens Athens Greece Greece

Tel: +30 210 363 4262 Tel: +30 210 363 4262 Email: [email protected] Email: [email protected] URL: www.stplaw.com URL: www.stplaw.com

Ioannis Stavropoulos has been a Managing Partner at Stavropoulos & Aimilia Stavropoulou joined Stavropoulos & Partners Law Office in Partners Law Office since 1991. As a tax consultant and tax attorney, 2017. As a Junior Associate, she regularly supports the tax team he has dealt with numerous cases concerning the application of double in various topics mainly relating to EU and taxation treaties, transfer pricing and EU direct taxation and VAT and assists with the drafting of legal opinions on corporate taxation legislation. A number of his cases constitute leading jurisprudence issues related to income taxation. In the field of EU & competition published in Greek and international legal and tax journals. He law, she regularly assists in legal research on various topics and has has participated in legislative and scientific committees, both as participated in the preparation of the defence file in a significant abuse an independent expert and representing various organisations. In of dominance case. 2012–2013 he actively participated, as an expert, in the tax reform She has gained valuable experience by participating in mergers and committee which produced the new tax codes. acquisitions projects with international aspects, as part of the due As a business lawyer, Ioannis has taken part in major mergers and diligence team, and assisting in the drafting of the due diligence acquisitions projects, domestic and international share and asset reports. Finally, she regularly assists in the labour law field carrying out transactions, as well as anti-trust cases. He has published articles research and responding to queries on a wide range of employment on various tax issues and has participated as a speaker in numerous topics raised by corporate clients on several occasions, including seminars. He participates in the Taxation Committee of the American- business transformation and restructuring. Hellenic Chamber of Commerce, as well as in tax and legal committees of various Federations and Chambers.

“STAVROPOULOS & PARTNERS” Law Office is a Greek law firm which was established in Athens in 1991. Since its formation, the firm’s practice has included legal counsel, advice and litigation on a wide range of Greek and EU business and tax law matters. Throughout its 27 years in the Greek legal market, the firm has developed widely-recognised expertise and gained an excellent reputation, ranked within high tiers in the fields of taxation, EU and competition, corporate and mergers and acquisitions, as well as dispute resolution. The firm is privileged to serve on a constant basis companies which are considered as “blue chip” internationally, but also has vested and continuous interests and activities in Greece, handling complex and important work that requires a high level of expertise and consistency. The lawyers of the firm have done contemporary undergraduate and postgraduate studies and are assisted by secretarial and clerical staff supported by modern infrastructure. The main target is to successfully meet the increasing demands of clientele while maintaining a high degree of dynamism, flexibility and close personal contact with each case.

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Hong Kong Vivien Teu

Vivien Teu & Co LLP Kenneth Yim

business substance in Hong Kong in order to obtain a Certificate of 1 Tax Treaties and Residence Resident Status from the Inland Revenue Department (the “IRD”). As such, for the aforementioned reasons, Hong Kong has opted 1.1 How many income tax treaties are currently in force in to adopt a principal purpose test (“PPT”) only in respect of the your jurisdiction? Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”), under which Hong Kong has a relatively small yet quickly expanding double a person will not be granted benefits under a DTA if obtaining tax agreements (“DTA”) network. As at September 2018, it has such benefits is one of the principal purposes of the transactions or concluded 40 DTAs, 38 of which are effective at the moment. arrangements involved. Currently, seven tax information exchange agreements (“TIEAs”) have been concluded. The Government aims to expand Hong 1.5 Are treaties overridden by any rules of domestic Kong’s DTA network, especially with respect to countries along law (whether existing when the treaty takes effect or the so-called “Belt and Road” business initiative, with a view to introduced subsequently)? bringing the total number of DTAs to at least 50 over the next few years. Where a DTA has been concluded, the domestic law position may be overridden by the DTA if the pertinent conditions are satisfied. 1.2 Do they generally follow the OECD Model Convention or another model? 1.6 What is the test in domestic law for determining the residence of a company? In principle, Hong Kong generally follows the Organisation for Economic Co-operation and Development (“OECD”) Model A company is resident in Hong Kong if its central management and Convention in negotiating and concluding DTAs and TIEAs. control is exercised in Hong Kong in the relevant year of assessment. However, under Hong Kong’s territorial basis of taxation, the 1.3 Do treaties have to be incorporated into domestic law chargeability to tax is generally determined on the source of income before they take effect? rather than on residence status. Having said that, the residence status can be relevant in the application of DTA provisions with Typically, DTAs concluded with other jurisdictions are subject to other jurisdictions. ratification. More specifically, a bill would have to be passed by the Legislative Council before it is enacted into law. 2 Transaction Taxes

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.1 Are there any documentary taxes in your jurisdiction?

In accordance with the current OECD Model Convention, Hong The transfer of Hong Kong stock is subject to the imposition of Kong does not incorporate limitation of benefits (“LOB”) clauses in Hong Kong stamp duty on the instrument of transfer. The rate of the DTAs that have been concluded so far. stamp duty on the transfer of Hong Kong stock is currently 0.2% Nonetheless, most of the existing DTAs concluded by Hong Kong of the higher of the consideration or the market value of the stock already contain specific provisions to prevent treaty abuse under transferred. The stamp duty is payable by the seller and purchaser specific articles (e.g. those on dividends, interest and royalties), equally (i.e. 0.1% each), while the (“SDO”) based on whether one of the main purposes of the arrangement or stipulates that any person who purchases Hong Kong stock, as either transaction is to obtain treaty benefits. Furthermore, Hong Kong’s principal or agent, is required to execute a contract note that is liable domestic tax law also contains general anti-avoidance provisions to stamp duty at the rate of 0.1% on the consideration or value of the to deny a tax benefit if a transaction is entered into for the sole or shares bought and sold. dominant purpose of enabling the taxpayer to obtain tax benefit. Under the SDO, stamp duty relief may be applied on a conveyance Moreover, in practice, both Hong Kong incorporated entities and of an interest in stock between group companies with at least a 90% foreign-incorporated entities must have an appropriate level of common shareholding subject to satisfying certain conditions.

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or exploitation (“DEMPE”) of an IP and income is derived by a 2.2 Do you have Value Added Tax (or a similar tax)? If so, non-Hong Kong resident that is an associate of that person from the at what rate or rates? use of or a right to use such IP outside Hong Kong, the part of the income which is attributable to the value creation contributions in Hong Kong does not have a VAT or GST regime at present. Hong Kong will be regarded as a taxable trading receipt arising in or derived from a trade or business carried on in Hong Kong. 2.3 Is VAT (or any similar tax) charged on all transactions *In this regard, the deemed assessable profit in principle is 30%, or are there any relevant exclusions? subject to tax at the ordinary profits tax rate of 16.5%, resulting in a withholding tax of 4.95% on the gross payment. This is not applicable.

Hong Kong 3.3 Would there be any withholding tax on interest paid 2.4 Is it always fully recoverable by all businesses? If not, by a local company to a non-resident? what are the relevant restrictions? Hong Kong does not impose withholding tax on interest payments This is not applicable. made by a resident company to residents or non-residents.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.4 Would relief for interest so paid be restricted by is it “establishment only” VAT grouping, such as that reference to “thin capitalisation” rules? applied by Sweden in the Skandia case? Hong Kong does not have thin capitalisation rules at present. This is not applicable.

3.5 If so, is there a “safe harbour” by reference to which 2.6 Are there any other transaction taxes payable by tax relief is assured? companies? This is not applicable. This is not applicable.

3.6 Would any such rules extend to debt advanced by a 2.7 Are there any other indirect taxes of which we should third party but guaranteed by a parent company? be aware? This is not applicable. This is not applicable.

3.7 Are there any other restrictions on tax relief for 3 Cross-border Payments interest payments by a local company to a non- resident?

3.1 Is any withholding tax imposed on dividends paid by No, as Hong Kong does not impose withholding tax on interest. a locally resident company to a non-resident? Withholding taxes are generally not levied, except on (deemed) royalties. Hong Kong does not impose withholding tax on dividend payments made by a resident company to residents or non-residents. 3.8 Is there any withholding tax on property rental payments made to non-residents? 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? Payments of fees for rental or management services are not subject to withholding tax in Hong Kong. In brief, the following types of payments are effectively subject to a withholding tax*: 3.9 Does your jurisdiction have transfer pricing rules? ■ sums derived from the exhibition or use of cinematograph or television films or tapes, sound recording or advertising material connected with such film, tape or recording which Until recently, Hong Kong had no statutory transfer pricing are deemed to arise in Hong Kong because of their exhibition rules addressing non-arm’s length transactions between “closely or use in Hong Kong; and connected persons” and the IRD relied on the general provisions ■ sums derived from the use of or the right to use a patent, in the IRO, case law, and (since 2009) practice notes to deal with design, trademark, copyright material, secret process or transfer pricing issues. On 4 July 2018, the Legislative Council formula or other property of a similar nature which are enacted Hong Kong’s new transfer pricing regime which has codified deemed to arise in Hong Kong because of the use of or the and reaffirmed the taxpayers’ and IRD’s common understanding that right to use such property in Hong Kong. transactions between related parties (which are typically determined A new deeming provision on income from intellectual property on the basis of participation in the management, control and capital (“IP”) has been introduced, but the Government has deferred the of another or of common participation by/through a third party) effective date of this section to the year of assessment 2019/2020 should follow the arm’s length principle, consistent with the OECD’s to allow the business community to analyse the implications in this transfer pricing guidelines. In connection with the codification of regard. More specifically, where a person has contributed in Hong the OECD’s “Rule 1”, the IRD is empowered to adjust profits or Kong to the development, enhancement, maintenance, protection losses where a transaction between related parties departs from the

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transaction that would have been entered into between independent persons, in cases where this has created a Hong Kong tax advantage. 4.4 Are there any tax grouping rules? Do these allow There may be the upward adjustment of profits with an assessment for relief in your jurisdiction for losses of overseas subsidiaries? or additional assessment of Hong Kong tax, or a computation of loss or smaller amount of computed loss may be issued. Based on the transfer pricing “Rule 2”, i.e. the separate enterprises principle, At present, Hong Kong does not have any tax grouping rules. the arm’s length principle will also apply to dealings between different parts of an enterprise such as between the head office and 4.5 Do tax losses survive a change of ownership? a permanent establishment. The attribution of profits to permanent establishments is also introduced and covered in detail. Losses of a revenue nature can generally be carried forward The said Rule 1 applies to transactions for year of assessment indefinitely and set off against chargeable profits in the future. Hong Kong 2018/19, i.e. the period commencing 1 April 2018 onwards. Rule However, losses may not be carried back. 2 is expected to apply as of the year of assessment 2019/20, i.e. as In principle, a transfer of shares in a Hong Kong company does of 1 April 2019. not affect the availability of the tax losses to be carried forward by As an aside, it is worth noting that a formal regime for advance that company, unless the change in the company’s shareholders is pricing arrangements (“APA”) has also been established, which effected for the sole or dominant purpose of using the tax losses of should facilitate taxpayers entering into unilateral APAs or bilateral the Hong Kong company. APAs involving other jurisdictions. Any unused tax losses incurred by the transferor cannot be transferred to the transferee on the sale of the business or the assets 4 Tax on Business Operations: General of the transferor.

4.6 Is tax imposed at a different rate upon distributed, as 4.1 What is the headline rate of tax on corporate profits? opposed to retained, profits?

On 29 March 2018, the Inland Revenue (Amendment) (No. 3) Both the retention and distribution of profits made by Hong Kong Ordinance 2018 (the Ordinance) was gazetted to implement a “two- companies are not chargeable to tax. tiered” profits tax rates regime (instead of the previous flat rate of 16.5%). 4.7 Are companies subject to any significant taxes not The two-tiered profits tax rates regime will be applicable to any year covered elsewhere in this chapter – e.g. tax on the of assessment commencing on or after 1 April 2018. The profits tax occupation of property? rate for the first $2 million of profits of corporations will be lowered to 8.25%. Assessable profits exceeding that amount will continue to Property rates, based on the estimated annual letting value, are be subject to the tax rate of 16.5%. For unincorporated businesses levied as a tax on the occupation of property on a quarterly basis. (i.e. partnerships and sole proprietorships), the two-tiered tax rates will be set at 7.5% and 15%, respectively. As a result, a tax-paying corporation or unincorporated business may save up to $165,000 5 Capital Gains and $150,000 each year, respectively.

5.1 Is there a special set of rules for taxing capital gains 4.2 Is the tax base accounting profit subject to and losses? adjustments, or something else? Gains of a capital nature are specifically exempt from the charge of For Hong Kong profits tax purposes, the tax base is determined on profits tax. Whether a gain is regarded as capital or revenue in nature the (audited) accounting profit subject to tax adjustments. Hong is a question of facts and depends on the particular circumstances Kong applies a territorial basis of taxation, whereby tax is imposed of each case. Generally speaking, and considering the frequency on assessable income or profits arising in or derived from Hong of a fund’s normal course of business of buying and selling of Kong sources, or deemed as such. investments, gains and losses derived from the purchase and sale of It is also worth noting that there is a proposal to introduce legislative investments would in practice usually be regarded from a profits tax amendments to allow taxpayers to elect fair value accounting for perspective as in the nature of revenue. Conversely, capital losses tax reporting purposes. This would provide the legal basis for a are not deductible for profits tax purposes. practice that has been endorsed by the IRD and remove unnecessary uncertainty for taxpayers who would like to adopt this tax-reporting 5.2 Is there a participation exemption for capital gains? basis. As both capital gains and dividends are not chargeable to profits 4.3 If the tax base is accounting profit subject to tax, there is no such need for a participation exemption in Hong adjustments, what are the main adjustments? Kong.

Income of a capital nature (i.e. dividends and capital gains) falls 5.3 Is there any special relief for reinvestment? outside the scope of chargeability to profits tax. Expenses, where revenue in nature and incurred in the production of (Hong Kong) assessable profits, are in principle tax deductible. Typical In accordance with profits of a capital nature not being taxed, there adjustments in this regard include depreciation and amortisation in are no special reliefs for reinvestments in this regard. respect of capital expenditure, intangible assets and interest.

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As most persons are not taxed on foreign income, the deduction is 5.4 Does your jurisdiction impose withholding tax on the actually limited to financial institutions. proceeds of selling a direct or indirect interest in local assets/shares? 6.5 Would any withholding tax or other similar tax be There is no (withholding) tax on acquisitions that take the form imposed as the result of a remittance of profits by the branch? of a purchase of shares of a company as opposed to a purchase of its business and assets. Persons are only subject to profits tax on their profits arising in or derived from Hong Kong from a trade, Hong Kong does not have a branch profits/remittance tax. profession or business carried on in Hong Kong, except for any profits realised from sales of capital assets, which are not within the 7 Overseas Profits Hong Kong chargeable scope of profits tax. As such, sellers are able to dispose of equity investments free of profits tax. By contrast, sales of certain assets may trigger a recapture of capital allowances claimed and 7.1 Does your jurisdiction tax profits earned in overseas possibly higher transfer duties (depending on the assets involved). branches? However, asset purchases do have benefits, e.g. the potential to obtain deductions for the financing costs incurred on funds borrowed As explained above, the only items of income which have a source to finance the acquisition of business assets. in Hong Kong are subject to profits tax. Moreover, Hong Kong does not have branch profits/remittance tax. 6 Local Branch or Subsidiary? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? Dividend income received by a local company from a non-resident company is generally not subject to profits tax in Hong Kong, not The capital duty levied on Hong Kong companies has been abolished being Hong Kong-sourced. since 1 June 2012. A relatively small business registration fee and levy are charged for the business registration certificate which, in 7.3 Does your jurisdiction have “controlled foreign principle, every person who carries on a trade or business in Hong company” rules and, if so, when do these apply? Kong must have applied for within one month from the date of commencement of business. Hong Kong does not have controlled foreign company rules.

6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 8 Taxation of Commercial Real Estate company (for example, a branch profits tax)?

As branches and subsidiaries are taxed on the same basis and at the 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? same rates, there are theoretically no noteworthy differences (though practical differences could arise in respect of, amongst others, the Non-residents investing in real estate are subject to the general attribution of profits and expenses between the head office and the taxation principles of the IRO where the source of rental income branch, which are less likely to be an issue with a subsidiary). and profits derived from the sale of real estate are determined on the basis of the location of the property in question. Only income 6.3 How would the taxable profits of a local branch be in connection with properties situated within Hong Kong is, in determined in its jurisdiction? principle, subject to profits tax in Hong Kong. To determine the nature of the gain in relation to the sale of Hong As explained above, since Hong Kong applies a territorial basis Kong situated real estate, the IRD will generally consider various of taxation, the chargeability to tax is actually determined on the factors to distinguish capital from revenue including, but not limited source of income as opposed to the residence status. As such, a to, the taxpayer’s intention, the length of the ownership of the non-resident can also be held liable for tax in Hong Kong in respect property, the financial ability to hold the asset for long-term purposes, of assessable profits which are attributable to a trade or business whether any work had been carried out to improve the property’s carried on in Hong Kong and which have a Hong Kong source. value, the steps undertaken to lease out the property or the reasons for not letting out the property, the rate of return obtained by leasing 6.4 Would a branch benefit from double tax relief in its out as opposed to the return obtained from selling, whether the sale jurisdiction? was incidental or part of a series of transactions, etc. Only revenue income will be assessable for Hong Kong profits tax purposes. Hong Kong’s territorial basis of taxation serves, to a large extent, Apart from profits tax, the transfer of Hong Kong real estate is as a measure of unilateral relief from double taxation, since most subject to stamp duty, whereby the rate depends on the value of persons are not taxed on non-Hong Kong-sourced income. the immovable property based on the ad valorem rates prescribed A deduction would (only) be available for foreign tax paid in in the SDO. An exemption may apply for the conveyance of an connection with interest or profits from the disposal or redemption interest in immovable property between companies with at least a of certificates of deposit and bills of exchange which are deemed 90% common shareholding if certain conditions are satisfied under to be derived from a trade or business carried on in Hong Kong. the SDO. On the basis that the residential property in question has

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been held for more than 36 months, no special stamp duty (“SSD”) disclosures of avoidance schemes. However, the IRD has expressed will be triggered upon the transfer. its view in practice notes that GAAR will be invoked where The transfer of real estate may also trigger buyer’s stamp duty taxpayers book profits offshore with a view to avoiding Hong Kong (“BSD”) consequences, but these are generally the responsibility of tax. In particular, the IRD pays close attention to transactions where the purchaser (in practice, usually both the BSD and the AVD are taxpayers have entered into transactions with a closely connected contractually shifted to the purchaser). non-resident person, which would have to be reported in the profits tax return at hand. Upon request by the IRD, taxpayers are obliged In addition to profits tax and stamp duty, property tax is in principle to provide information to substantiate claims that the profits in charged on the owners of land and/or buildings in Hong Kong in question are not sourced in Hong Kong. respect of the income derived in this connection (the standard rate is currently 15%). Notwithstanding this, a company subject to

profits tax may apply for an exemption from property tax where 9.3 Does your jurisdiction have rules which target not Hong Kong the property is used by the company for the production of profits only taxpayers engaging in tax avoidance but also chargeable to profits tax. Property tax is, in principle, creditable anyone who promotes, enables or facilitates the tax avoidance? against profits tax. Last but not least, property rates are levied on the occupation There is no specific legislation that aims at promoting, enabling or of properties. The rateable values are generally based on the facilitating tax avoidance. However, there are rules on tax evasion estimated (annual) letting value, which can be obtained from the under the IRO, which apply to both taxpayers and any other persons Commissioner of Rating and Valuation. who assist taxpayers in evading tax. Under the Hong Kong Anti-Money Laundering and Counter- 8.2 Does your jurisdiction impose tax on the transfer of Terrorist Financing Ordinance (“AMLO”), “money laundering” is an indirect interest in commercial real estate in your defined as “an act intended to have the effect of making any property: jurisdiction? (a) that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of Both transfers of immovable property and Hong Kong shares are any conduct which if it had occurred in Hong Kong would generally subject to stamp duty (including transfers of shares in a constitute an indictable offence under the laws of Hong Hong Kong company which owns Hong Kong real estate). Kong; or (b) that in whole or in part, directly or indirectly, represents such 8.3 Does your jurisdiction have a special tax regime proceeds, for Real Estate Investment Trusts (REITs) or their not to appear to be or so represent such proceeds.” equivalent? “Tax evasion” under the Inland Revenue Ordinance is an indictable tax offence fulfilling the above “money laundering” definition, Hong Kong does not have a specific tax regime for REITs or which constitutes a predicate offence for money laundering in Hong equivalents. However, in Hong Kong, REITs are regulated by Kong: the Securities and Futures Commission (“SFC”) which is given (1) “Any person who wilfully with intent to evade or to assist any the power, under the Securities and Futures Ordinance (“SFO”), other person to evade tax— to authorise collective investment schemes (which include mutual funds and unit trusts) to be offered to the retail public. In order to (a) omits from a return made under this Ordinance any sum which should be included; or be authorised as a REIT, the structure and investment restrictions of the scheme have to comply with the SFC Code on REITs and (b) makes any false statement or entry in any return made the scheme would also apply to be listed on the Hong Kong Stock under this Ordinance; or Exchange. Profits tax exemption applicable to SFC authorised (c) makes any false statement in connection with a claim for funds shall also apply to REITs that are authorised funds. any deduction or allowance under this Ordinance; or (d) signs any statement or return furnished under this Ordinance without reasonable grounds for believing the 9 Anti-avoidance and Compliance same to be true; or (e) gives any false answer whether verbally or in writing to any question or request for information asked or made in 9.1 Does your jurisdiction have a general anti-avoidance accordance with the provisions of this Ordinance; or or anti-abuse rule? (f) prepares or maintains or authorizes the preparation or maintenance of any false books of account or other Hong Kong has general anti-avoidance rules (“GAAR”) in the records or falsifies or authorizes the falsification of any IRO, in respect of which transactions which reduce the amount of books of account or records; or tax payable and which appear to be artificial or fictitious may be (g) makes use of any fraud, art, or contrivance, whatsoever or disregarded by the tax authorities in determining the taxpayer’s authorizes the use of any such fraud, art, or contrivance, assessable profits, particularly to dissuade the shifting of assessable commits an offence.” income from a Hong Kong resident to a closely connected non- resident person. Further, there are various specific anti-avoidance rules in the IRO. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 9.2 Is there a requirement to make special disclosure of avoidance schemes? Hong Kong has shown consistency in encouraging “cooperative compliance”, particularly to provide procedural benefit. Amongst There is no specific legislation which aims at making special others, as of 12 April 2013, Hong Kong is able to enter into TIEAs

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with jurisdictions with which a DTA has not (yet) been concluded or to enhance existing exchange of information arrangements 10.4 Does your jurisdiction maintain any preferential tax under DTAs. On 13 November 2014, the Foreign Account Tax regimes such as a patent box? Compliance Act (“FATCA”) agreement with the United States was signed. On 30 June 2016, Hong Kong adopted the new Although Hong Kong does not have a patent box regime, it does international standard for automatic exchange of financial account have various other preferential tax regimes and concessions, such as information in tax matters, i.e. the common reporting standard (but not limited to) profits tax exemption for offshore funds which (“CRS”) promulgated by the OECD. On 6 October 2017, Hong has extended to private equity funds, open-ended fund companies Kong enabled its participation in the Multilateral Convention on which have their central management and control exercised in Hong Mutual Administrative Assistance in Tax Matters and the alignment Kong and meet certain conditions (of not being “closely held”), of the IRO with CRS. Furthermore, Hong Kong has expressed its a notional tax regime for profits in connection with qualifying Hong Kong commitment to the OECD’s BEPS framework, and has already put aircraft leasing and/or management activities, qualifying corporate in place the necessary legislative framework for transfer pricing treasury centres, tax concessions for gains derived from qualifying rules which cover the latest guidance from the OECD, spontaneous debt instruments, concessions for captive insurers reinsurance exchange of information with regard to tax rulings, country-by- companies, and outright or accelerated tax deductions for qualifying country (“CbC”) reporting requirements, and the cross-border environmentally-friendly investments, etc. dispute resolution mechanism and the Multilateral Instrument. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax 10.1 Has your jurisdiction introduced any legislation digital activities or to expand the tax base to capture in response to the OECD’s project targeting Base digital presence? Erosion and Profit Shifting (BEPS)? Currently, the IRO does not contain any provisions that deal In June 2016, Hong Kong accepted the invitation of the OECD to specifically with e-commerce. As such, to determine if income in join the inclusive framework for global implementation of the Base connection with digital activities are assessable profits, the general Erosion and Profit Shifting (“BEPS”) measures. In June 2017, taxation principles (and relevant case law) and the (above-explained) China signed the MLI on behalf of Hong Kong (although with rights “deeming provisions” with respect to sums which are chargeable to reserved with respect to most articles of the MLI). profits tax as royalties or licence fees for IP under the IRO apply in this regard. Nonetheless, to provide clarity on the IRD’s opinion Nonetheless, Hong Kong has expressed its commitment to the on the taxation of e-commerce businesses, a specific practice note implementation of the four minimum standards of OECD’s BEPS on the taxation of e-commerce was issued in July 2001. Broadly Action Plan, namely: (i) countering harmful tax practices (Action speaking, the IRD has been taking a neutral approach as regards the 5); (ii) preventing treaty abuse (Action 6); (iii) imposing CbC tax treatment of e-commerce businesses. The IRD has expressed its reporting (Action 13); and (iv) improving the cross-border dispute view that e-commerce is treated on the same basis as “conventional” resolution regime (Action 14). On 29 December 2017, the Inland forms of business and no particular business form should have either Revenue (Amendment) (No. 6) Bill 2017 (“the Amendment Bill”) an advantage or a disadvantage for profits tax purposes in Hong was published in the Gazette and subsequently enacted as Inland Kong. Revenue (Amendment) (No. 6) Ordinance 2018 to implement aforesaid BEPS Actions. 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services 10.2 Does your jurisdiction intend to adopt any legislation tax? to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? At present, Hong Kong has not expressed any formal opinion on the EC’s interim proposal for a digital services tax. Nevertheless, it As explained above, Hong Kong has committed to the implementation is worth noting that ever since the EU had once named Hong Kong of the four minimum standards at present. as one of the jurisdictions that were not cooperating in efforts to fight tax avoidance in the European Commission’s Corporate Tax 10.3 Does your jurisdiction support public Country-by- Reform Action Plan (announced on 17 June 2015), Hong Kong Country Reporting (CBCR)? has been spending utmost efforts in keeping up to comply with evolving international tax standards. Such positive attitude has also Hong Kong resident ultimate parent companies of multinational been recognised by the EU Council, demonstrated by the fact that enterprises with consolidated revenue of over HK$ 6.8 billion (i.e. Hong Kong was not being listed as a non-cooperative jurisdiction approximately EUR 750 million) in the previous year of assessment, on the EU blacklist released on 5 December 2017. As such and or Hong Kong entities that are nominated as surrogate filing entities, to avoid any potential reputational damage, it is expected that the will be required to prepare and submit a CbC report to the IRD. A Government will continue its positive approach in taking necessary CbC report must be prepared for accounting periods beginning on measures, amongst others, addressing any preferential tax regimes or after 1 January 2018, in principle, within 12 months after the end with a ring-fencing feature that are identified in the future. of the accounting period to which the report relates.

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Vivien Teu Kenneth Yim Vivien Teu & Co LLP Vivien Teu & Co LLP 17th Floor 17th Floor 29 Wyndham Street 29 Wyndham Street Central Central Hong Kong Hong Kong

Tel: +852 2969 5300 Tel: +852 2969 5300 Email: [email protected] Email: [email protected] URL: www.vteu.co URL: www.vteu.co

Vivien Teu is the founding and managing partner of Vivien Teu & Co Kenneth Yim is a tax consultant, specialising in the tax-efficient Hong Kong LLP. She has extensive and in-depth experience as a corporate and restructuring of cross-border corporate and commercial transactions commercial lawyer specialising in the financial services sector, funds for asset managers, investors and family offices in or involvingAsia. and wealth management. Vivien carries diverse legal practice with His international tax planning experience includes tax considerations top-tier and magic circle firms in the areas of tax, trusts, banking and in respect of start-ups, mergers & acquisitions, joint-ventures, finance, financial services, investment funds, securities regulatory and financial intellectual property, real estate, insurance, estate planning, employment, institutions set-up, as well as mergers & acquisitions. Along with and supply-chain management in a cross-border context. He also significant in-house counsel experience at a global investment firm, supports taxpayers in disputes with tax authorities and negotiations on Vivien brings unique insights and practical commercial approaches in advance tax rulings. her practice, and with a particular China focus. Prior to joining Vivien Teu & Co LLP, Kenneth worked for the Hong Vivien’s experience in the areas of asset management covers diverse Kong office of a global professional services firm where his last position forms of investment funds include Hong Kong SFC authorisation of was head of tax, respectively, a “Big Four” accountancy firm where retail funds (including UCITS funds and domestic HK fund series), he provided and coordinated tax advice for financial institutions with Mainland-Hong Kong Mutual Recognition of Funds, China-theme business across Asia-Pacific. Before relocating to Hong Kong in 2011, investment funds including QFII and RQFII China A Share Funds, RMB he worked as a tax lawyer in the Netherlands where he developed Fixed Income Funds, Stock Connect, accessing the China-Interbank a particular interest and experience in tax structuring with respect to Bond Market, and advising in relation to ETFs and REITs. Vivien also Western and Asian inbound and outbound transactions. regularly advises on: China outbound investments; structured finance and securitisation; SFC licensing and regulatory matters; Hong Kong Kenneth is the author of IBFD’s Hong Kong chapter of “Investment securities compliance advice; assisting clients of diverse backgrounds Funds and Private Equity”, and is a regulator contributor to their with establishing private investment funds including hedge funds, publications on international tax matters. private equity funds, real estate funds, institutional segregated He graduated from Tilburg University with LL.M. degrees in tax law account mandates and other investment arrangements; and advising and civil law in 2005 and 2006, respectively. He later qualified with on fund distribution matters, custody structure, investment and trading the Netherlands Association of Tax Advisors (“Nederlandse Orde van matters. Vivien’s experience also includes joint ventures or mergers Belastingadviseurs”). & acquisitions of financial institutions or asset management firms, advising on shareholders agreements, corporate governance, general corporate and commercial advice, private and corporate trusts, tax issues and tax structuring.

Vivien Teu & Co LLP is a Hong Kong solicitors firm established in early 2015. At Vivien Teu & Co, we are dedicated to providing legal services for clients at the highest standards to meet their needs in today’s complex and dynamic business and regulatory environment. Established with the philosophy of a boutique law firm focusing on the areas of corporate, securities, asset management and financial services, our lawyers are experienced in advising international and local corporations, including large global institutions, listed entities, industry conglomerates, as well as international, Hong Kong and China financial institutions such as commercial and private banks, securities companies, asset management and private equity firms. As a Hong Kong law firm founded with people closely connected and dedicated to Hong Kong, we understand the unique culture and position of Hong Kong as a Special Administrative Region of the People’s Republic of China and versus the rest of the world. Our lawyers carry in-depth Hong Kong and international legal practice experience, combined with deep and broad knowledge of China and regional markets. Besides corporate and commercial practice, Vivien Teu & Co LLP has a particular focus on asset management and financial services practice areas, regularly advising local and international clients who are establishing or operating asset management platforms in Hong Kong, or otherwise accessing investors or investment opportunities in the Greater China region and beyond. The firm also boasts dedicated trusts and succession advisory expertise, increasingly serving high-net-worth private clients and entrepreneurs, in its wider financial services and wealth management practice. The firm’s tax advisory capability is an integral part of its corporate and commercial practice and a value-add where required, and augments its asset management and financial services practice.

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Iceland Garðar Víðir Gunnarsson

LEX Law Offices Guðrún Lilja Sigurðardóttir

Finally, Icelandic domestic tax legislation includes a general anti- 1 Tax Treaties and Residence avoidance rule, which has been applied in cases of treaty shopping (see section 9). 1.1 How many income tax treaties are currently in force in your jurisdiction? 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or In Iceland there are currently 40 tax treaties in force, one of which introduced subsequently)? is a multilateral treaty between the Nordic countries (Denmark, the Faroe Islands, Finland, Iceland, Norway, and Sweden). One treaty No, generally they are not overridden by rules of domestic has been signed but has not yet entered into force, and two more law. However, there exists a general principle that international treaties have been drafted and are currently under review. Moreover, obligations entered into by the Icelandic government should, to the Iceland has entered into 36 treaties concerning the exchange of extent possible, be construed in accordance with domestic law. information relating to tax matters. A further seven information exchange treaties have been signed but have not yet entered into 1.6 What is the test in domestic law for determining the force. Iceland has signed the Multilateral Convention to Implement residence of a company? Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, although it has not yet entered into force. Iceland has also The test applied when determining corporate residence is comprised signed an agreement with the government of the United States of of three different factors. Accordingly, a company is considered a America to improve international tax compliance and to implement tax resident in Iceland if (i) it is registered in Iceland, (ii) its effective FATCA. management is in Iceland, or (iii) Iceland is considered the domicile of the company according to its articles of association. 1.2 Do they generally follow the OECD Model Convention or another model? 2 Transaction Taxes The tax treaties that Iceland has entered into generally follow the OECD model. 2.1 Are there any documentary taxes in your jurisdiction?

1.3 Do treaties have to be incorporated into domestic law In Iceland, stamp duty is imposed on deeds on immovable property before they take effect? and vessels over five gross tonnes (0.8% for individuals, 1.6% for legal entities). In the case of deeds regarding real estate, the Tax treaties are not incorporated into Icelandic law. Pursuant to percentage is calculated from the rateable value of the property. Icelandic tax law, the government of Iceland has the authority to In the case of vessels over five gross tonnes, the percentage is negotiate and enter into tax treaties with governments of other calculated from the purchase price but the basis for the calculation countries. The prevailing practice in Iceland is that after being shall never be lower than the amount of any encumbrances. published in the Official Gazette (Icelandic: Stjórnartíðindi), a tax treaty enters into force and has effect in Iceland. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? Iceland has a VAT system, regulated by the Value Added Tax Act, No 50/1988, pursuant to which VAT is imposed on all stages of Tax treaties that Iceland has entered into do not generally incorporate supply of goods and services. Currently, there are two VAT rates limitation of benefits articles. However, such a provision can be applicable: found in the Iceland-US treaty, the Iceland-Barbados treaty and the ■ The standard rate of VAT is 24%. The standard rate applies to Iceland-India treaty. Furthermore, the Iceland-Luxembourg treaty any supply of goods and services that is not exempt from VAT includes a provision similar to a limitation of benefits provision, as or subject to the reduced rate. it excludes certain types of companies from the benefits of the treaty.

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■ A reduced rate of 11%. This applies, inter alia, to food, following a tax assessment, if the company submits a tax return and utilities such as electricity and water for heating, passenger files for a refund. transportation, accommodation services, travel agency Withholding tax rates can be reduced pursuant to provisions in an services, books, newspapers/magazines and music records. applicable tax treaty following an application to the Directorate of Internal Revenue (“DIR”). Such application can be made before the 2.3 Is VAT (or any similar tax) charged on all transactions dividend is paid and then the distributing entity shall only withhold or are there any relevant exclusions? tax at the reduced treaty rate. If, however, the application has not been made prior to payment of the dividends, the receiving entity As a general rule, VAT shall be levied on all transactions that are not can nevertheless file for a refund and request that the treaty rates be expressly excluded by law. Sectors and services excluded from VAT applied retroactively. Iceland are, inter alia: financial and banking services; insurance services; health services; social services; education; libraries; museums; 3.2 Would there be any withholding tax on royalties paid sports activities; public transportation; transportation of school by a local company to a non-resident? children, people with disabilities and elderly people; postal services; renting of real estate; lotteries; and charities. All exceptions are In Iceland a 22% withholding tax is imposed on royalties paid construed restrictively. Moreover, certain types of transactions are to foreign companies and individuals. The rate can be reduced considered as exempt turnover, in which case the VAT is 0% but the pursuant to provisions in an applicable tax treaty. taxable person is allowed to recover the input tax.

3.3 Would there be any withholding tax on interest paid 2.4 Is it always fully recoverable by all businesses? If not, by a local company to a non-resident? what are the relevant restrictions?

Withholding tax is levied on interests paid to non-residents by an Only taxable entities registered for VAT purposes are entitled Icelandic company. The applicable rate is 12% for both individuals to recovery of input tax for transactions relating to their taxable and companies. However, in the case of individuals, income from operations. Should a taxable entity’s input tax exceed its output tax interest up to ISK 150,000 is exempt from taxation. Furthermore, during a settlement period, that entity is entitled to reimbursement. rates can be reduced pursuant to provisions in an applicable tax treaty. 2.5 Does your jurisdiction permit VAT grouping and, if so, Also, it should be noted that interests on bonds issued by the Central is it “establishment only” VAT grouping, such as that Bank of Iceland, financial undertakings in their own name or energy applied by Sweden in the Skandia case? companies are exempt from withholding tax, given that the bonds are listed and that the transaction in question is not subject to VAT grouping of two or more limited liability companies is currency restrictions. permitted in Iceland, if the parent company owns at least 90% of shares in the subsidiary(ies), and pursuant to the parent company’s application to that effect. Furthermore, the companies in question 3.4 Would relief for interest so paid be restricted by must all have the same fiscal year. VAT grouping shall be in the reference to “thin capitalisation” rules? name of the parent company and must last for at least five years. Yes. According to Icelandic thin-capitalisation rules, the deduction of interest paid to related parties is limited to 30% of the taxpayer’s 2.6 Are there any other transaction taxes payable by earnings before interest, taxes, depreciation and amortisation companies? (“EBITDA”). However, this limitation does not apply if: (i) the total interest paid to related parties does not exceed ISK 100 million; (ii) No, there are not. the recipient of the interest bears unlimited tax liability in Iceland; (iii) the Icelandic taxpayer proves that their debt-equity ratio is not 2.7 Are there any other indirect taxes of which we should more than 2% below the debt-equity ratio of the group to which it be aware? belongs (some restrictions apply); or (iv) the Icelandic taxpayer is a financial undertaking, an insurance company, or a company owned Excise tax is charged on automobiles, fuel, alcohol and tobacco. In by such companies which undertake similar operations. cases of import, customs and, if applicable, excise tax may be levied parallel to the goods being imported into the country. 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 3 Cross-border Payments Yes. Please see the answer to question 3.4.

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company?

Non-resident individuals and companies are subject to a withholding It is not directly stipulated by the rules. However, it is possible tax on dividends gained and/or received by a resident company in that the rules could be construed in that way, depending on the Iceland. The rate for the withholding tax is 22% for individuals and circumstances, having regard to the purpose of thin-capitalisation 20% for companies. rules. If the receiving company is a limited liability company registered in an EU/EEA country, the withholding tax can be reimbursed

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company remain the same as before, the tax losses will survive for 3.7 Are there any other restrictions on tax relief for the benefit of the new owner(s). interest payments by a local company to a non- resident? In the event of a merger or division of a company, tax losses will survive if all of the following conditions are met: There are no further restrictions that target interest payments, but (i) The company/companies taking over engage in similar general anti-avoidance rules may apply (see section 9). operations to those of the company being dissolved. Losses are not transferred if the company being dissolved had insubstantial properties or did not engage in any operations. 3.8 Is there any withholding tax on property rental (ii) The merger or division of the existing company is made for payments made to non-residents? ordinary and normal operational purposes. Iceland (iii) The losses in question occurred in operations similar to the Rental payments on property made to non-residents are not subject operations of the recipient company. Note that tax losses may to withholding tax. only be carried forward and offset against taxable income in the following 10 years.

3.9 Does your jurisdiction have transfer pricing rules? 4.6 Is tax imposed at a different rate upon distributed, as Yes. Iceland has adopted transfer pricing rules, which are based opposed to retained, profits? on the OECD transfer pricing guidelines. Pursuant to the transfer pricing provision, the conditions for the implementation of the No, the tax rate is the same for distributed and retained profits. provision, including documentation, are laid down in Regulation No 1180/2014 on documentation and transfer pricing in transactions 4.7 Are companies subject to any significant taxes not between related parties. covered elsewhere in this chapter – e.g. tax on the occupation of property? 4 Tax on Business Operations: General A social security tax is levied on all wages and is paid by companies employing staff/workers. The rate for the social security tax is now 4.1 What is the headline rate of tax on corporate profits? 6.85%. Real estate taxes are imposed by municipalities on all commercial In Iceland, the general corporate income tax rate for limited liability real estate. The rates vary between different municipalities, but companies is 20% and for other company forms it is 37.6%. average at 1.65%. Financial institutions are subject to a special tax at the rate of 5.5%; 4.2 Is the tax base accounting profit subject to the tax base is total salaries paid. Financial institutions are also adjustments, or something else? subject to a special income tax at the rate of 6%, with a total income tax base (income less deductible expenses) exceeding ISK 1 billion. The tax base is determined by the total worldwide income of resident A further tax is imposed on banks and lending institutions, including companies, less any deductible expenses. ones that are undergoing winding-up proceedings, at the rate of 0.376%. The tax base is total debts, according to the tax return of the relevant company, exceeding ISK 50 billion. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? Other taxes include, for example: lodging tax – imposed on all entities providing lodging and accommodation services (at a flat rate of ISK 300 per night); various fuel taxes are levied on fuel upon The main adjustments include, inter alia: deductible expenses, import; and the supply of hot water is subject to 2% tax of the retail which generally consist of costs incurred in acquiring, securing and price. maintaining the taxable income; and depreciation of assets.

4.4 Are there any tax grouping rules? Do these allow 5 Capital Gains for relief in your jurisdiction for losses of overseas subsidiaries? 5.1 Is there a special set of rules for taxing capital gains and losses? Icelandic tax law permits group tax consolidation for resident companies and resident permanent establishment (“PE”) of companies within the same group and are resident within the EEA The applicable tax rate on capital gains for non-resident companies area, in an EFTA member state or the Faroe Islands, which provides is 20%. For companies registered in Iceland, general corporate for relief for losses against other group companies’ profits. Note income tax (see question 4.1) is levied on all profits, including that relief for losses in the case of a PE is subject to the condition capital gains. However, in the case of a disposal of shares by a that losses cannot be set off against profits in the foreign company. corporate shareholder, a full deduction against such capital gains is Furthermore, such relief is not available and may not be extended to permitted, which results in 0% taxation. This may also apply to the overseas subsidiaries. sale of shares in companies registered in Iceland sold by companies registered in Iceland, EEA or EFTA countries or the Faroe Islands. Finally, this can apply to capital gains from the sale of shares in non- 4.5 Do tax losses survive a change of ownership? resident companies, provided that the seller can demonstrate that the foreign company’s profit has been taxed abroad under provisions In the event of a change of ownership, tax losses can survive if that do not substantially deviate from those prevailing in Iceland and certain conditions are met. Provided that the operations of the that the profits of the foreign company have been subject to taxation

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at a rate that is not lower than the general tax rate in any OECD, EEA or EFTA country or the Faroe Islands. Capital gains on shares 6.4 Would a branch benefit from double tax relief in its held by an individual are subject to 22% tax upon their disposal. jurisdiction?

In general, foreign branches are taxed in the same manner as resident 5.2 Is there a participation exemption for capital gains? companies.

No. There is no participation exemption in Iceland. However, the possibility of full deduction for a corporate shareholder against 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the capital gains may apply (see question 5.1). Furthermore, many branch? double tax treaties to which Iceland is a party include reduced tax Iceland rates on capital gains, based on a participation threshold. No, such withholding tax would not be imposed. Remittance of profits by a branch forms part of the taxable base and is subject to 5.3 Is there any special relief for reinvestment? corporate income tax.

In the matter of share investments, no special relief for reinvestment is awarded following the adoption of full deduction against 7 Overseas Profits capital gains, leading to 0% taxation on capital gains for corporate shareholders (see question 5.1). However, regarding the sale of real 7.1 Does your jurisdiction tax profits earned in overseas estate and permanent operational assets, taxation on capital gains branches? realised from the sale of such assets can be deferred by reinvestment within a certain time limit. Yes, unless overseas branch profits are exempt by an applicable tax treaty. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local 7.2 Is tax imposed on the receipt of dividends by a local assets/shares? company from a non-resident company?

Upon the sale of shares in an Icelandic company, foreign individuals The general principle is that tax is imposed in such circumstances. and legal entities will be subject to withholding tax under Icelandic However, a deduction in the amount of the dividends received is law (individuals at 22% and legal entities at 20%). However, the permitted, provided that the distributing company’s profit has been possibility of full deduction for a corporate shareholder against taxed abroad under provisions that do not substantially deviate from capital gains may apply (see question 5.1). Hence, if the seller is a those prevailing in Iceland and that the profits of the distributing limited company in an EU/EEA country, full reimbursement can be company have been subject to taxation at a rate that is not lower applied for, following a tax assessment, if the company submits a than the general tax rate in any OECD, EEA or EFTA country or the tax return and files for a refund. Faroe Islands. Furthermore, it is possible to apply for a reduced withholding tax rate pursuant to provisions in an applicable tax treaty. 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? 6 Local Branch or Subsidiary? Yes, Iceland has enacted CFC rules. When a company or an individual owns shares in a company (directly or indirectly) in a 6.1 What taxes (e.g. capital duty) would be imposed upon low-tax jurisdiction, the company’s profits are subject to taxation in the formation of a subsidiary? Iceland as personal profits to the owner. A jurisdiction is considered to be low-tax if the taxes imposed there are lower than ⅔ of the tax Taxes are not imposed upon the formation of subsidiaries. that would be imposed in Iceland on the same income.

6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident 8 Taxation of Commercial Real Estate company (for example, a branch profits tax)?

8.1 Are non-residents taxed on the disposal of A local branch of a non-resident company that is resident in the commercial real estate in your jurisdiction? EEA, an EFTA member state or the Faroe Islands may be jointly taxed with an Icelandic company belonging to the same group (see Gains from the disposal of commercial real estate are subject to tax question 4.4). There is no other difference. for non-resident companies at a 20% rate and individuals at a 22% rate. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your There are no special rules enacted in Iceland on how to allocate jurisdiction? income to branches. Rules on transfer pricing (see question 3.9) may, however, effect abnormal allocation. Determination of the tax If indirect interest in real estate stems from ownership through a base for a local branch would generally be the income allocated to company and shares in said company are sold with profits, this the branch, less the deductible costs allocated to the branch. would not be considered as the sale of real estate in regard to

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taxation and tax would not be levied on the transfer of such indirect (BEPS Action 7). Furthermore, Icelandic legislation previously ownership. Rules on capital gains would nevertheless apply to the included CFC rules, transfer pricing rules and transfer pricing sale of shares, cf. section 5. documentation. The transfer of other kinds of indirect interest, e.g. rental rights or other indirect property rights, may be subject to taxation. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? No such legislation has been introduced. Iceland

No, Iceland does not have such a tax regime. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 9 Anti-avoidance and Compliance Yes. The Icelandic CBCR rule is placed in Article 91 a. of the Income Tax Act No 90/2003. Furthermore, Regulation No 9.1 Does your jurisdiction have a general anti-avoidance 1166/2016, on Country-by-Country Reporting was introduced in or anti-abuse rule? December 2016 and came into force on 1 January 2017. It should also be noted that Iceland signed the Multilateral Competent Yes, the Icelandic tax legislation has a provision under which it Authority Agreement on the Exchange of CBC Reports in May may be possible to disregard a transaction if its purpose is only to 2016. circumvent tax. The wording of the relevant provision does not, According to the Icelandic CBCR rules, an ultimate parent company however, provide for clear conditions under which it is applicable. (“UPC”) in a group of multinational enterprises that has unlimited This provision has been construed as constituting a general anti- tax liability in Iceland shall hand in a CBC report to the DIR, unless avoidance rule. the total income of the group was less than 100 billion ISK or more in the fiscal year. Furthermore, other companies in Iceland that are part of a group of multinational enterprises but are not UPCs must 9.2 Is there a requirement to make special disclosure of avoidance schemes? hand in a CBC report if the UPC is foreign and: (i) the foreign UPC is not obliged to hand in a CBC report in its No, there is not. country of residence; (ii) the UPC’s country of residence has not entered into an information exchange agreement with Iceland that includes 9.3 Does your jurisdiction have rules which target not provisions on automatic exchange of CBC reports; or only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax (iii) the DIR has notified the Icelandic company that the UPC’s avoidance? country of residence has not entered into an information exchange agreement with Iceland or the UPC’s country of residence does not provide the Icelandic tax authorities with According to Icelandic law, the involvement in punishable tax CBC reports for other reasons. offences can lead to punishment for the person involved. Apart from that, there are no such rules. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural There is a special act on incentives for initial investment in Iceland benefits only or result in a reduction of tax? to promote initial investment in commercial operations, the competitiveness of Iceland and regional development. If a company No. Iceland does not encourage “co-operative compliance”. qualifies for this scheme the incentives may, inter alia, include: (i) derogations from certain taxes and charges; (ii) a reduced rate of 10 BEPS and Tax Competition income tax fixed for up to 10 years; (iii) a stability clause in terms of new taxation; and (iv) favourable depreciation rules. Special incentives are granted for film and TV production in Iceland. 10.1 Has your jurisdiction introduced any legislation The film and TV production cost rebate rate is currently 25%. in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? There is an incentives scheme for innovation companies. Under the scheme, companies that carry out research and development projects Yes. In October 2016, three amendments that implement certain can apply to the Icelandic Centre for Research for a tax credit, which factors of BEPS were introduced into Icelandic law. These rules is 20% of ISK 300 or 450 million of the project cost, irrespective of included Country-by-Country reporting, a provision on interest whether the total project cost is higher. This support is granted as a deduction (BEPS Action 4) and permanent establishment status reimbursement of the respective company’s paid income tax.

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must register for VAT purposes in Iceland, collect VAT on services 11 Taxing the Digital Economy sold and return to the Treasury. No other action has been taken so far in terms of taxation on digital activities. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 11.2 Does your jurisdiction support the European digital presence? Commission’s interim proposal for a digital services tax? Under the Icelandic VAT act, electronically supplied services are taxable in Iceland if the user of the services is resident in Iceland. This is not applicable as Iceland is not a part of the EU tax regime. Thus, anyone who sells electronically supplied services in Iceland Iceland

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

Tel: +354 590 2600 Tel: +354 590 2600 Email: [email protected] Email: [email protected] URL: www.lex.is URL: www.lex.is

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

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

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India T. P. Ostwal

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

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

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

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arrangements for declaration and payment of dividends within India, specified international organisations, are exempt by way of a refund is a resident of India. With effect from 1 April 2016, the residential in the case of services. status of a foreign company will be determined based on its Place of Effective Management “PoEM”. Any company whose PoEM is 2.4 Is it always fully recoverable by all businesses? If not, in India will be a regarded as resident in India. For this purpose, what are the relevant restrictions? PoEM means the place where the key management and commercial decisions that are necessary for the conduct of the business of Being an indirect levy, GST is recoverable by all businesses from an entity as a whole, are in substance made. Detailed guidelines the customers. In other words, the burden of tax is shifted onto describing parameters to determine the PoEM of a foreign company the end-consumer. Further, every business is allowed to take a in India have been prescribed. India credit of tax or duty paid on inputs, be it goods or services. In cases where businesses have an excess amount of input tax against which 2 Transaction Taxes no output tax is available for set-off, a refund of such input tax is available. Therefore, effectively, a business only has to pay the differential amount of taxes paid on inputs or purchases and taxes 2.1 Are there any documentary taxes in your jurisdiction? collected on output or sale. The final consumer of the goods or service bears the entire amount of tax or duty. In India, a documentary tax called Stamp Duty is levied on certain types of documents or agreements. The levy of Stamp Duty is 2.5 Does your jurisdiction permit VAT grouping and, if so, governed by Central legislation – namely, the Indian Stamp Act, is it “establishment only” VAT grouping, such as that 1899 – and the respective State legislation. The rate of duty, applied by Sweden in the Skandia case? the value on which the duty is levied, and the type of document on which it is levied, depend on the prevailing law of the state, The concept of “group taxation” does not exist in India in either wherever specifically provided, or otherwise the Indian Stamp Act. Direct or Indirect Tax Laws. Further, an Indian branch of a foreign Certain documents have a per-unit duty, while others have an ad company and a foreign branch of an Indian company are treated as valorem rate. separate legal entities for taxation purposes.

2.2 Do you have Value Added Tax (or a similar tax)? If so, 2.6 Are there any other transaction taxes payable by at what rate or rates? companies?

From 1 July 2017, India adopted a dual Goods and Service Tax India has introduced a tax called the Equalization Levy (“EL”), with (“GST”), which is a destination-based tax applicable on all effect from 1 June 2016, which is charged on payments made to a transactions involving the supply of goods and services for a non-resident as consideration for online advertisement or provision consideration, subject to exceptions thereto. GST is imposed of digital advertising space. An amount of 6% must be deducted by concurrently by the Centre and States: the Central Goods and any Indian resident or a non-resident with a permanent establishment Service Tax (“CGST”), levied and collected by Central Government; (“PE”) in India making such payment for business or professional the State Goods and Service Tax (“SGST”), levied and collected purposes to a non-resident. Further, the consideration on which EL by State Government/Union Territories with State Legislature; and is applicable is exempted from Income Tax in the hands of such the Union Territory Goods and Service Tax (“UTGST”), levied and non-resident recipient. The EL is a special levy and is not part of the collected by Union Territories without State Legislatures, on intra- Indirect Tax or Income Tax laws. State supplies of taxable goods and/or services. Inter-State supplies Further, a Securities Transaction Tax and a Commodities Transaction of taxable goods and/or services will be subject to the Integrated Tax are levied on securities or commodities transactions that take Goods and Service Tax (“IGST”). place on any recognised stock or commodity exchange in India. Rates for CGST, IGST, SGST and UTGST as notified by the Government are 5%, 12%, 18% and 28%, respectively. IGST is approximately a sum total of CGST and SGST/UTGST and will be 2.7 Are there any other indirect taxes of which we should levied by the Centre on all inter-State supplies. The maximum rate be aware? of CGST is 20%, while for IGST it is 40%. Certain taxes which will continue in the GST era are Basic Customs The following taxes are subsumed into GST: Central Excise Duty; Duty, Stamp Duty, Property Tax levied by Local Bodies, Profession Service Tax; Countervailing Duty (“CVD”) and Special CVD; Central Tax, Central Excise in respect of alcohol for human consumption, ; surcharges and cesses in relation to the supply of goods and Central Excise/VAT on petroleum products, etc. services; Entertainment Tax (except those levied by local bodies); Tax on Lottery, Betting and Gambling; Entry Tax and Purchase Tax; VAT/ Sales Tax; Luxury Tax; and taxes on advertisements. 3 Cross-border Payments

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

In the case of GST, there are certain goods as well as services on Dividends paid by a domestic company to any person who is a which GST is imposed at a nil rate. For example, milk, cereal, fruits shareholder (whether resident or non-resident) are exempted in & vegetables, jaggery, food grains, rice & wheat, spices, tea, coffee, the hands of the shareholder. However, individuals, firms and sugar, vegetable/mustard oil, newsprint, coal, Indian sweets, silk Hindu Undivided Families (“HUFs”) which are resident in India and jute fibre in the case of goods. Hotels and lodges with tariffs and receiving dividends in excess of INR 1 million will be taxed below Rs. 1,000, and services provided to the United Nations or

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at the rate of 10% on the excess amount of dividends. Further, the deducted and paid to the credit of the government. In such cases, domestic tax laws also say that a domestic company distributing interest expenditure is disallowed for the purpose of computation of dividends to its shareholders has to pay a Dividend Distribution Tax Income Tax of the payer. (“DDT”) on such dividends at the rate of 15%.

3.8 Is there any withholding tax on property rental 3.2 Would there be any withholding tax on royalties paid payments made to non-residents? by a local company to a non-resident? Property rental payments made to a non-resident would also be Royalties are subject to a withholding tax at the rate of 10%, added subject to a withholding tax based on a maximum marginal rate of India by applicable surcharge and cess as per the domestic tax law. tax as applicable to such non-resident. In other words, individuals are subject to a withholding tax at the rate of 30% unless the individual obtains a certificate from the prescribed authority 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? allowing withholding at a lower rate. Persons other than individuals are subject to withholding at a rate of 40% on the gross amount. However, even non-individuals can obtain a certificate that would Interest paid to a non-resident is generally subject to a 40% allow withholding at a lower rate. withholding tax, added by applicable surcharge and cess. However, when interest is paid for foreign currency borrowings, the withholding rate is 20% plus surcharge and cess. In certain cases, where interest 3.9 Does your jurisdiction have transfer pricing rules? is payable in respect of long-term bonds and infrastructure debt funds, the lower rate of 5% is applicable. This rate is also applicable in cases India has transfer pricing rules with respect to both domestic where a business trust (such as a REIT) distributes interest income transactions and international transactions. However, with a view to received from a special-purpose vehicle to its non-resident unitholders. reducing the domestic transfer pricing burden, a recent amendment Further, in the case of rupee-denominated offshore bonds, popularly has restricted the domestic transfer pricing applicability only to known as “masala bonds”, the interest would be taxed (by way of domestic Indian entities enjoying benefits of any /profit- final withholding tax) at a reduced rate of 5% up to 2020. linked deduction where the aggregate of such a transaction exceeds INR 200 million.

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

A provision has recently been introduced into the ITA which provides for restrictions on interest deductibility in line with the 4.1 What is the headline rate of tax on corporate profits? OECD BEPS project, with effect from 1 April 2018. As per this amendment, any debt issued by a non-resident associated Profits of an Indian or domestic company are taxed at 30%,and enterprise, the interest expense of which exceeds INR 10 million, those of a foreign company at 40%. However, a recent amendment shall not be allowed as a deduction in computation of its income. has reduced the rate of tax to 25% on companies which have an Further, excess interest has been defined as total interest paid or annual turnover of INR 500 million or less. Further, an additional payable in excess of 30% of EBITDA or the interest actually paid or surcharge of 7% (2% for foreign companies) is levied on income payable, whichever is less. exceeding INR 10 million up to INR 100 million, and 12% (5% for foreign companies) on income exceeding INR 100 million. Additionally, a Health & Education Cess of 4% of the tax is also 3.5 If so, is there a “safe harbour” by reference to which levied. tax relief is assured?

The safe harbour rules in India recently underwent an amendment to 4.2 Is the tax base accounting profit subject to adjustments, or something else? include intra-group loans to a non-resident wholly owned subsidiary, either in foreign currency or Indian currency. Indian tax law contains specific provisions for accounting treatment of certain income and certain expenditure that differs from the 3.6 Would any such rules extend to debt advanced by a treatment or requirements for the purpose of ordinary or non-tax third party but guaranteed by a parent company? accounting and reporting. As a result, the accounting profit is subject to certain adjustments for the purpose of calculating the The thin capitalisation regime under the ITA also covers cases taxable income and tax due thereon. where a debt issued by an unrelated lender, i.e. a lender which is Further, companies are also subject to the Minimum Alternate Tax not an associated enterprise (“AE”), is backed by either an implicit (“MAT”) whereby, if the tax payable as normally calculated is lower or explicit guarantee by a non-resident AE of the Indian borrower to than 18.5% on the book profits of the company, the company would the lender or an AE deposits a matching amount of funds, such debt have to pay an MAT equal to 18.5% of the book profits, and the would also be deemed to have been issued by such AE. differential amount (i.e. the difference between the tax liability as normally calculated and the MAT liability) is available as MAT 3.7 Are there any other restrictions on tax relief for credit which can be carried forward for 15 assessment years. interest payments by a local company to a non- resident?

There is no restriction on payment of interest by a local company to a non-resident under the ITA unless the withholding tax is not duly

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4.3 If the tax base is accounting profit subject to 4.7 Are companies subject to any significant taxes not adjustments, what are the main adjustments? covered elsewhere in this chapter – e.g. tax on the occupation of property? In 2015, the Indian government announced certain Income Computation and Disclosure Standards (“ICDS”), which become There are many minor taxes that businesses may have to pay in the effective from April 2015 onwards. ICDS apply to all taxpayers form of annual or periodic fees to various government or municipal following an accrual system of accounting for the purpose of bodies, depending on the State where the business is located. computation of income under the “Heads” of “Profits and gains of Property Tax, payable by the owner of real estate, is payable to the local municipal body; Profession Tax is levied in most States on business and profession” and “Income from other sources”. Further, India the method of accounting prescribed in ICDS is mandatory but it is salaried individuals and professionals, and the same is withheld and meant only for income computation and not maintenance of books paid by the employer. Further, Profession Tax is also applicable to of accounts. Most Indian companies follow the Indian Accounting each legal entity engaged in an active business or profession. Standards (“IndAS”) that are based on the International Financial Reporting Standards (“IFRS”) for the purpose of financial reporting, and there are differences in several areas between the IndAS and 5 Capital Gains the ICDS. Further, for the purpose of Income Tax, computation of depreciation 5.1 Is there a special set of rules for taxing capital gains and treatment of income from sale or disposal of assets is based and losses? on the “block of assets” concept; while for accounting purposes the same is calculated for individual assets. Further, for Income Taxability of capital gains is governed by the provisions of the ITA. Tax purposes, the income earned is segregated into five “heads” of The computation mechanism is specifically provided, which lays income, and there are specific computation rules for each head, and down the rules for the determination and taxation (or treatment) of also for adjustment of losses within the head and between different capital gains and losses. The rate of tax on capital gains is lower as heads, and for the manner of carrying forward such losses, while the compared to other sources of income in most cases. Further, capital treatment as per IndAS is different. gains that arise from assets considered long-term enjoy a lower Further, adjustments also have to be made for certain deductions or rate of tax, whereas short-term capital gains are charged tax at the accounting provisions that are disallowed (or limited) for Income regular rate of Income Tax. Tax purposes, as well as for certain provisions or deductions that While computing long-term capital gains, the benefit of indexation are allowed to be taken over-and-above the expenses accounted is available based on the cost inflation index, thereby resulting in a for; certain income may be exempt from taxation; and the quantum higher deduction of cost base as compared with the original cost of of income that is taxable may differ from the accounting revenue acquisition. recognised. The law also contains provisions which test for the fair market value The concept of deferred tax liabilities and assets exists in the Indian of an asset being transferred with the actual consideration. Transfer accounting space, but not for tax purposes. at a value other than fair market value may entail tax consequences for either or both the transferor and the transferee.

4.4 Are there any tax grouping rules? Do these allow Further, in cases of non-residents acquiring assets in foreign for relief in your jurisdiction for losses of overseas currency, gains are computed in foreign currency and thereafter subsidiaries? arrive at the resultant gain by applying the prescribed conversion exchange rate. There is no concept of tax grouping rules in Indian tax law and, Set-off and carry-forward of losses is permissible intra-group and therefore, there is no relief for losses of overseas subsidiaries. inter-group, subject to certain terms and conditions. It should be noted, that up to March 2018, capital gains from the 4.5 Do tax losses survive a change of ownership? sale of listed shares held for more than 12 months were exempt from tax, subject to certain other criteria. From April 2018 onwards, The tax losses of a private limited company survive a change in such capital gains will be taxed at 10%. The tax-free gains that ownership if such change does not result in a change in voting would have been earned have been grandfathered by allowing the power up to 49% of the voting power in the company. In other substitution of the quoted price of such stocks on 31 January 2018 words, not less than 51% of the voting power should remain the instead of the actual purchase price. same to continue the carry-forward of tax losses in a company. 5.2 Is there a participation exemption for capital gains? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? India does not have the concept of a participation exemption for capital gains. Irrespective of the level of participation, capital gains There is no additional tax on “retained profits”. If tax-paid on the transfer of shares or any other security are chargeable to tax profits are reinvested in the business, or simply retained andnot on a uniform basis. distributed, there is no additional tax levied. However, there is a tax on distribution by a company of tax-paid profits, the DDT which is levied at 15%.

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due to non-maintenance of records, a formulaic approach has been 5.3 Is there any special relief for reinvestment? prescribed for the apportionment of income based on local and global turnover. There are certain rollover or capital gains tax deferment options available to taxpayers that earn capital gains with specific conditions 6.4 Would a branch benefit from double tax relief in its and assets in which the gains must be reinvested with a prescribed jurisdiction? lock-in period. A branch, which would normally be considered as a PE of the 5.4 Does your jurisdiction impose withholding tax on the foreign company in India, can seek relief from double taxation under India proceeds of selling a direct or indirect interest in local the tax treaty in India and in its respective jurisdiction of residence. assets/shares?

The direct transfer of any Indian asset, including shares of an Indian 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the company, property, etc. is subject to a withholding tax when the branch? seller of such assets is a non-resident. Further, withholding taxes are also levied where immovable Withholding taxes are payable by the person making payments to property (other than agricultural land) is acquired by a resident – the local branch of a foreign entity, if such payment represents sums the withholding is applicable if the consideration exceeds INR 5 chargeable to tax in India. Further, the branch would also have million at a rate of 1% of the consideration. to determine its actual tax liability (as per domestic law or treaty, Additionally, even the indirect transfer of any Indian asset is subject whichever is more beneficial) and accordingly pay the additional tax to withholding tax if the foreign entity being transferred derives its over and above the tax withheld or seek a refund. value substantially (i.e. more than 50%) from Indian assets, whether held directly or indirectly by such entity being transferred and the value of such Indian assets exceeds INR 100 million. 7 Overseas Profits

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

6.1 What taxes (e.g. capital duty) would be imposed upon Yes, overseas branches of an Indian entity would be taxed in the formation of a subsidiary? India, since taxes are levied on the global income of a resident entity. However, credit for the taxes paid on such income would At the time of formation of a subsidiary, registration fees are levied be available. on the amount of authorised capital of the company, subject to a maximum ceiling. Also, Stamp Duty is levied by different States 7.2 Is tax imposed on the receipt of dividends by a local on the Memorandum of Association and Articles of Association of company from a non-resident company? the company (documents required to be filed while incorporating a company), the basis of which differs from one State to another. Dividends received from a non-resident company, in which the recipient local company holds 26% or more of the nominal share 6.2 Is there a difference between the taxation of a local capital, are taxable at 15% (plus applicable surcharge and cess) subsidiary and a local branch of a non-resident while, if the shareholding is less than 26%, the dividends would be company (for example, a branch profits tax)? taxed at the normal headline rate of tax as applicable.

A locally formed subsidiary is considered an Indian or domestic company and is therefore subject to tax in the same manner as any 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? other Indian company, and is taxed at 30% on its taxable income. A branch of a non-resident company is, however, taxed at 40% on its There are no specific rules regarding “controlled foreign companies” taxable income, since it is considered a foreign company. A branch in Indian tax law at present. of a foreign company is taxed only on income accruing or arising in India or received in India, whereas a domestic company is taxed on its global income whether or not it is accrued or received in India. 8 Taxation of Commercial Real Estate Presently, there is no branch profit tax payable specifically by local branches of non-resident companies; only Income Tax is payable on taxable income. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction?

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

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8.2 Does your jurisdiction impose tax on the transfer of 9.3 Does your jurisdiction have rules which target not an indirect interest in commercial real estate in your only taxpayers engaging in tax avoidance but also jurisdiction? anyone who promotes, enables or facilitates the tax avoidance? Yes. If any share or interest in a foreign company or entity derives its value substantially from the assets, whether real estate or other, The GAAR also covers connected persons and “accommodating located in India, then such share or interest is deemed to be situated parties” under its purview and, consequently, they may also face in India. Thus, any income arising from the transfer of such share or implications if they are found to be part of an impermissible interest is deemed to accrue or arise in India and is taxed accordingly. avoidance arrangement entered into in order to obtain tax benefits. India The share or interest would be deemed to derive value substantially from Indian assets if they constitute 50% or more of the total value 9.4 Does your jurisdiction encourage “co-operative of such share or interest. Further, in the case of domestic companies compliance” and, if so, does this provide procedural holding immovable property as the only asset, there is no specific benefits only or result in a reduction of tax? provision targeting the transfer of such company as an indirect transfer of immovable property – however, the gains arising from Although India does not have “co-operative compliance”, the transfer of the company itself would be subject to tax. Ministry of Finance has set up Large Taxpayer Units (“LTU”), which are self-contained tax offices under the Department of Revenue 8.3 Does your jurisdiction have a special tax regime which act as a single-window clearance point for all matters relating for Real Estate Investment Trusts (REITs) or their to Income Tax, Corporate Tax and Goods & Service Tax. equivalent? Eligible taxpayers opting for assessment by an LTU can file their excise return, direct tax return and service tax return at such LTUs In the past few years, the government has come out with new and, for all practical purposes, will be assessed to these taxes provisions and amendments to existing provisions to rationalise thereunder. the REIT tax regime in India. Subject to certain conditions and However, this does not result in a reduction of tax. requirements, REITs have been granted pass-through status and exemption from paying DDT and the income would be taxed in the hands of the unitholders instead. Further, the provisions regarding a 10 BEPS and Tax Competition “business connection” (which is pertinent in determining taxability of income in the hands of non-residents) for REITs sponsored by foreign funds, have been relaxed to exclude Indian fund managers 10.1 Has your jurisdiction introduced any legislation of such foreign REITs from being considered as “business in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? connections” in India.

India has introduced several legislative provisions in response to 9 Anti-avoidance and Compliance the BEPS Action Plans such as the Country-by-Country Reporting, transfer pricing documentation requirements, anti-avoidance rules to minimise treaty abuse, a limit on interest deduction, secondary 9.1 Does your jurisdiction have a general anti-avoidance adjustment, etc. or anti-abuse rule?

India first introduced the General Anti-Avoidance Rules (“GAAR”) 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is in the domestic tax law in 2012, but the same had been made recommended in the OECD’s BEPS reports? effective from 1 April 2017. These rules are also, in effect, anti- abuse rules, since they give the power to the tax administration to India has already introduced an Equalization Levy at the rate of override the provisions of tax treaties. 6% on specified payments, mainly in respect of online advertising services, made by residents or permanent establishments of non- 9.2 Is there a requirement to make special disclosure of residents to other non-residents. avoidance schemes?

10.3 Does your jurisdiction support public Country-by- There is no special or additional disclosure requirement on taxpayers Country Reporting (CBCR)? in respect of aggressive tax planning schemes, but true and complete disclosure of all information regarding transactions is required to be India has incorporated provisions in the ITA for Country-by-Country made to the tax authorities and specific information can be called Reporting which came into effect on 1 April 2017. The provisions for in order to determine whether the taxpayer has resorted to an are in line with the guidelines of BEPS Action Plan 13. avoidance scheme. In July 2018, the tax authorities introduced a disclosure requirement into the tax audit report requiring the auditor to determine and report 10.4 Does your jurisdiction maintain any preferential tax whether any transaction could be considered an impermissible regimes such as a patent box? avoidance arrangement, effectively making the auditor responsible for the work of the tax authorities. After much representation and India has introduced the patent box regime with effect from April lobbying by trade and professional groups, the applicability of these 2017, under which a resident receiving royalties for a patent requirements was deferred to the next reporting period. developed and registered in India is taxed at a reduced rate of 10%

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on the gross royalty. For a patent to be considered “developed in (b) transactions with a prescribed number of persons related to India”, at least 75% of the expenditure for such development must systematic and continuous soliciting of business activities or have been incurred in India. engaging in interaction, specifically in India, through digital means. In July 2018, the tax authorities called for comments in relation 11 Taxing the Digital Economy to setting the value threshold and number-of-users threshold for determining SEP. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 11.2 Does your jurisdiction support the European India digital presence? Commission’s interim proposal for a digital services tax? In addition to the abovementioned Equalization Levy, in 2018, India introduced the concept of “significant economic presence” in the In effect, India has been more proactive and already introduced domestic law, which is to be applicable from tax year 2019. The legislation that is proposed under the EC’s proposal. provisions cover income earned by non-residents through digital The “SEP test” introduced in India which will become live from means without the need to necessarily have an actual physical 2019 onwards is similar to the incorporating a “digital presence” presence. An entity with SEP in India would be considered to have a or a “virtual PE” test which is proposed under the first legislative business connection in India giving rise to income deemed to accrue proposal under the European Commission’s proposal. and arise in India and therefore be chargeable to tax in India. Further, through the Equalization Levy, introduced in 2016, India A non-resident would be said to have SEP in India under two has already levied a 6% tax on digital/online advertising services conditions if a non-resident having place of business in India provided by non-residents. undertakes the provision of services: (a) above a prescribed value threshold in respect of goods, services or property including provision of download of data or software in India; or

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

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

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

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

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

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Indonesia

Mul & Co Mulyono

However, Indonesia has recently updated its domestic anti-treaty 1 Tax Treaties and Residence abuse rule. Please refer to question 9.1.

1.1 How many income tax treaties are currently in force in 1.5 Are treaties overridden by any rules of domestic your jurisdiction? law (whether existing when the treaty takes effect or introduced subsequently)? There are currently 68 income tax treaties in force in Indonesia. Several (new or renegotiated) tax treaties are still in the process of Article 32A of Law Number 7 of 1983 on Income Tax, as lastly developments with the other jurisdictions, i.e., Cambodia, Malaysia, amended by Law Number 36 of 2008 (“Income Tax Law”) states Mexico, Serbia, Singapore and Zimbabwe. that the Indonesian government has the authority to enter to a tax Indonesia has also participated in the signing of the Multilateral treaty with other jurisdictions. It is also stated that the tax treaty is Convention to Implement Tax Treaty Related Measures to Prevent lex specialis in nature in relation to domestic income tax law. Base Erosion and Profit Shifting (“MLI”) on June 7, 2017. The Director General of Tax (“DGT”) has issued DGT Regulation Until the end of 2017, Indonesia has Exchange of Information Number PER-10/PJ/2017 (“PER-10”), a new guideline for tax (“EOI”) cooperation based on the tax treaties with 65 jurisdictions. treaties implementation. The DGT sets out several conditions, In addition, with the passing of Tax Information Exchange including administrative and beneficial ownership criteria that must Agreement (“TIEA”), Indonesia also has EOI cooperation with four be fulfilled, in order for the non-resident taxpayer to be eligible for jurisdictions: Bermuda; Guernsey; Isle of Man; and Jersey. the reduced rate in the tax treaty. In practice, with the issuance of this regulation, the DGT can “override” the eligibility of the non- resident taxpayers for the tax treaty benefits in the situation that all 1.2 Do they generally follow the OECD Model Convention or some of the conditions in PER-10 are not fulfilled. or another model?

Since Indonesia is a developing country, Indonesia largely adopts 1.6 What is the test in domestic law for determining the the UN Model in developing the tax treaties, with the combination residence of a company? of several principles in domestic taxation laws. Some of the Indonesian tax treaties might be modified from the UN Model or Article 2 paragraph (3) letter b of Income Tax Law states that a OECD Model, as a result of the negotiation process among the resident tax subject shall be any entity that is established or domiciled jurisdictions. in Indonesia, except certain units of government agencies. A fully foreign-owned company that is established and domiciled in Indonesia is considered as an Indonesian tax resident, even though the key 1.3 Do treaties have to be incorporated into domestic law management and commercial decisions are taken outside Indonesia. before they take effect?

For the tax treaties to be in force, they must follow the legalisation 2 Transaction Taxes process. Based on Law Number 24 of 2000 on International Agreements, the legalisation process of international agreements in relation to tax matters is done through the issuance of a Presidential 2.1 Are there any documentary taxes in your jurisdiction? Regulation that legalises the tax treaty. The Government of Republic of Indonesia will then submit the copy of the In Indonesia, the documentary taxes called Stamp Duty are levied Presidential Regulation that legalises the tax treaty to the House of based on Law Number 13 of 1985 on Stamp Duty and Government Representative to be evaluated. Regulation Number 24 of 2000. Generally, the Stamp Duty is imposed to the documents, such as agreements or other letters that are made for the purpose to be used as: evidence for actions, facts, 1.4 Do they generally incorporate anti-treaty shopping or other civil matters; notarial/land titles registrar deeds; and letters rules (or “limitation on benefits” articles)? that contain a monetary amount of above Rp 1,000,000. The tariff of Stamp Duty ranges from Rp 3,000 to Rp 6,000 depending on the Most of the tax treaties with Indonesia do not incorporate limitation type and the nominal amount stated in the documents. on benefits clause articles, except for few tax treaties, e.g., Russia.

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of land and/or building rights (payable by the purchaser). A transfer 2.2 Do you have Value Added Tax (or a similar tax)? If so, transaction of a motor vehicle ownership is subject to duty of motor at what rate or rates? vehicle transfer (regional tax).

In addition to direct tax, such as income tax, Indonesia also imposes indirect taxes, such as Value Added Tax (“VAT”) at the rate of 2.7 Are there any other indirect taxes of which we should be aware? 10%, in accordance with Law Number 8 of 1983 on VAT, as lastly amended by Law Number 42 of 2009 (“VAT Law”). In general, the VAT rate is 10%. There are several transactions that are imposed Certain luxury goods (vehicle and non-vehicle) are imposed with by VAT with the tariff of 0% (e.g., export transactions) or exempted the Luxury Goods Sales Tax with the rate being between 10% and by VAT. 200%. Depending on the regions and type of businesses, there are also several applicable regional taxes, such as entertainment tax, Indonesia cigarettes tax, advertising tax, parking tax, and hotel tax. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 3 Cross-border Payments The VAT Law adopts a negative list approach, of which Article 4A paragraph (2) and (3) of VAT Law define the list of goods and 3.1 Is any withholding tax imposed on dividends paid by services that are not subject to VAT. All of the other goods and a locally resident company to a non-resident? services are considered as Taxable Goods and Services that are subject to VAT. In the absence of a tax treaty, the dividends paid by an Indonesian Further, the VAT Law and the implementing regulations define the tax resident company to a foreign tax resident are subject to Article criteria for a small entrepreneur, which is the entrepreneur (taxpayer) 26 withholding tax at the rate of 20%. The withholding tax is that has an annual gross turnover not more than Rp 4.8 billion. The payable when the dividend is declared by the company. taxpayers that do not fulfil this annual turnover threshold are not Most of the applicable Indonesian tax treaties generally provide mandatorily stipulated as Taxable Entrepreneurs for VAT purposes a reduced rate of withholding tax on dividends at the source and, therefore, the delivery of goods and services by the small country to be 10–15%. Several tax treaties provide a lower rate for entrepreneurs is not subject to VAT. substantial ownership holding. For example, in the Indonesia-Hong Kong Tax Treaty, if a beneficial owner (a company) in Hong Kong 2.4 Is it always fully recoverable by all businesses? If not, holds directly at least 25% of the equity of the Indonesian company what are the relevant restrictions? paying the dividends, the dividend is subject to withholding tax at a reduced rate of 5%. There are several restrictions for the Input VAT to be credited in the periodic VAT returns, such as: 3.2 Would there be any withholding tax on royalties paid a. the Input VAT that is acquired before the taxpayers are by a local company to a non-resident? stipulated as Taxable Entrepreneurs, before the Taxable Entrepreneur starts commercial production, or that is not directly related to the business activities; Similar to the dividends payment, in the absence of a tax treaty, the royalties paid by an Indonesian tax resident company to a foreign tax b. the Input VAT from the acquisition and maintenance of motor resident are subject to Article 26 withholding tax at a rate of 20%. vehicles in the form of sedan and station wagon, except as commodities for sale or for rent; The withholding tax is payable at the time stated in the contract or at the time the invoice is issued. c. the Input VAT of which the tax invoice does not fulfil the formal provisions; and Indonesian tax treaties generally provide a reduced withholding tax d. the Input VAT that is collected by issuing a tax assessment, or rate on royalties to be 10–15%. In a few tax treaties, e.g., tax treaties is discovered during a tax audit. with Hong Kong, Qatar and the United Arab Emirates (“UAE”), the reduced withholding tax rate is 5%.

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

VAT grouping for several entities is not permitted in Indonesia. Based on Income Tax Law, the Article 26 withholding tax at the rate Based on current VAT Law, in case a company has several branches of 20% is also applied on interest paid by an Indonesian tax resident in different locations, each branch must be stipulated separately company to a foreign tax resident. The withholding tax is payable as the company’s branches and must conduct a separate VAT at the time the interest is due to the creditors. administration. In this situation, the company’s branches are In most of the applicable Indonesian tax treaties, they generally allowed to request for centralisation of VAT administration in one provide a reduced rate of withholding tax at the source country; selected location. 10–15%. In the Tax Treaty with Kuwait and the UAE, the reduced rate of withholding tax is 5%. 2.6 Are there any other transaction taxes payable by companies? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? In the case of a land and/or building transfer transaction, there is final income tax (payable by the seller) and duty on the acquisition Article 18 paragraph (1) of Income Tax Law provides the authority to the Ministry of Finance to determine the maximum Debt-to-

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Equity Ratio (“DER”) to compute the Taxable Income. In 2015, rental payments from an Indonesian tax resident to foreign tax the Ministry of Finance issued a regulation that determines the residents for any property located in Indonesia are subject to Article maximum allowable DER amount that determines the interest 26 withholding tax at the rate of 20%. deductibility. Please see question 3.5.

3.9 Does your jurisdiction have transfer pricing rules? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? The transfer pricing regulations in Indonesia are based on Article 18 paragraph (3) of Income Tax Law. The DGT then issued an Based on Ministry of Finance Regulation Number 169/ implementing transfer pricing regulation, DGT Regulation Number PMK.010/2015 (“PMK-169”), for the CIT calculation, the threshold PER-43/PJ/2010 on Implementation of Arm’s Length Principle Indonesia for DER is 4:1. If the actual DER exceeds 4:1, the amount of (“ALP”) among Taxpayers that have a related-party relationship, as deductible interest expense must be adjusted proportionately to an amended by DGT Regulation Number PER-32/PJ/2011. The scope allowable amount based on the 4:1 ratio. of the ALP application covers: The amount of debt for the purpose of calculating DER is the a. the transactions conducted between domestic taxpayers monthly average debt balance during a certain fiscal year or part of or Permanent Establishments (“PE”) in Indonesia with an the fiscal year. The amount of equity for the purpose of calculating affiliated foreign tax resident; and DER is the monthly average equity balance during a certain fiscal b. the transactions conducted with the other domestic taxpayers year or part of the fiscal year. In case the equity is zero or negative, or PEs in Indonesia that have a related-party relationship, all of the interest expense is non-deductible. The debt includes which aim to utilise different tax tariffs, such as final and a long-term debt, as well as short-term debt, including interest- non-final income tax for certain businesses, imposition of bearing trade payables. The total equity includes equity based on sales tax on luxury goods, and transactions conducted with oil and gas contractors. the financial accounting standard and non-interest bearing loans from related parties. Further, in line with BEPS Action 13, Indonesia has also introduced Ministry of Finance Regulation Number 213/PMK.03/2016 (“PMK-213”) and DGT Regulation Number PER-29/PJ/2017 3.6 Would any such rules extend to debt advanced by a (“PER-29”), which provide the detailed provisions on Country-by- third party but guaranteed by a parent company? Country Reporting (“CbCR”). The Transfer Pricing Documentation consists of the Master File (“MF”), Local File (“LF”), and/or PMK-169 also states that any interest payable to a related party must CbCR. The content of MF, LF, and CbCR is generally similar with be calculated in accordance with the arm’s length principle. The recommendations set out in the BEPS Action Plan 13. DGT is authorised to readjust the value of interest payment to a related party according to the arm’s length principle. Please also see question 3.9. 4 Tax on Business Operations: General A debt by a third party but guaranteed by a parent company does not create a related-party relationship. The related-party relationship 4.1 What is the headline rate of tax on corporate profits? criteria based on Article 18 paragraph (4) of Income Tax Law is as follows: The general Corporate Income Tax (“CIT”) rate in Indonesia is a. the taxpayer that has capital participation directly or indirectly 25%. There are several facilities regarding the CIT rate applied for of a minimum of 25% at other taxpayer; a relationship between a taxpayer with a minimum participation of 25% at companies that fulfil certain criteria, as follows: the other two or more taxpayers; or a relationship between a. a company that has an annual gross turnover up to Rp 50 two or more taxpayers mentioned latter; billion is allowed the 50% reduction from the general CIT b. the taxpayer that controls the other taxpayer or two or more rate (12.5%) for the proportion of Taxable Income of the taxpayers that are under the same control both directly and gross turnover up to Rp 4.8 billion; indirectly; or b. a company that is listed in the stock exchange where a c. there is family relation both biologically and by marriage in minimum of 40% of the shares are traded in stock exchange vertical and/or horizontal lineage of the first degree. and fulfil other criteria, is allowed a 5% lower rate compared to the general CIT rate (20%); c. a company that has an annual gross turnover of no more than 3.7 Are there any other restrictions on tax relief for Rp 4.8 billion can be imposed with final income tax of 0.5% interest payments by a local company to a non- from the gross turnover maximum of three years; or resident? d. a company that makes investments with a certain minimum investment value in several pioneering industries may receive There are currently no other restrictions on tax relief for interest a reduction of the CIT rate of up to 100% for a period of five payments by a local company to a non-resident company (with no to 20 years, depending on the total investment value. related-party relationship).

4.2 Is the tax base accounting profit subject to 3.8 Is there any withholding tax on property rental adjustments, or something else? payments made to non-residents? Yes. The tax base for computing the CIT is Taxable Income. At In general, Article 6 of the Indonesian tax treaties provides taxation the end of the fiscal year, the taxpayers are required to make fiscal rights to the country where the property is located and does not reconciliations from the accounting profit to calculate the Taxable provide any reduced withholding tax rate. Therefore, any property Income, which is the Taxable Revenue (gross revenue) deducted with any Deductible Expenses.

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

5.1 Is there a special set of rules for taxing capital gains There are several types of adjustments in the fiscal reconciliations to and losses? derive the Taxable Income from the accounting profits, as follows: a. Taxable Revenue: Excluding revenues that are 1) not included In general, Indonesian Income Tax Law adopts a wide meaning as income tax object, and 2) already subject to final income of an “income” as referred to an “additional economic benefit in tax. whatever forms and names”. Article 4 paragraph (1) letter d of b. Deductible Expenses: 1) temporary difference, such as Income Tax Law clearly states that capital gains arising from the

differences in timing of recognition of fiscal depreciation transfer of assets are included as Taxable Income (similar to income Indonesia and accounting depreciation; and 2) permanent difference; from ordinary/business profits). The capital gains are taxed upon several expenses are non-deductible for CIT calculation, such as expenses to create allowance (e.g., allowance for doubtful realisation, which means that the unrealised gains resulting from the accounts), expenses for personal interest of shareholders, fair value adjustments of assets are not taxable in computing CIT. benefit-in-kind, administrative sanctions. A transfer of land and/or building is subject to a special provision on final income tax at a rate of 2.5% for the seller and 5%duty on acquisition of land and/or building rights for the purchaser. A 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas transfer of shares that are publicly traded in the stock market is also subsidiaries? subject to a special provision of final income tax at the rate of 0.1% from the total sale value. No, there are no tax grouping rules in Indonesia. Based on elucidation or Article 4 paragraph (1) Income Tax Law, the losses 5.2 Is there a participation exemption for capital gains? from overseas operations cannot be deducted in calculating CIT. There is no participation exemption for taxation on capital gains. 4.5 Do tax losses survive a change of ownership? 5.3 Is there any special relief for reinvestment? The tax losses of a (private and public) limited liability company survive change of ownership, without certain threshold limitation. In the context of Branch Profit Tax for a PE, the Branch Profit Tax is The tax loss carry-forward is valid for the period of five years. not imposed if the profits are re-invested back in Indonesia. Please Based on Ministry of Finance Regulation Number 52/PMK.010/2017, also refer to question 6.4. the taxpayers that will conduct mergers can request for the use of a There is no special relief in the context of dividend payments that book value for transfer of the assets of the merger companies. In this are used for reinvestment in Indonesia. The dividends paid to an case, the recipient company of the assets that use the book value for Indonesian company’s shareholder by its Indonesian subsidiary with the transfer is not allowed to use the tax loss carry-forward from the a minimum of 25% share ownership are considered as Non-Taxable transferor company. Income.

4.6 Is tax imposed at a different rate upon distributed, as 5.4 Does your jurisdiction impose withholding tax on the opposed to retained, profits? proceeds of selling a direct or indirect interest in local assets/shares? The CIT is generally imposed at the end of the fiscal year towards the Taxable Income. Please also refer to question 4.1 for the CIT In general, Article 13 of the Tax Treaties with Indonesia provides rate. Currently, there is no additional tax if the profits are “retained” Indonesia the taxing rights for alienation of property situated in by the companies. Indonesia by a foreign tax resident. There is an applicable final The distribution of profits towards the company’s shareholders is income tax imposed to a direct transfer of land and/or building at taxed upon the declaration of the dividend. There is no mandatory the rate of 2.5%. obligation for the domestic companies to declare dividends annually. A direct transfer of an Indonesian company’s shares by a foreign The restrictions for distribution of profits in form of dividends are tax resident is subject to Article 26 withholding tax of an effective subject to Law Number 40 of 2007 on Company Law. rate of 5%. In the case of an indirect transfer of shares, the Minister In the case of a PE, in addition to the CIT, the profits after tax are of Finance issues Ministry of Finance Regulation Number 258/ also subject to additional Branch Profit Tax at the end of the fiscal PMK.03/2008 which regulates that an Article 26 withholding tax year with the general rate of 20% (or tax treaty rate). with an effective rate of 5% is imposed to a transfer of shares of a special purpose company (“SPC”) (that is established in a tax haven country) which has related-party relationship with a company in 4.7 Are companies subject to any significant taxes not Indonesia. A direct transfer of shares that is publicly traded in the covered elsewhere in this chapter – e.g. tax on the occupation of property? stock market is imposed with final income tax at the rate of 0.1%. Please also refer to questions 5.1 and 8.2. Depending on the regions where the company is located and the type of businesses of the companies, there are several taxes to be paid by the companies. Please refer to questions 2.6 and 2.7. The Property Tax is also payable by the company in case the property is owned by the company.

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c. the payments received in letter (b) above that are received by 6 Local Branch or Subsidiary? the Head Office are not considered as Taxable Objects by the PEs, except for interests related to the banking businesses. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 6.4 Would a branch benefit from double tax relief in its jurisdiction? In order to form an Indonesian subsidiary company, the article of incorporation of the subsidiary must be prepared by an Indonesian A branch from an overseas entity shall be treated as a PE. In addition Notary, which is subject to Stamp Duty in the amount of Rp 6,000. to the general CIT rate, the PE is subject to Branch Profit Tax, based Further, the company’s subsidiary must be registered in the Ministry on Article 26 paragraph (4) of Income Tax Law, unless the profits

Indonesia of Law and Human Rights (“MOLHR”) and subject to certain Non- are re-invested back in Indonesia. Please also refer to question 6.2. Tax State Revenue duty. The reinvestment must be done at the end of the following fiscal year at the latest. The PE must also submit a written notification 6.2 Is there a difference between the taxation of a local regarding the type of capital investment, realisation of reinvestment, subsidiary and a local branch of a non-resident and/or the commencement of commercial production for the newly company (for example, a branch profits tax)? established company to the registered Tax Office. In general, Article 10 of the Tax Treaties with Indonesia provides a From an Indonesian legal point of view, Indonesia does not reduced rate of the Branch Profit Tax of the PE situated in Indonesia, recognise a branch as a separate legal entity. A local “branch” of a to be 5–15%. Several tax treaties, such as with Thailand and Sri non-resident company must be registered as a PE in Indonesia. In Lanka, do not provide such relief and therefore, the PE is subject to general, a PE is subject to general CIT as in the case of a general Branch Profit Tax, as regulated in the domestic taxation regulations. company. Please refer to question 6.3 for the Taxable Revenue Object and allowable Deductible Expenses for a PE. There are also several specific tax rate treatments for PEs depending on the type 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the of business, such as PEs that act as a trade representative office, branch? conduct shipping, and airline businesses.

In addition to the CIT, the PE is also subject to additional Branch In principle, the profits after tax by the branch (treated as a PE in Profit Tax at the rate of 20% (or a reduced rate depending on the Indonesia) are already subject to the Branch Profit Tax at the end of applicable tax treaty), unless the profits are reinvested back in the fiscal year. Therefore, the remittance of the profits by the branch Indonesia. is not subject to additional withholding tax. For a local subsidiary company of a non-resident company, the tax treatment is the same as a locally owned company, except the dividends declared and distributed to the foreign shareholder are 7 Overseas Profits subject to Article 26 withholding tax at the rate of 20% (or a reduced rate in the applicable tax treaty). 7.1 Does your jurisdiction tax profits earned in overseas branches? 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Indonesia adopts a Worldwide Income principle, of which all of the (domestic and overseas) incomes that are received by the companies Article 5 of Income Tax Law states that the Taxable Revenue Object domiciled in Indonesia (including profits from overseas branches) (gross revenue) for a PE, is as follows: are taxable in Indonesia. However, based on elucidation of Article a. revenue from business or activities of the PE and from the 4 paragraph (1) of Income Tax Law, the loss from overseas branches owned assets; is non-deductible in computing the Taxable Income. b. revenue from the Head Office from business or activities, sale of goods, or delivery of services in Indonesia that is similar to 7.2 Is tax imposed on the receipt of dividends by a local the ones conducted by the PE in Indonesia; and company from a non-resident company? c. other revenues (such as interest, royalty, service fees, gift) that are received or earned by the Head Office, as long as Yes. The dividends from a non-resident company are also subject to there is an effective relationship with the assets or activities a general CIT rate in Indonesia. Any withholding tax applied in the of the PE that generates the incomes. source country is allowed to be credited in the same fiscal year up to The expenditures that are related towards the above revenues can be a certain amount to the total tax payable in Indonesia. deducted in computing the Taxable Income. Further, in calculating the Taxable Income: 7.3 Does your jurisdiction have “controlled foreign a. the Head Office administrative expenditures that are allowed company” rules and, if so, when do these apply? to be deducted are the expenditures that are related to the business activities of the PEs; Indonesia has the general provision on Controlled Foreign b. the payments to the Head Office that cannot be deducted as Deductible Expenses, such as: royalties or other Company (“CFC”) rules in Article 18 paragraph (2) of Income remunerations in connection with the use of assets, patents, Tax Law. Indonesia has amended its implementing regulation or other rights; remunerations in connection with the on CFC by issuing Ministry of Finance Regulation Number 107/ management fees or other fees; and interest, except interest PMK.03/2017 (“PMK-107”). The Indonesian taxpayer must pay for banking business; and

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tax by recognising a deemed dividend to the extent that the profits its assets constitute land and/or building in Indonesia by a foreign of the CFC are not distributed to the Indonesian taxpayer in form of tax resident, the transaction is still considered as a transfer of an actual dividends (“Deemed Dividend”). ordinary company’s shares (not a land and/or building transfer) and There is no change in the timing for the recognition of the Deemed is subject to withholding tax in Indonesia at the effective rate of 5% Dividend, i.e., the 4th month after the deadline submission of the (with certain exceptions). CFC annual income tax return, or the 7th month after the end of the fiscal year, if the CFC has no obligation to submit an annual income 8.3 Does your jurisdiction have a special tax regime tax return or if there is no submission deadline of the annual income for Real Estate Investment Trusts (REITs) or their tax return. equivalent? PMK-107 regulates that the Deemed Dividend must be imposed on directly owned CFCs (“Direct CFCs”) and indirectly owned CFCs Government Regulation Number 40 of 2016 and Ministry of Indonesia (“Indirect CFCs”). The definition of a Direct CFC is similar to that Finance Regulation Number 37/PMK.03/2017 provide regulations given in previous regulations and in line with Article 18 paragraph on income tax on the income from real estate with the scheme of (2) of the Income Tax Law, which states that a Direct CFC is a certain collective investment contracts (“KIK”). In this scheme, the foreign non-listed company that is directly owned at least 50% by an real estate is owned by an SPC, of which a 99.9% share is owned by Indonesian taxpayer; or is directly owned at least 50% collectively the collective investment contract. by several Indonesian taxpayers. Although Article 18 paragraph (2) Any income that is received or earned by the taxpayer from the of the Income Tax Law has already provided the definition of a CFC transfer of real estate to the SPC or the KIK, is subject to final (which is similar to the Direct CFC definition) and mandated the income tax at the rate of 0.5% from the gross value of the transfer of Ministry of Finance to only determine the timing of the recognition real estate. The final income tax must be self-paid by the taxpayer of the Deemed Dividend, PMK-107 has “expanded” the definition prior to the deeds, decisions, or any agreements related to transfer of CFC and indirectly introduced the definition of an Indirect CFC, of real estate to the SPC or the KIK being signed by the authorised which is a foreign non-listed company in which at least 50% of the officer. shares are: owned by a Direct CFC and/or an Indirect CFC; jointly owned by an Indonesian taxpayer and another Indonesian taxpayer through a Direct and/or an Indirect CFC; or jointly owned by a 9 Anti-avoidance and Compliance Direct and/or and an Indirect CFC. The Deemed Dividend is calculated from profit after tax of a 9.1 Does your jurisdiction have a general anti-avoidance Direct CFC and profit after tax of an Indirect CFC multiplied by or anti-abuse rule? the percentage ownership of the Direct CFC. The profit after tax is generally based on the accounting standard in the CFC country In principle, Indonesia adopts a substance-over-form rule of residence, deducted by the income tax payable in the respective (recognition of income, in whatever names and forms), as reflected country. Based on this calculation, it can be inferred that generally, in Articles 4, 23, and 26 of Income Tax Law. Further, Article 26 all of the profit after tax from the CFC in that particular year should paragraph (1a) of Income Tax Law has also introduced the general be recognised as Deemed Dividend income for the Indonesian concept of beneficial ownership. The DGT has issued DGT taxpayer. Regulation Number PER-10/PJ/2017 (“PER-10”), a new guideline for tax treaties implementation. In addition of the substantive conditions, such as no tax treaty abuse, PER-10 also provides 8 Taxation of Commercial Real Estate additional administrative conditions, “certain conditions”, and beneficial ownership conditions for tax treaties applications. The 8.1 Are non-residents taxed on the disposal of administrative conditions are mainly to completely prepare and commercial real estate in your jurisdiction? submit the copy of the original or the “legalised” copy of the Form DGT-1 or Form DGT-2 in the withholding tax returns. The certain Most of the tax treaties with Indonesia (Article 6 of Tax Treaty) conditions criteria are generally related to the business activities of provide the taxation rights to the source country (Indonesia) for any the non-resident taxpayers, e.g., the effective management, assets income derived by any property situated in Indonesia. owned, employees and types of incomes. Based on Government Regulation Number 34 of 2016, the transfer As regulated in PER-10, Indonesia has introduced a more of land and/or building is subject to final income tax at the rate of prescriptive criteria of a beneficial owner, as follows: 2.5% from the gross value of transfer which is applied for the seller. 1. for an individual foreign taxpayer, does not act as an Agent or There are few exceptions applied, i.e., 1% for basic housing and Nominee; or very basic housing, and 0% for transfer of land and/or building to 2. for a corporate foreign taxpayer, does not act as an Agent or government- or state-owned enterprises. Generally, the tax base Nominee, or Conduit, which must fulfil certain conditions: that is used in the context of the sale and purchase of land and/or a. has the control to use or to enjoy funds, assets, or rights, building is the actual transaction value or, in the case of an affiliated- which generate income from Indonesia; party transaction, is the fair value of the assets. b. no more than 50% of the income is used to fulfil the obligation to other parties (the 50% income does not include: the fair remuneration to the employee in relation 8.2 Does your jurisdiction impose tax on the transfer of to the work relationship; other disbursed expenses by the an indirect interest in commercial real estate in your foreign taxpayer in conducting the business activities; and jurisdiction? profit distribution in form of dividend to the shareholders); c. bear the risk on asset, capital, and/or the liabilities that it In some treaties, e.g., Tax Treaties with Hong Kong, in the case of owns; and a transfer of an Indonesian company’s shares where the majority of

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d. does not have a written or unwritten obligation to transfer Generally, PMK-213 and PER-29 adopt BEPS Action 13. Please part or all of the income received from Indonesia to other refer to question 3.9. Indonesia also signed the MLI on June 7, party. 2017, which is related to BEPS Action 15.

9.2 Is there a requirement to make special disclosure of 10.2 Does your jurisdiction intend to adopt any legislation avoidance schemes? to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? There are currently no mandatory requirements to make a special disclosure of avoidance schemes. In relation to adoption of BEPS Action Plan 13, as currently set out in PMK-213 and PER-29 (please also refer to question 3.9),

Indonesia there are several additional requirements beyond BEPS Action 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also Plan 13, such as the LF must be supplemented with the copy of anyone who promotes, enables or facilitates the tax the agreement/contract for significant transaction and information avoidance? related to financial statement. For CbCR, the DGT requires the taxpayer to also attach the working paper (according to the format Article 43 of Law Number 6 of 1983 on General Taxation Provisions regulated by the DGT) as part of the CbCR. and Procedures, as lastly amended by Law Number 16 of 2009 There are currently no other new regulations to adopt any legislation (“GTP Law”), states that a representative, a proxy, employee of to tackle BEPS beyond OECD’s BEPS reports. taxpayers, or other parties that request, jointly participate, suggest, or assist in tax criminal actions can also be subject to criminal 10.3 Does your jurisdiction support public Country-by- penalty and administrative sanctions. Country Reporting (CBCR)?

9.4 Does your jurisdiction encourage “co-operative Indonesia has only incorporated provisions of CbCR in PMK-213 compliance” and, if so, does this provide procedural and PER-29, which are generally in line with BEPS Action 13. benefits only or result in a reduction of tax?

Article 8 of Indonesian Income Tax Law provides the opportunity 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? for the taxpayers to voluntarily make amendments to tax returns that have been submitted. For example, in case of a tax audit, as long as the tax assessment has not been issued, the taxpayers are No, Indonesia does not maintain any preferential tax regime such allowed to make amendments to their tax returns and are subject to as a patent box. administrative sanction of 50% from any tax underpayment. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 10.1 Has your jurisdiction introduced any legislation digital presence? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? There are currently no new regulations reflecting unilateral action In general, Indonesia has introduced several local regulations to from the DGT to tax digital activities or to expand the tax base. adopt BEPS Action Plans. For example, Indonesia has adopted a common approach for BEPS Action 4 by introducing a thin 11.2 Does your jurisdiction support the European capitalisation rule (“PMK-169”) that is based on equity approach Commission’s interim proposal for a digital services (balance sheet test), as opposed to the fixed or group ratio in BEPS tax? Action 4. Please refer to questions 3.4 and 3.5. Further, in line with BEPS Action 13, Indonesia has introduced PMK-213 and There is currently no digital services tax imposed in Indonesia. PER-29 on Transfer Pricing Documentation (MF, LF, and CbCR).

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Mulyono Mul & Co Jl. Pluit Raya 121 Blok A/12 Penjaringan, North Jakarta, 14440 Indonesia

Tel: +62 21 668 1998 Email: [email protected] URL: www.mul-co.com

Mulyono is the managing partner of Mul & Co. He has a triple Indonesia Master’s in finance, law, and notary, as well as several professional certifications such as Certified Public Accountant, Chartered Accountant, Certified Financial Planner, Certified Management Accountant, and Affiliate Wealth Manager. He is also a licensed legal counsel in the Tax Court, a licensed advocate and member of the Indonesian Advocate Association (PERADI), and a registered tax consultant. He is currently pursuing a Doctorate degree in Law. Prior to setting up Mul & Co, he gained extensive experience working in tax and legal environments, such as in Baker McKenzie (Hadiputranto Hadinoto & Partners), PB Taxand (formerly known as PB & Co.), and McKinsey & Company. His experience in the taxation field extends to tax disputes, tax due diligence, tax advisory, tax compliance, as well as company restructuring. In tax dispute areas, he has represented various multi-national clients in tax appeal and lawsuit cases in the Tax Court, as well as assisting taxpayers in the civil review process in the Supreme Court. He has served in a variety of industries, including in manufacturing, trading, real estate, mining and oil & gas, telecommunication, hospitality, and services. His unique combination of technical knowledge in tax, accounting, finance and law, and his expertise in the Indonesian taxation business process system, enable him to be a trusted advisor to his clients.

Mul & Co is one of a very few Law Firms in Indonesia that specialises in taxation fields. Mul & Co is founded by experienced practitioners with multi-disciplinary backgrounds in tax, law, accounting, and finance. We mainly assist our clients in tax litigation cases (tax audit, tax objection, tax appeal, tax lawsuit, and tax civil review), as well as tax restructuring projects. We believe that our success depends upon our clients’ satisfaction. We therefore always strive to provide our clients with the best possible solutions to their tax matters. Our firm brings a rich understanding of Indonesia’s unique business and legal culture to provide our tax services to our client. Our firm is also staffed by dedicated professionals with a deep understanding of taxation law regulations and business culture. We are also independent and free from a lengthy conflict checks process which can sometimes be time-consuming.

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Ireland Andrew Quinn

Maples and Calder David Burke

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

1.1 How many income tax treaties are currently in force in your jurisdiction? A company is resident in Ireland if it is incorporated in Ireland or, if not Irish-incorporated, is centrally managed and controlled in Ireland. This latter test is based on case law and focuses on board As of September 2018, 74 treaties have been signed, 73 of which control, but is a question of fact based on how decisions of the are in force. company are made in practice. If a company incorporated in Ireland is managed and controlled in a 1.2 Do they generally follow the OECD Model Convention treaty state, it may be regarded as resident in that other state under or another model? the “tie-breaker” clause of Ireland’s double taxation treaty (“DTT”) with that state. Generally speaking, they follow the OECD Model.

1.3 Do treaties have to be incorporated into domestic law 2 Transaction Taxes before they take effect? 2.1 Are there any documentary taxes in your jurisdiction? Yes, but a number of Irish domestic provisions, including certain exemptions from withholding tax, take effect immediately when a Generally a document is chargeable to stamp duty, unless exempt, treaty is signed. where the document is both: ■ listed in Schedule 1 to the Irish Stamp Duties Consolidation 1.4 Do they generally incorporate anti-treaty shopping Act 1999 (the principal head of charge is a transfer of any rules (or “limitation on benefits” articles)? Irish property); and ■ executed in Ireland or, if executed outside Ireland, relates to No, other than in respect of certain treaties such as the treaty with property situated in Ireland or to any matter or thing done or the US. to be done in Ireland. Additionally, the OECD’s Base Erosion and Project Shifting project The transferee is liable to pay stamp duty and a return must be recommended that members include in their double tax treaties a filed and stamp duty paid within 45 days of the execution of the limitation-on-benefits test and/or a principal purpose test (“PPT”) as instrument. a condition for granting treaty relief. This recommendation will be Stamp duty is charged on the higher of the consideration paid for, or implemented by means of a multilateral instrument (“MLI”). The the market value of, the relevant asset at the following rates: MLI was signed by Ireland on 7 June 2017 and Ireland has indicated ■ Shares or marketable securities: 1%. that it will include the PPT in its treaties. Ireland’s double tax treaty ■ Non-residential property: 6%. with another country will be modified by the MLI where both treaty partners have ratified the MLI. ■ Residential property: 1% on consideration up to €1 million and 2% on the excess. There are numerous reliefs and exemptions including: 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or ■ Group relief on transfers between companies where the introduced subsequently)? transferor and transferee are 90% associated at the time of execution and for two years afterwards. No, Irish double tax treaties prevail over domestic law. As noted ■ Reconstruction relief on a share-for-share exchange or under question 1.3, certain domestic exemptions mirror the treaty share-for-undertaking transaction, subject to meeting certain relief and indeed may be more favourable and apply before a treaty conditions. comes into force. ■ Exemptions for transfers of intellectual property, of non-Irish shares and land, loan capital, aircraft and ships.

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

VAT is a transaction tax based on EU directives as implemented Customs duties are payable on goods imported from outside the EU. into Irish law. It is chargeable on the supply of goods and services Excise duty applies at varying rates to mineral oils, alcohol and in Ireland and on goods imported into Ireland from outside the EU. alcoholic beverages, tobacco products and electricity, and will also Persons in business in Ireland generally charge VAT on their apply to certain premises and activities (e.g. betting and licences for supplies, depending on the nature of the supply. retailing of liquor).

The standard VAT rate is 23% but lower rates apply to certain There is an insurance levy on the gross amount received by an Ireland supplies of goods and services, such as 13.5%, e.g. on supplies of insurer in respect of certain insurance premiums. The rate is 3% for land and property, and 0%, e.g. on certain food and drink, books, non-life insurance and 1% for life insurance. There are exceptions and children’s clothing. for re-insurance, voluntary health insurance, marine, aviation and transit insurance, export credit insurance and certain dental insurance contracts. 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 3 Cross-border Payments The application of VAT to a supply of goods or services depends on the place of supply of those goods or services. For example, business-to-business supplies of services take place where the 3.1 Is any withholding tax imposed on dividends paid by recipient is established. a locally resident company to a non-resident? The supply of the following goods and services is exempt from VAT: most banking, insurance and financial services; medical services; Dividend withholding tax at 20% applies to dividends paid to non- education and training services; and passenger transport. resident persons. However, a number of exemptions apply in that case, including where payments are made to: The transfer of certain assets of a business between accountable ■ persons resident in an EU Member State (other than Ireland) persons is not subject to VAT where the assets constitute an or a country with which Ireland has concluded a DTT (“EU/ undertaking capable of being carried on independently. treaty state”); ■ companies ultimately controlled by persons who are resident 2.4 Is it always fully recoverable by all businesses? If not, in an EU/treaty state; and what are the relevant restrictions? ■ companies whose shares are substantially and regularly traded on a recognised stock exchange in an EU/treaty state VAT incurred will generally be recoverable as long as it is incurred or where the recipient company is a 75% subsidiary of such a by a taxable person (a person who is, or is required to be, VAT- company or is wholly owned by two or more such companies. registered) for the purpose of making taxable supplies of goods and services. VAT incurred by a person who makes exempt supplies is 3.2 Would there be any withholding tax on royalties paid not recoverable. Where a taxable person makes exempt and non- by a local company to a non-resident? exempt or non-business supplies, VAT recovery will be allowed in respect of the non-exempt supplies only. However, if the Royalties are not generally subject to withholding tax unless paid in VAT incurred cannot be attributed to either (for example, general respect of an Irish patent. overheads), the VAT must be apportioned between the taxable and exempt supplies. No withholding tax will apply to royalties paid in the course of a trade or business to a company resident of an EU/treaty state or paid between “associated companies” in the EU. 2.5 Does your jurisdiction permit VAT grouping and, if so, It is Irish Revenue’s administrative practice since 2010 not to charge is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? withholding tax on royalties payable under a licence agreement executed in a foreign territory which is subject to the law and jurisdiction of a foreign territory (subject to the Irish company’s Under Ireland’s VAT grouping rules, inclusion within a VAT group obtaining advance approval from Revenue). is on an all-or-nothing basis for a legal entity and so once a branch is included within an Irish VAT group registration the entire legal entity is included. Irish Revenue is still considering the implications 3.3 Would there be any withholding tax on interest paid of the Skandia decision. by a local company to a non-resident?

Payments of “yearly” interest by an Irish corporation to a non- 2.6 Are there any other transaction taxes payable by companies? resident are normally subject to withholding tax at 20%. There are wide exemptions from this requirement, the most notable of which include payments: Certain taxes, including interest withholding tax, dividend withholding tax, professional services withholding tax and relevant ■ between “associated companies” under the EU Interest and contract tax, may be payable depending on the nature of the Royalties Directive; transaction and the type of business carried on by the parties to the ■ by a company in the ordinary course of its trade or business transaction. to a company resident in an EU/treaty state (provided the payments do not relate to an Irish branch or agency of the

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lender), where that state imposes a tax that generally applies to interest receivable in that state by companies from sources 3.9 Does your jurisdiction have transfer pricing rules? outside that state; ■ on quoted Eurobonds; or Yes, Ireland has had transfer pricing rules since 2011 and these ■ by an Irish “section 110 company” to a person resident in an apply to arrangements entered into between associated companies EU/treaty state, other than where it relates to an Irish branch where one of them carries on a trade. If an arrangement is not made or agency. at arm’s length, an adjustment will be made to the trading profits to reflect an arm’s length amount. The Irish tax legislation refers to the OECD Transfer Pricing Guidelines for the interpretation of 3.4 Would relief for interest so paid be restricted by the arm’s length principle. There is an exemption for small and

Ireland reference to “thin capitalisation” rules? medium-sized enterprises. There are no “thin capitalisation” rules applicable in Ireland. It is nonetheless possible in certain limited cases that the interest 4 Tax on Business Operations: General may be reclassified as a distribution preventing such interest from being tax-deductible. 4.1 What is the headline rate of tax on corporate profits?

3.5 If so, is there a “safe harbour” by reference to which Ireland has two rates of corporation tax, a 12.5% rate and a 25% tax relief is assured? rate. The 12.5% rate applies to the trading profits of a company which Interest that would ordinarily be reclassified as a distribution may carries on a trade in Ireland. There is no precise definition of what nevertheless be deductible for an Irish “section 110 company” if one constitutes a trade for this purpose. As a general rule, it would of four safe harbours apply including where the recipient is resident require people on the ground in Ireland carrying out real economic and subject to tax in an EU/treaty state. activity on a regular or habitual basis, and normally with a view to realising a profit. 3.6 Would any such rules extend to debt advanced by a The corporation tax rate of 25% applies in respect of passive third party but guaranteed by a parent company? income, profits arising from a possession outside of Ireland (i.e. foreign trade carried on wholly outside of Ireland) and profits of This is not applicable. certain such as dealing in or developing land and mineral exploration activities. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- 4.2 Is the tax base accounting profit subject to resident? adjustments, or something else?

Interest is generally deductible if provided for as an expense in A company’s profits for tax purposes will follow its accounts, the statutory accounts of the company, and is incurred wholly and provided that they are prepared in accordance with generally exclusively for the purposes of its trade. accepted accounting principles, subject to specific adjustments Subject to meeting certain conditions, interest incurred in lending required by Irish tax legislation. money to a trading or rental company or in acquiring shares in a trading or rental company or a holding company of such a company, should also be deductible. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? Tax relief for interest is restricted where it is paid for acquiring shares in or lending to a connected company or for the purposes of Revenue expenses which are not incurred wholly and exclusively acquiring a trade or business of that or another connected company for the purposes of the trade are not deductible from the company’s (irrespective of the payee’s country of residence). taxable profits. The new EU Anti-Tax Avoidance Directive (“EU ATAD”) contains While accounting-based depreciation of assets is not generally certain restrictions on borrowing costs. Ireland has applied for a deductible, tax-based depreciation can be taken into account for derogation for implementation of the restrictions until 2024 but it “plant and machinery” and “industrial buildings” subject to meeting is unclear whether an agreement will be secured in relation to this certain conditions. derogation from the EU Commission. It is possible to carry forward trading profits arising from the same trade and surrender losses from group companies to reduce taxable 3.8 Is there any withholding tax on property rental profits. payments made to non-residents?

Withholding tax applies at a rate of 20% on rent paid directly to a 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas non-resident landlord in respect of Irish situate property (payable to subsidiaries? Irish Revenue by the tenant).

The appointment of an Irish tax-resident agent by the non-resident Yes. Companies can be grouped for different tax purposes (but are landlord to collect rental payments on his behalf excludes the not taxed on the basis of consolidated accounts). application of withholding tax on the rent altogether. For loss relief and capital gains tax (“CGT”) purposes, a group consists of a principal company and all its effective 75% subsidiaries.

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An Irish company may be allowed relief for losses in an Irish subsidiary and for losses in an overseas subsidiary provided the loss 5.2 Is there a participation exemption for capital gains? is not available for use by the overseas subsidiary. Capital losses cannot be surrendered between members of a CGT group. Where an Irish company disposes of shares in a company resident Capital assets may be transferred between group members on a in Ireland or an EU/treaty state in which it has held at least 5% of no gain/no loss basis. This has the effect of postponing liability the ordinary shares for more than 12 months, any gain should be until the asset is transferred outside the group or until the company exempt from CGT. The subsidiary must carry on a trade, or else the holding the asset is transferred outside the group. activities of the disposing company and all of its 5% subsidiaries taken together must amount to trading activities. Payments between members of a 51% group can be made without withholding. Ireland Transfers between associated companies are exempt from stamp 5.3 Is there any special relief for reinvestment? duty where certain conditions are met. No, there is no such relief. It is possible to apply for a VAT grouping of companies established in Ireland that are under common control. Transactions between these companies are disregarded for VAT purposes. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 4.5 Do tax losses survive a change of ownership? Where a company disposes of Irish real estate, or shares Tax losses may survive a change in ownership but there are rules deriving more than 50% of their value from Irish real estate, for denying the use of carry-forward losses in certain circumstances a consideration exceeding €500,000, or in the case of residential following such a change. property exceeding €1 million, the purchaser is obliged to withhold 15% of the sales proceeds unless the purchaser obtains a CG50 4.6 Is tax imposed at a different rate upon distributed, as clearance certificate from Irish Revenue. Such certificate will be opposed to retained, profits? issued where the vendor is resident in Ireland, the CGT has been paid or no CGT arises. A surcharge of 20% applies in respect of “estate and investment” income retained by “close” companies. In general terms, close 6 Local Branch or Subsidiary? companies are ones which are controlled by five or fewer people. A surcharge of 15% will also be applicable in respect of retained professional income in cases of close “professional” service 6.1 What taxes (e.g. capital duty) would be imposed upon companies. the formation of a subsidiary?

4.7 Are companies subject to any significant taxes not No taxes would be imposed. covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident Other than “local” rates which may apply to the occupation of company (for example, a branch profits tax)? commercial property, no they are not. Yes. An Irish-resident subsidiary would pay corporation tax on its worldwide income and gains, whereas a branch would be liable 5 Capital Gains to corporation tax only on the items listed in question 6.3. The charge to Irish corporation tax only applies where the non-resident 5.1 Is there a special set of rules for taxing capital gains company is carrying on a trade in Ireland through the branch. A and losses? branch set up for investment purposes only, and not carrying on a trade, is not subject to Irish corporation tax, though certain Irish Yes, there is a separate set of rules for computing capital gains. source income (mainly rent and interest) may be subject to income Those rules are broadly as follows: tax either through withholding or by way of income tax charge, subject to any available exemptions. A branch would not be subject ■ costs of acquisition and disposal are deducted from disposal proceeds; to a branch profits tax. ■ enhancement expenditure is generally deductible where such expenditure is reflected in the value of the asset; 6.3 How would the taxable profits of a local branch be ■ the application of capital losses carried forward may reduce determined in its jurisdiction? the amount of gain; and ■ the purchase price and enhancement expenditure may be A non-resident company carrying on a trade though an Irish branch adjusted for inflation (indexation relief). is subject to Irish tax on the following items: The rate of tax imposed upon capital gains is currently 33% and ■ the trading income arising directly or indirectly through or therefore differs from the rate imposed on business profits (12.5% from the branch; for trading income, 25% for investment income). ■ income from property or rights used by or held by or for the branch; and ■ such gains as, but for the corporation tax rules, would be chargeable to CGT in the case of a company not resident in Ireland.

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The profits subject to tax may arise from within Ireland and from place for the essential purpose of obtaining a tax advantage and abroad. target CFC income that has been artificially diverted from Ireland. The deadline for implementation of the EU ATAD in Member States 6.4 Would a branch benefit from double tax relief in its is 1 January 2019. jurisdiction? 8 Taxation of Commercial Real Estate Irish domestic legislation does not give treaty relief against Irish tax unless the person claiming credit is resident in Ireland for the accounting period in question. This means that the Irish branch of a 8.1 Are non-residents taxed on the disposal of

Ireland non-resident company cannot claim treaty relief. commercial real estate in your jurisdiction?

6.5 Would any withholding tax or other similar tax be CGT arises on the disposal of commercial Irish real estate by non- imposed as the result of a remittance of profits by the residents. branch? 8.2 Does your jurisdiction impose tax on the transfer of No such tax would be imposed. an indirect interest in commercial real estate in your jurisdiction? 7 Overseas Profits CGT arises on the disposal of shares or securities (other than shares or securities quoted on a stock exchange) deriving their value, 7.1 Does your jurisdiction tax profits earned in overseas or the greater part of their value, directly or indirectly from Irish branches? commercial real estate.

Profits in overseas branches are, as a general rule, taxed in Ireland 8.3 Does your jurisdiction have a special tax regime because an Irish resident company is subject to corporation tax on for Real Estate Investment Trusts (REITs) or their its worldwide profits. It is nonetheless generally possible to claim a equivalent? tax credit for the foreign tax paid. Ireland introduced a REIT regime in 2013. A REIT is exempt from 7.2 Is tax imposed on the receipt of dividends by a local tax on income and chargeable gains of its property rental business, company from a non-resident company? provided it meets certain conditions as to Irish residence, listing of shares (on an EU stock exchange), derives 75% of its assets and Dividends received from a non-resident company are generally profits from its property rental business, and distributes 85% of its taxed at 25% but the lower rate of 12.5% applies in many cases property income by dividend to shareholders in each accounting including where dividends are paid out of the “trading profits” of period. Income tax can apply where a dividend is paid to a a company resident in an EU/treaty state or in a country which is a shareholder who holds at least 10% of the share capital or voting signatory to the Convention on Mutual Administrative Assistance in rights in the REIT. Tax Matters. In any event, tax credits can be claimed, up to the Irish corporation tax due, for: 9 Anti-avoidance and Compliance ■ withholding tax suffered on the dividend; and ■ underlying tax suffered on the trading profits out of which the dividend was paid. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? It is possible to pool and carry forward excess foreign tax credits and offset these against Irish corporation tax on other foreign dividends. Ireland has a general anti-avoidance provision, section 811 of the Irish Taxes Consolidation Act 1997, the applicability of which was 7.3 Does your jurisdiction have “controlled foreign considered by the Irish Supreme Court in O’Flynn Construction company” rules and, if so, when do these apply? Limited & Others v The Revenue Commissioners. Section 811 applies where Irish Revenue forms an opinion that a Currently, Ireland has no controlled foreign company (“CFC”) transaction gives rise to a tax advantage for the taxpayer, was not rules. However, following the formal adoption of the EU ATAD by undertaken for any other purpose but obtaining that advantage, and the Economic and Financial Affairs Council of the European Union would be a misuse or abuse of any relief sought by the taxpayer. on 12 July 2016, Ireland will be required to introduce legislative Article 6 of the EU ATAD also introduces a broad general anti- provisions to give effect to the CFC rules contained in Article 7. avoidance provision. However, the existing Irish general anti- EU Member States have a certain level of flexibility in choosing avoidance provision in section 811 is regarded as being broader than the form and method of achieving the results intended by the EU that contained in Article 6 and accordingly it is considered that no ATAD. For example, the preamble to the EU ATAD notes that further amendment to section 811 is envisaged at this time. rules can target a low taxed subsidiary, particular types of income or a targeted rule which taxes profits which have been artificially diverted to that subsidiary. 9.2 Is there a requirement to make special disclosure of avoidance schemes? A corporation tax strategy paper published by the Irish Department of Finance on 1 August 2018 has provided a broad indication of Yes, Ireland has a mandatory disclosure regime for tax avoidance Ireland’s proposed approach. It suggested that the CFC provisions transactions similar to the regime in the UK. Section 817D – will focus on non-genuine arrangements which have been put in

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section 817T of the Taxes Consolidation Act (“TCA”) deal with the It has also introduced country-by-country reporting and updated its mandatory reporting of certain defined transactions. transfer pricing legislation as recommended in the BEPS reports. The regime aims to enforce promoters, advisors, and on occasion the clients who implement tax avoidance schemes, to inform Revenue 10.2 Does your jurisdiction intend to adopt any legislation of the details of such schemes. to tackle BEPS which goes beyond what is The promoter includes persons involved in designing, managing recommended in the OECD’s BEPS reports? or marketing the transaction. The promoter is entitled to assert legal professional privilege when making the disclosure, subject to Ireland’s objective is to adopt best international practice. Preceding informing the taxpayer of its obligation to disclose the transaction BEPS, Ireland already operated certain anti-avoidance measures not directly to Revenue. existing in other OECD countries, such as a legislative general anti- Ireland avoidance rule (“GAAR”) and rules denying tax deductibility in Failure to comply can result in penalties determined by the court Ireland in certain cases to payments which are not correspondingly in amounts ranging up to a maximum of €4,000 plus €500 per day taxed in an EU/DTT country. for each day the scheme remains unnotified after the due date for notification. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Yes. Regulations implementing CBCR have applied since 2016 to avoidance? groups with an Irish presence and turnover exceeding €750 million.

In addition to the Irish mandatory disclosure regime, in May 2018 10.4 Does your jurisdiction maintain any preferential tax the Council of the European Union adopted a directive introducing regimes such as a patent box? new EU mandatory disclosure rules. The rules are aimed at “cross- border tax arrangements”. They therefore have a slightly different Ireland has recently introduced a “knowledge development box” emphasis to the Irish rules. The directive targets intermediaries such (“KDB”) which provides for an effective 6.25% tax rate on income as tax advisors, accountants and lawyers that design and/or promote from IP and software that was improved, created or developed in tax planning schemes and will require them to report schemes that Ireland. are potentially aggressive. Additionally, Ireland amended its legislation in relation to Ireland has until 31 December 2019 to transpose the directive into securitisation companies (section 110 TCA) in 2011 in advance national law, but reporting must include transactions implemented of BEPS, to prevent certain possible cross-border “double non- from 25 June 2018. taxation” results arising.

9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 11 Taxing the Digital Economy benefits only or result in a reduction of tax? 11.1 Has your jurisdiction taken any unilateral action to tax Yes, in January 2017 Irish Revenue relaunched its cooperative digital activities or to expand the tax base to capture compliance framework (“CCF”) for large cases division (“LCD”) digital presence? taxpayers. The CCF is designed to promote open communication between No such unilateral action has been taken in Ireland. Irish Revenue and larger taxpayers, reflecting the mutual interest in being certain about tax liabilities and ensuring there are no surprises 11.2 Does your jurisdiction support the European in later reviews. It is entirely voluntary and does not result in a Commission’s interim proposal for a digital services reduction of tax. tax?

10 BEPS and Tax Competition The Irish Government has strongly opposed the European Commission’s interim proposal for a digital tax with the Irish Minister for Finance emphasising the need for unanimity before 10.1 Has your jurisdiction introduced any legislation any EU digital tax proposal can be agreed. Reference was made to in response to the OECD’s project targeting Base the OECD reports on digital taxation, hinting at a need for broader Erosion and Profit Shifting (BEPS)? international consensus on this issue, rather than EU-focused measures. Moreover, the Irish Government has also published a In response to certain themes emerging from the BEPS consultation, reasoned opinion on 16 May 2018, addressed to the President of the Ireland amended its corporate tax residence rules in order to Council of the European Union, questioning the necessity of these phase out the so-called “double Irish” structure used by certain measures. multinational groups.

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

Tel: +353 1 619 2038 Tel: +353 1 619 2779 Email: [email protected] Email: [email protected] URL: www.maplesandcalder.com URL: www.maplesandcalder.com Ireland Andrew is Head of Tax at Maples and Calder. He is an acknowledged David is a highly experienced tax specialist and advises on leader in Irish and international tax and advises companies, investment international transactions structured in and through Ireland. He works funds, banks and family offices on Ireland’s international tax offerings. with companies, banks and investment funds and their advisors to Andrew is Chairman of the Irish Debt Securities Association and the structure and implement capital markets, structured finance, asset International Fiscal Association Ireland. He is a member of the Tax finance and funds transactions. Committees of the Law Society of Ireland and the Irish Funds Industry David joined Maples and Calder in 2013 from an Irish corporate law Association. firm. He trained in London and was Special Counsel in the London Prior to joining Maples and Calder, Andrew was a senior partner with office of a New York law firm. a large Irish law firm and, before that, a tax consultant with Ernst & David holds the Chartered Tax Advisor qualification in both the UK Young. He is recommended by a number of directories including and Ireland. Chambers, The Legal 500, PLC Which Lawyer?, Who’s Who Legal, World Tax, Best Lawyers, International Tax Review’s World Tax Guide and the Tax Directors Handbook. Andrew has also been endorsed in Practical Law Company’s Tax on Transactions multi-jurisdictional guide.

Maples and Calder is a leading international law firm advising financial, institutional, business and private clients around the world, on the laws of the British Virgin Islands, the Cayman Islands, Ireland and Jersey. The firm’s affiliated organisation, MaplesFS, provides specialised fiduciary, corporate formation and administrative services to corporate, finance and investment funds entities. The Maples group comprises over 1,700 staff in 16 offices. Since establishing in Ireland in 2006, the Dublin office has grown to over 350 people and has advised on many high-profile and complex transactions in Ireland.

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Italy Guido Lenzi

Puri Bracco Lenzi e Associati Pietro Bracco, Ph.D.

(i) the legal seat; 1 Tax Treaties and Residence (ii) the place of effective management; or (iii) the main object/purpose of the business. 1.1 How many income tax treaties are currently in force in The Italian tax law provides for anti-abuse provisions where your jurisdiction? companies qualify as tax resident companies where only formally resident abroad (i.e. unless proof to the contrary is provided, a Italy has entered 96 tax treaties for the avoidance of double taxation foreign company which controls an Italian company and is directly and the prevention of fiscal evasion with respect to taxes on income or indirectly controlled or administrated by Italian residents, is and capital (“double tax treaties”). deemed to be an Italian tax resident).

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

Double tax treaties signed by the Italian Government generally 2.1 Are there any documentary taxes in your jurisdiction? follow the OECD Model Convention. Transfers of assets carried out within the Italian territory are 1.3 Do treaties have to be incorporated into domestic law generally subject to registration tax, provided that the deed of before they take effect? transfer is (mandatory or voluntary) subject to registration on the Public Register. Registration tax may apply at a fixed rate of Double tax treaties should be ratified by both the Italian Parliament, €200.00 (i.e. if the transfer is subject to VAT) or proportionally, by means of a domestic law, and the relevant foreign Country: with rates generally ranging from 0.5% to 3% (increasing up to a exchange of ratification is needed in order for the treaty to enter maximum of 15% in case of real estate properties), depending on into force. the kind of asset transferred. Certain deed/certificates/documents, expressly indicated by the tax 1.4 Do they generally incorporate anti-treaty shopping law, are further subject to stamp tax, which may apply at a fixed rules (or “limitation on benefits” articles)? rate (ranging from €1.00 to €300.00) or proportionally (with rates generally ranging from 0.01% to 0.12%). Italian double tax treaties generally do not contain specific anti- The transfer of shares and of participating financial instruments in treaty shopping rules, with some exceptions, such as the treaties Italian companies is generally subject to financial transaction tax signed with the United States of America, Chile and Switzerland. (0.2% or 0.1% in case of quoted companies), due by the purchaser, regardless of the tax residence of the seller and of the purchaser as well as the territory in which the transfer is carried out. Several 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or exemptions and exclusions are provided for by the law (i.e. in case introduced subsequently)? of transfer of limited liability companies’ quotas or intercompany transactions). Domestic laws cannot, in principle, override a treaty’s provisions (regardless of whether they were enforced before or after the 2.2 Do you have Value Added Tax (or a similar tax)? If so, enforcement of the treaty), unless the domestic provision results are at what rate or rates? more favourable. VAT is generally applied in Italy on sales of goods and provision of 1.6 What is the test in domestic law for determining the services, at the following rates: residence of a company? ■ 22% standard rate; ■ 10% reduced rate applied, for instance, to sales of certain A company qualifies as tax resident if, for the greater part of the food and pharma products, water/gas/electricity supplies year, it has alternatively in Italy: in specific cases, transport services, non-luxury real estate properties;

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■ 5% further reduced rate applied, for instance, to the provision of social and health services by social co-operatives; and 3 Cross-border Payments ■ 4% ultra-reduced rate applied, for instance, to sales of specific food products, books and newspapers. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? In principle, the payment of dividends towards a non-resident recipient is subject to a final 26% withholding tax (lower rates Certain VAT exclusions are provided for, for instance, in case applicable according to double tax treaty, if any). A partial Italy of international sales of goods/provision of services, sales of refund could be claimed by the foreign recipient (up to 11/26 of agricultural lands, sales of going concerns and transfer of assets in the withholding tax levied) subject to the proof (through proper the context of M&A transactions. documentation released by the foreign tax authorities) that the same dividends were taxed in the State of residence. Several VAT exemptions are provided for, for instance, in case of financial transactions and sales and rent of real estate properties. A reduced rate of 1.20% may apply provided that the recipient: ■ is a company or an entity (with no permanent establishment in Italy) resident in an EU/EEA Country which allows an 2.4 Is it always fully recoverable by all businesses? If not, adequate exchange of information with Italy; and what are the relevant restrictions? ■ is liable to corporate income tax in the residence Country. As a general rule, VAT is recoverable for taxable persons (not for According to the Directive 2011/96/EU (“EU Parent-Subsidiary final customers), provided that the purchase of goods/services is Directive”), no withholding tax is levied on dividends paid by an pertinent to the business activity and that such business activity is Italian subsidiary to its foreign parent company, provided that the subject to VAT. VAT is not recoverable for taxable persons who carry latter: out VAT-exempt transactions (banks, hospitals, etc.). In case both ■ is tax-resident in an EU Member State; VAT-taxable activities and VAT-exempt activities are carried out, ■ meets the requirements provided for by the Directive to be VAT paid to suppliers is recoverable through a pro rata mechanism. considered as “qualified” for the purposes of the Directive; Limitation to VAT deduction is provided for with respect to the ■ is subject to corporate income tax in the State of residence; purchase of certain goods (cars, telephone devices, etc.) and services and (representative expenses, telephone services, etc.). ■ has held at least 10% of the capital of the Italian subsidiary for an uninterrupted period of, at least, one year.

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

Italian corporate groups are allowed to opt for the set-off of VAT credits In principle, the payment of royalties towards a non-resident and debts emerging from the annual tax return (so-called “liquidazione recipient is subject to a final 30% withholding tax (lower rates Iva di Gruppo”). applicable according to double tax treaty, if any). Starting from January 1st 2019, it will also be possible for taxpayers According to Directive 2003/49/EU (“EU Interest and Royalties established in the State (included Italian permanent establishment of Directive”), no withholding tax is levied on royalties paid to foreign companies) which qualify as the holding/subholding of a group foreign companies (or permanent establishments), provided that the of companies meeting specific financial, economic and organisational following requirements are met: requirements, to opt for the establishment of a VAT group. ■ the recipient is tax resident in another EU Member State; Such VAT groups will qualify as a single taxable person for VAT ■ the recipient meets the requirements provided for by the purposes obtaining several benefits, including the exclusion from Directive to be considered as “qualified” for the purposes of VAT of infra-group transactions. the Directive; ■ the recipient is liable to corporate income tax in the State of residence; 2.6 Are there any other transaction taxes payable by companies? ■ the royalties flow is subject to corporate income tax in the State of residence of the recipient; and Mortgage and cadastral taxes, applicable in fixed terms (€50.00 or ■ the recipient and the payer qualify as “associated companies”: €200.00) or proportionally (with rates ranging from 0.5% to 3%) (a) one of them has continuously held directly at least, 25% of the voting rights of the other company for at least one year; or depending on the kind of transaction, apply to the transfer of real (b) a third EU company has continuously held directly at least estate properties. 25% of the voting rights of the two companies for at least one year. 2.7 Are there any other indirect taxes of which we should be aware? 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? As a general rule, goods imported from extra EU countries are subject to custom duties upon their entrance in the Italian territory In principle, the payment of interest towards a non-resident recipient according to EU Custom Legislation. is subject to a final 26% withholding tax (lower rates applicable Specific goods (e.g. alcohol, electricity, natural gas) are subject to according to double tax treaty, if any). excise duties.

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According to Directive 2003/49/EU (“EU Interest and Royalties For IRES purposes, if a company qualifies as a “dummy entity” Directive”), no withholding tax is levied on interest paid by an (“società di comodo”), the ordinary rate is increased to 34.5%. Italian company to an EU “associated” one, provided that the requirements provided for by the Directive are met (please see 4.2 Is the tax base accounting profit subject to question 3.2). adjustments, or something else?

3.4 Would relief for interest so paid be restricted by For the purposes of determining the IRES taxable base, the net profit/ reference to “thin capitalisation” rules? loss resulting from the official financial statement of the company is adjusted according to several tax rules provided for by the tax law. Italy Thin capitalisation rules do not apply in Italy. 4.3 If the tax base is accounting profit subject to 3.5 If so, is there a “safe harbour” by reference to which adjustments, what are the main adjustments? tax relief is assured? For IRES purposes, adjustment could be segregated between This is not applicable. “permanent adjustments” and “timing differences”. The main permanent adjustments refer to: i) partial exemption 3.6 Would any such rules extend to debt advanced by a from taxation of qualified capital gains (in accordance with the third party but guaranteed by a parent company? “Participation Exemption Regime”) and dividends (in both cases tax exemption on 95% of the income); and ii) total or partial avoidance This is not applicable. of deduction for certain costs as to depreciation of lands, vehicle expenses, telephone costs, etc. The main timing differences concern: i) depreciation of goodwill, 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- real estate properties and other immovable assets; ii) bad debt resident? accrual (deduction limited to 5% of the receivables accounted in the financial statement); iii) receivables write off (deductible under No, there are not. specific circumstances as the bankruptcy of the debtor); and iv) interest deduction (limited to 30% of EBITDA with a carry back/ carry forward mechanism). 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.4 Are there any tax grouping rules? Do these allow In principle, the payment towards a non-resident of royalties for for relief in your jurisdiction for losses of overseas subsidiaries? the exploitation of intellectual properties and rents for the rental of industrial, commercial or scientific equipment is subject to a final Two different tax consolidation regimes are applicable in Italy 30% withholding tax (lower rates are applicable according to double (upon option): tax treaty, if any). ■ a domestic consolidation regime, including only Italian A withholding tax is further applied on rents coming from short- controlled companies; and term leases (so-called “Airbnb tax”). Such withholding tax, levied ■ a worldwide consolidation regime, including, both Italian and by the intermediaries of the transaction, is equal to 21% regardless foreign controlled companies. of the fact that the recipient is Italian resident or not. In both cases, the tax group determines a single taxable basis for IRES purposes given by the sum of the taxable basis of the companies 3.9 Does your jurisdiction have transfer pricing rules? included in the tax consolidation perimeter. In this respect, while the option for the domestic tax consolidation regime implies that Italy enforced a specific transfer pricing regulation, compliant not all the Italian subsidiaries must be consolidated (“cherry picking with Article 9 of the OECD Model Tax Convention, the OECD mechanism”), the worldwide tax consolidation regime implies that Transfer Pricing Guidelines for Multinational Enterprises and Tax all the subsidiaries must be consolidated (“all-in mechanism”). Administrations and the outcome of BEPS Actions. The Italian law grants a penalty protection (in case of TP challenge 4.5 Do tax losses survive a change of ownership? raised by the tax authorities) provided that the tax payer prepares and makes available in case of tax inspection a TP study realised As a general rule, tax losses suffered in the first three years of following the guidelines provided for by the Law. business activity can be carried forward without limitation while losses suffered in the subsequent years can be used to offset future 4 Tax on Business Operations: General IRES profit limited to 80% of their amount. Changes in the control of a company, in principle, do not affect the tax losses carry forward unless, according to a specific anti-abuse 4.1 What is the headline rate of tax on corporate profits? provision, the business activity of the company is changed in the year in which the change in control is realised or in the following In Italy corporate profits are generally subject to a 24% corporate two years. income tax (“Imposta sul reddito delle società” or “IRES”). Anti-abuse provisions finalised at avoiding tax losses suffered by An increased IRES rate (27.5%) applies to certain banks and an entity being used to offset taxable incomes of another entity also financial institutions. apply in the case of M&A transactions.

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4.6 Is tax imposed at a different rate upon distributed, as 5.4 Does your jurisdiction impose withholding tax on the opposed to retained, profits? proceeds of selling a direct or indirect interest in local assets/shares? The distribution vs the retainment of profits does not trigger any differences in the IRES nominal rate applicable. However, equity A 26% withholding tax applies to the proceeds of selling Italian increases due to profit retainment may entail a notional deduction to shareholdings by non-resident taxpayers. No withholding tax is the IRES taxable basis according to the “ACE” rule. In such a case conversely applied on the proceeds of selling a direct or indirect the effective tax rate could be affected by the retainment of profit. interest in local assets. Italy

4.7 Are companies subject to any significant taxes not 6 Local Branch or Subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.1 What taxes (e.g. capital duty) would be imposed upon In addition to IRES, business profits are also subject to a 3.9% the formation of a subsidiary? Regional Tax on Business Activity (“Imposta Regionale sulle Attività Produttive” or “IRAP”). The IRAP ordinary rate could In principle, the establishment of a subsidiary is not subject to taxes increase/decrease by specific regional tax law on the basis of the in Italy. business actually carried out by the tax payer. Nevertheless, should the subsidiary be formed through a contribution The IRAP taxable base is different from the IRES one and it is in kind, a capital gain could arise in the hands of the contributor, determined on the basis of the EBIT resulting from the official unless the contribution does not involve a going concern or majority financial statement of the company being adjusted taking into of shareholdings. consideration few specific tax adjustments provided for by the IRAP law with the purpose of excluding or limiting the deduction of 6.2 Is there a difference between the taxation of a local labour costs, depreciations and provisions/accruals. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 5 Capital Gains In principle, for Italian taxation purposes there is no difference between a branch and a local subsidiary, given that both are subject 5.1 Is there a special set of rules for taxing capital gains to IRES and IRAP. and losses? From the foreign parent company standpoint, on the contrary, some differences may arise, given that, as a general rule, net profit/losses In principle, capital gains/losses are included in the IRES taxable of the branch are ascribed to such parent company and consequently basis upon realisation. taxed in the residence Country, while net profit of the subsidiary Certain capital losses (i.e. those realised upon the disposal of could be taxed abroad only upon distribution. participation eligible for the Participation Exemption Regime – In case of dividend distribution also some differences may arise, please see question 5.2) are not deductible. given that no withholding tax is applied on the repatriation on branch profits while dividends distributed to a foreign shareholder 5.2 Is there a participation exemption for capital gains? are generally subject to a 26% withholding tax (see question 3.1).

Italian tax law provides for a Participation Exemption Regime 6.3 How would the taxable profits of a local branch be according to which capital gains realised on the sale of shareholdings determined in its jurisdiction? and assimilated financial instruments are 95% exempt for IRES purposes, provided that all of the following requirements are met: For taxation purposes, the local branch is requested to prepare a (i) the shareholdings have been held for at least 12 months proper statutory account, based on which the taxable income is equal before the disposal; to the net profit/loss of the year adjusted taking into consideration (ii) the shareholdings were accounted as a financial fixed asset in the IRES/IRAP adjustments applicable to domestic corporations the first balance sheet after the acquisition; (see questions 4.3 and 4.7). (iii) the subsidiary is not resident in a blacklisted Country; and Profits of the local branch are determined pursuant to the so-called (iv) the subsidiary carries out an actual business activity (to be “separated entity approach” based on which the branch is considered investigated in case of holding companies and excluded in a functionally segregated entity from the head office. Transactions case the assets of the subsidiary are mainly represented by with the head office are subject to transfer pricing rules. real estate properties).

6.4 Would a branch benefit from double tax relief in its 5.3 Is there any special relief for reinvestment? jurisdiction?

According to the patent box regime (see question 10.4) capital gains Domestic branches are entitled to benefit from the Italian tax credit realised upon the sale of eligible immovable assets are not subject relief for taxes paid abroad on incomes taxed (also) in Italy. to IRES and IRAP provided that (at least 90% of) financing coming from the sale is re-invested in R&D activities.

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6.5 Would any withholding tax or other similar tax be 8 Taxation of Commercial Real Estate imposed as the result of a remittance of profits by the branch? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? The remittance of branch profits is not subject to withholding taxes in Italy. The disposal by a non-resident of commercial real estate owned in Italy is subject to IRES taxation in the State. 7 Overseas Profits Italy 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 7.1 Does your jurisdiction tax profits earned in overseas jurisdiction? branches?

The disposal of shareholdings in an Italian real estate company by Based on the worldwide taxation principles, Italian resident a non-resident shareholder is subject to tax in Italy according to the companies are subject to IRES on their worldwide income, including ordinary discipline applicable to participation. The Participation profits realised abroad through local branches. Exemption Regime may not apply in case of real estate companies The Italian tax law provides for a branch exemption regime based (see question 5.2). on which, Italian companies are allowed to opt for the exemption of profit and losses realised through all of their foreign branches (all-in approach). 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? Italian tax law provides for a special regime applicable to listed real estate investment companies (“SIIQS”), based on which income As a general rule, foreign dividends received by Italian companies from real estate properties leased to third parties are not subject to are taxed for IRES purposes (no IRAP taxation) on 5% of their IRES and IRAP. amount, unless the dividends are distributed by a company resident in a “privileged tax regime” Country; in such a case dividends are taxed on their whole amount. 9 Anti-avoidance and Compliance Under the Italian tax law, States that apply a nominal corporate income tax rate lower than 50% of the Italian one (determined taking 9.1 Does your jurisdiction have a general anti-avoidance into consideration both IRES and IRAP) qualify as “privileged tax or anti-abuse rule? regime” Countries. The Italian tax system provides for a general anti-abuse discipline, 7.3 Does your jurisdiction have “controlled foreign based on which the tax authorities can disregard tax consequences of company” rules and, if so, when do these apply? transactions that are devoid of economic substance and exclusively tax driven. The Italian tax law provides for a “controlled foreign company” Such tax avoidance behaviour (“abuso del diritto”) is realised when rule based on which incomes of (directly and indirectly) controlled a transaction (as well as sequences of transactions, facts, actions foreign companies are ascribed to the Italian parent company (and and agreements) is not finalised at generating significant economic taxed in Italy accordingly) subject to the fact that such companies: consequences but, despite apparent compliance with the tax law, ■ are resident in a “privileged tax regime” Country (see at reaching undue tax benefits. These tax benefits are undue when question 7.2 for definition) other than EU and EEA States they conflict with the purpose of the relevant tax provisions and the which grant an adequate exchange of information with Italy; principles of the tax system. and ■ are resident in a different Country (including EU and EEA 9.2 Is there a requirement to make special disclosure of States) and both of the following conditions are satisfied: avoidance schemes? ■ they are subject to an effective taxation in the State of residence lower than 50% of the Italian one; and The Italian anti-abuse law does not require any disclosure of ■ more than 50% of their revenues are represented by potential avoidance schemes. However, before the realisation of a “passive incomes” and fees from the provisions of potentially tax abusive scheme, the taxpayers are allowed to apply intercompany services. for an advance tax ruling in order to obtain the blessing of the tax The “controlled foreign company” regime may be avoided should a authority and avoid future tax challenges. tax ruling be filed and accepted by the Italian tax authorities.

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9.3 Does your jurisdiction have rules which target not 10.3 Does your jurisdiction support public Country-by- only taxpayers engaging in tax avoidance but also Country Reporting (CBCR)? anyone who promotes, enables or facilitates the tax avoidance? In compliance with BEPS Action 13, in 2017 Italy introduced the Country-by-Country Reporting discipline, based on which Italian In principle, persons who promote, enable or facilitate tax avoidance parent companies of multinational groups having a consolidated behaviours may be subject to specific penalties. turnover exceeding €750 million must communicate to the tax authorities, on a yearly basis, a wide range of information concerning

Italy 9.4 Does your jurisdiction encourage “co-operative the group (i.e. tax residence of all the companies belonging to the compliance” and, if so, does this provide procedural group, revenues, profits, taxes paid, intangibles, employees, etc.). benefits only or result in a reduction of tax? Italian parent companies are subject to the CBCR discipline if altenatively: A co-operative compliance discipline was recently introduced in ■ they are mandatorily required to prepare the group Italy with the purpose of enhancing cooperation between tax payers consolidated financial statement; and tax authorities and consequently preventing tax litigation. ■ regardless of the existence of a (higher level) group holding Currently the co-operative compliance programme is available only company, such a (higher level) holding company is not for resident companies and Italian branches of foreign companies requested to prepare CBCR in its State of residence; or having a total turnover or operating revenues exceeding €10 billion, ■ regardless of the fact that such a (higher level) holding for tax payers with a turnover exceeding €1 billion which adhered to company prepares the CBCR, its State of residence does the “pilot project” and for enterprises which intend to give execution not guarantee an adequate exchange of information with the to the response obtained from the tax authorities after the filing of a Italian tax authorities. tax ruling concerning new investment projects.

The main benefits deriving from the adhesion at the co-operative 10.4 Does your jurisdiction maintain any preferential tax compliance programme concern: regimes such as a patent box? ■ reduction of time for obtaining the response to tax rulings concerning the application of tax provisions (45 days from A patent box regime was recently introduced in Italy, providing the request instead of 90); for a 50% exclusion from IRES and IRAP taxation of incomes ■ (50%) reduction of the minimum tax penalties applicable in deriving from the (direct and indirect) exploitation of intangibles case of tax assessment; and and intellectual properties. ■ dispensation from the presentation of guarantees for direct and indirect tax refund purposes. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 10.1 Has your jurisdiction introduced any legislation digital presence? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? Starting from 2019, a specific tax on digital transactions should be levied in Italy, with a rate of 3% applied on the value of Italy has recently introduced provisions implementing BEPS certain electronic services massively rendered (more than 3,000 Actions, such as i) the introduction of Country-by-Country Reporting, transactions) by resident and non-resident service providers ii) some amendments to the transfer pricing legislation in compliance to Italian tax substitute (i.e. enterprises and entrepreneur) and with the 2017 OECD Guidelines, iii) the introduction of the so-called permanent establishments of foreign companies. “web tax” (see question 11.1), and iv) some amendments to the definition of permanent establishment. 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services 10.2 Does your jurisdiction intend to adopt any legislation tax? to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? The introduction of the service tax on digital transaction (see question 11.1) was made in compliance with the European Commission’s Currently there is no evidence of a similar hypothesis. interim proposal for a digital services tax.

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Guido Lenzi Pietro Bracco, Ph.D. Puri Bracco Lenzi e Associati Puri Bracco Lenzi e Associati Via XXIV Maggio, 43, Roma / Via XXIV Maggio, 43, Roma / Via Cusani, 5, Milano Via Cusani, 5, Milano Italy Italy

Tel: +39 06 9521 5700 / +39 02 9295 5400 Tel: +39 06 9521 5700 / +39 02 9295 5400 Email: [email protected] Email: [email protected] URL: www.studiopbl.it URL: www.studiopbl.it Italy

Before becoming Founding Partner of Puri Bracco Lenzi e Associati, Before becoming Founding Partner of Puri Bracco Lenzi e Associati, Guido Lenzi performed his successful activity in prestigious Italian and Pietro Bracco performed his successful activity in prestigious Italian international Tax Law Firms such as: Ernst & Young; KPMG; Tonucci and international Tax Law Firms in Turin, Milan, Paris, Amsterdam and & Partners; and Miccinesi e Associati. He collaborated with some of Rome, and has been Partner of Fantozzi e Associati from 2011–2013 the most important Tax Law Firms, until his partnership in 2003, when and then Partner of Miccinesi e Associati in 2014. he was only 36. He has also worked abroad for several years (in Amongst his clients there are important multinational groups, London and Amsterdam), gaining a deep knowledge of international companies and associations. Over the years, he has consolidated and EU tax items. his experience assisting companies engaged in the energy sector and He gives assistance to international leading companies, focusing on many associations refer to him for Tax Law items. He has written the local and cross-border tax issues, even in operations involving many publications on specialised journals, teaches Energy and Tax investments outside the EU, benefitting from a consolidated worldwide Law in important masterclasses, and is a spokesman in meetings. He network with notable foreign Tax Law Firms. He is President of has been Tax Law and International Tax Law Visiting Professor at Turin Boards of Auditors for some Italian and foreign companies. He also University and at “Link Campus University of Malta”. He graduated in collaborated with the European Commission, writing – with other Business Economics at Turin University and achieved an International Authors – a report on the Italian “exit tax” regime for the “Study on Tax Law Ph.D. at Genoa University. the implementation of the Merger Directive”. A spokesman in many seminars in Italy and abroad, he graduated cum laude in Business Economics at Rome University “La Sapienza”.

Puri Bracco Lenzi e Associati is a Tax Law Firm founded in 2015 by experienced professionals who came from leading Italian and international contexts and decided to combine such experience under a new organisation. The Firm is one of the leading tax brands nationally and offers high-quality services in all tax areas. The goal of the Firm is to excel in meeting Clients’ needs; the assistance ranges from in- and out-of-court tax litigation, to tax planning and tax advice in general, both in domestic and cross-border matters, and in all related tax issues. The Partners of the Firm, who have worked together in their past endeavours, are: Paolo Puri; Pietro Bracco; Guido Lenzi; and Raffaele Massimo Simone. The Firm also includes about 40 other professionals – both lawyers and dottori commercialisti – who have accrued significant experience in several areas of Tax Law. Puri Bracco Lenzi e Associati has offices in Rome and Milan.

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Japan

Nagashima Ohno & Tsunematsu Shigeki Minami

entered into force on March 30, 2004 (the “Japan/US Treaty”) 1 Tax Treaties and Residence and some other recent treaties do incorporate certain limitation on benefits (“LOB”) clauses. The Japan/US Treaty is the first income 1.1 How many income tax treaties are currently in force in tax treaty executed by Japan in which fairly comprehensive LOB your jurisdiction? clauses of general application are included, and have been followed, with certain variations, in the most recent modernised tax treaties. There are 60 income tax treaties (including an agreement between As the US has not signed the MLI, the current Japan/US Treaty will private associations of Japan and Taiwan) applicable to 71 remain effective as it is. jurisdictions currently in force in Japan as of October 1, 2018, and Those treaties that have similar LOB clauses include the treaties Japan has entered into 11 tax information exchange agreements and with Australia, France, New Zealand, Sweden, Switzerland and the Convention on Mutual Administrative Assistance in Tax Matters. the United Kingdom. The amended Japan/Germany Treaty, signed on December 17, 2015, introduced a principal purpose test (“PPT”) in its Article 21, Paragraph 8, for anti-avoidance in line 1.2 Do they generally follow the OECD Model Convention or another model? with BEPS Action 6, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, which entered into force on October 28, 2016. Some treaties or agreements (other than the Yes. Most of the income tax treaties currently in force in Japan abovementioned modernised tax treaties) also include a simple anti- generally follow the OECD Model Convention with certain treaty shopping clause (examples of which are Article 22, Paragraph deviations. Japan signed the Multilateral Convention to Implement 2 of the tax agreement between Japan and Singapore and Article 26 Tax Treaty Related Measures to Prevent Base Erosion and Profit of the tax agreement between Japan and Hong Kong). However, Shifting (“MLI”) on June 7, 2017. Japan ratified the MLI on May these agreements will be modified by the MLI if a relevant country 18, 2018, and deposited its instrument of ratification with the OECD signs the MLI and the MLI takes effect between Japan and such on September 26, 2018. Based on such ratification, with respect country, depending upon the timing of the deposit (with the OECD) to certain countries, including United Kingdom, Australia, France, of the ratification instruments by both relevant countries. Israel, Sweden, New Zealand, Poland, and Slovakia, the MLI will be effective as early as January 1, 2019. With the important exception The BEPS Action 6 Final Report recommended, (1) that a clear of the US, which has not signed (and currently does not intend to statement that the States that enter into a tax treaty intend to avoid sign) the MLI, the MLI covers the 39 existing tax treaties that Japan creating opportunities for non-taxation through tax evasion or has entered into. avoidance will be included in tax treaties, and (2) that countries include in their treaties either (i) the combined approach of an LOB and PPT rule, (ii) the PPT rule alone, or (iii) the LOB rule 1.3 Do treaties have to be incorporated into domestic law supplemented by a mechanism that would deal with conduit before they take effect? financing arrangements not already dealt with in tax treaties.

No. Once treaties are ratified by the Diet (the Japanese Parliament) For the preamble, Japan chose to adopt the preamble in accordance and are promulgated in Japan, such treaties take effect domestically with Article 6(1) of the MLI, i.e., “Intending to eliminate double in Japan in accordance with those treaties, without being incorporated taxation with respect to the taxes covered by this agreement without into domestic law. However, the “Act on Special Provisions of creating opportunities for non-taxation or reduced taxation through the Income Tax Act, the Corporation Tax Act and the Local Tax tax evasion or avoidance”, with the exception of the Germany-Japan Act Incidental to Enforcement of Tax Treaties” provides certain treaty, which has a preamble already in line with the MLI. procedures for obtaining treaty benefits, including filing of various For anti-tax treaty shopping measures, Japan chose to adopt the PPT application forms and tax residence certificates (if applicable) with clause in accordance with Article 7(1) of the MLI, i.e., “a benefit the competent tax offices. under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude... that obtaining that benefit was one of the principal purposes of any 1.4 Do they generally incorporate anti-treaty shopping arrangement or transaction that resulted directly or indirectly in that rules (or “limitation on benefits” articles)? benefit”. Therefore, a significant number of treaties that Japan has entered into will be modified to include the foregoing PPT clauses No, although the new modernised tax treaty with the United States once the MLI is effective between Japan and a relevant country.

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rate is increased to 10% on October 1, 2019, as currently planned, 1.5 Are treaties overridden by any rules of domestic the 8% preferential rate will apply to foods (excluding liquor and law (whether existing when the treaty takes effect or dining-out) and certain newspapers. introduced subsequently)?

No. It is a well-established constitutional principle in Japan that no 2.4 Is it always fully recoverable by all businesses? If not, treaty is overridden by any rule of domestic law (whether existing at what are the relevant restrictions? the time the treaty takes effect or enacted subsequently). Generally, yes. At present, Consumption Tax that is charged on taxable purchases and incurred by a business enterprise is generally 1.6 What is the test in domestic law for determining the recoverable in full, by way of a tax credit or refund. By way of Japan residence of a company? exception: (i) if the ratio of a taxpayer’s revenue from taxable transactions over the taxpayer’s total revenue from transactions The applicable test is the “location of head or principal office” within Japan is less than 95%; or (ii) if a taxpayer’s revenue from test. Under Japanese domestic tax law, a corporation is treated as taxable transactions in the relevant fiscal year exceeds 500 million a Japanese corporation (having a corporate residence in Japan) if yen, such taxpayer would recover only the Consumption Tax such corporation has its head office or principal office in Japan, incurred from the taxable purchases that correspond to its taxable regardless of the place of effective management. sales. For recovery of the Consumption Tax incurred from taxable 2 Transaction Taxes purchases, taxpayers are obliged to keep books and records, but not invoices, of purchased goods and services as the Japanese Consumption Tax has yet to adopt an invoice system, which will be 2.1 Are there any documentary taxes in your jurisdiction? introduced on October 1, 2023.

Yes. Japan has Stamp Tax, which is imposed on certain categories 2.5 Does your jurisdiction permit VAT grouping and, if so, of documents that are exhaustively listed in the Stamp Tax Act, is it “establishment only” VAT grouping, such as that including, for example, real estate sales agreements, land leasehold applied by Sweden in the Skandia case? agreements, loan agreements, transportation agreements, merger agreements, promissory notes, articles of incorporation and bills of No, VAT grouping is not permitted. lading.

2.6 Are there any other transaction taxes payable by 2.2 Do you have Value Added Tax (or a similar tax)? If so, companies? at what rate or rates? Yes. There are some transaction taxes in Japan, including, but not Yes. Japan has Consumption Tax which is a Japanese version of limited to, Registration and Licence Tax, Real Property Acquisition Value Added Tax, consisting of a national consumption tax and Tax and Automobile Acquisition Tax. a local consumption tax. The current aggregate tax rate is 8% (national 6.3% and local 1.7%). Although an additional increase to 10% (national 7.8% and local 2.2%) was planned to be effective 2.7 Are there any other indirect taxes of which we should originally on October 1, 2015, the government decided to defer the be aware? increase until October 1, 2019 for fear of negative impacts on the economy. Yes. There are various indirect taxes in Japan such as Tonnage Tax, Special Tonnage Tax, Liquor Tax, Tobacco Tax and Gasoline Tax.

2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? 3 Cross-border Payments

Consumption Tax is generally charged on all transactions, while there are certain exclusions. Specifically, taxable transactions, for 3.1 Is any withholding tax imposed on dividends paid by the purposes of Consumption Tax, are broadly defined to mean a locally resident company to a non-resident? those transactions conducted by a business enterprise (including any resident and non-resident companies and individuals, regardless Generally, yes. Under Japanese domestic tax law, generally, a of whether they have any permanent establishment in Japan) to non-resident shareholder (either a non-resident company or a non- transfer or lease goods or other assets or to provide services, for resident individual) of a Japanese company is subject to Japanese consideration, within Japan. However, certain specified categories withholding tax with respect to dividends it receives from such of transactions, such as, for example, transfers and leases (other than Japanese company at the rate of 20.42%; however, if the Japanese for certain temporary purposes) of land, housing leases (other than company paying the dividends to a non-resident shareholder is a for certain temporary purposes), transfers of securities, extension listed company, this withholding tax rate is reduced to 15.315%, of interest-bearing loans, provision of insurance, deposit-taking except for the dividends received by a non-resident individual and other certain specified categories of financial services, and shareholder holding 3% or more of the total issued shares of such provision of certain specified medical, social welfare or educational listed Japanese company, to whom the rate of 20.42% is applicable. services, are excluded from taxable transactions for the purposes of However, most of the income tax treaties currently in force in Consumption Tax. With respect to imported goods, they are, when Japan generally provide that the reduced treaty rate at the source released from a bonded area, subject to Consumption Tax, except country shall be 15% or 10% for portfolio investors and 10% or for certain specified categories of imported goods. When the tax 5% for parent and other certain major shareholders. Furthermore,

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under the Japan/US Treaty and a certain limited number of other (3) Interest on loans extended by a non-resident lender (either modernised tax treaties recently executed by Japan (including those a non-resident company or a non-resident individual) to a with Australia, France, the Netherlands, Sweden, Switzerland and Japanese company in relation to such company’s business the United Kingdom), the withholding tax rate is reduced to 10% carried on in Japan is generally subject to Japanese for portfolio investors and 5% or 0% for parent and other certain withholding tax, under the Japanese domestic tax law, at the rate of 20.42%, with certain exemptions. major shareholders. (4) As an exception to the foregoing, if a certified non-resident company makes a deposit or extends a loan to certain qualified 3.2 Would there be any withholding tax on royalties paid financial institutions through a special Japan Offshore Market by a local company to a non-resident? account, such non-resident company would be exempt from Japan Japanese withholding tax with respect to interest to be paid Generally, yes. Under Japanese domestic tax law, royalties relating to on such deposit or loan. patents, trademarks, design, know-how with respect to technology, (5) Most of the income tax treaties currently in force in Japan and copyrights used for any Japanese company’s business carried provide that the withholding tax rate for interest (regardless on in Japan and paid by the Japanese company to a non-resident of whether it is interest on bonds, deposits or loans) is licensor (either a non-resident company or a non-resident individual) reduced generally to 10%. It is worth noting that under the modernised tax treaties, beginning with the Japan/US Treaty, are subject to Japanese withholding tax at the rate of 20.42%, with certain specified categories of financial or other qualified certain exemptions. institutions (the scope of which may slightly vary from treaty Most of the income tax treaties currently in force in Japan provide to treaty) which are residents of the contracting states, may be that the withholding tax rate for royalties generally be reduced to exempt from source country taxation with respect to interest, 10%. Furthermore, under the Japan/US Treaty and a certain limited subject to certain requirements. number of other modernised tax treaties recently executed by Japan (including those with France, the Netherlands, Sweden, Switzerland 3.4 Would relief for interest so paid be restricted by and the United Kingdom), an exemption from source country reference to “thin capitalisation” rules? taxation with respect to royalties may be available. No. The payor company of interest may be denied a deduction 3.3 Would there be any withholding tax on interest paid of the interest which it paid to a non-resident recipient for its by a local company to a non-resident? own corporation tax purposes, due to the application of the “thin capitalisation” rules under Japanese domestic tax law. The Japanese Generally, yes. thin capitalisation rules deny deductibility of interest expenses paid (1) to the payor company’s foreign affiliates when such company’s annual average ratio of debt to equity exceeds 3:1, subject to an (a) Interest on corporate bonds issued by a Japanese company that is paid to a non-resident bondholder (either a non- exemption available based on a certain alternative parameter. resident company or a non-resident individual) was However, even when the deductibility is denied under the thin generally subject to Japanese withholding tax at the rate capitalisation rules, the relief under a treaty (i.e., the reduced of 15.315%. withholding tax rate) available to the non-resident recipient of such (b) Also, under Japanese domestic tax law, with respect to a interest, would nevertheless not be restricted. certain specified scope ofdiscount corporate bonds issued by a Japanese company (except for certain qualified 3.5 If so, is there a “safe harbour” by reference to which short-term discount bonds), such Japanese company tax relief is assured? was required to withhold, at the time of the issuance of the discount corporate bonds, 18.378% (or 16.336% for certain bonds), as the case may be, of the amount No. This is not applicable. Please see question 3.4. equivalent to the difference between the face value and the issue price thereof (original issue discount). There 3.6 Would any such rules extend to debt advanced by a were important exceptions to the foregoing (a) and (b): third party but guaranteed by a parent company? (i) corporate bonds issued outside Japan by Japanese corporations; and (ii) book-entry corporate bonds. Yes. Under the thin capitalisation rules in Japan, debt advanced by a The 2013 Tax Reform, which came into force on January 1, third party and guaranteed by a parent company would generally be 2016, introduced, among others, a new rule for withholding tax to be applied to discount corporate bonds. Under such treated as related party debt, subject to the thin capitalisation rules. new rule, a withholding tax at the time of the issuance of discount corporate bonds was lifted, and a withholding tax 3.7 Are there any other restrictions on tax relief for at the time of the redemption was introduced. An issuer interest payments by a local company to a non- company of discount corporate bonds is generally required resident? to withhold, at the time of the redemption of such discount corporate bonds, 15.315%, as the case may be, of the amount equivalent to (i) 0.2% of the amount of the redemption (if the Yes. Japan has earnings stripping rules, under which deduction for term of the bond in question is one year or less), and (ii) 25% net interest payments (as defined in these rules) to certain related of the amount of the redemption (if the term of the bond in persons (as defined in these rules) in excess of 50% of an adjusted question is more than one year). taxable income (as defined in these rules) will be disallowed, and (2) Interest on bank deposits and other similar deposits made the disallowed amounts may be carried forward for seven ensuing by a non-resident depositor (either a non-resident company business years. If the disallowed interest amount under the earnings or a non-resident individual) with any office of a bank or stripping rules is smaller than the amount disallowed for deduction other institution in Japan is generally subject to Japanese under the thin capitalisation rules, then deduction is disallowed to withholding tax, under Japanese domestic tax law, at the rate the extent of the larger of the two disallowed amounts. of 15.315%.

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The aforementioned 50% (of an adjusted taxable income) threshold appears to be less rigorous than the standard recommended by 4.3 If the tax base is accounting profit subject to BEPS Action 4 Report, “Limiting Base Erosion Involving Interest adjustments, what are the main adjustments? Deductions and Other Financial Payments” (i.e., 10% to 30%). The Japanese government is, therefore, expected to tighten its The main differences include, but are not limited to, the treatment earnings stripping rules, presumably by lowering the threshold of donations and entertainment expenses. Donations, including and by widening the scope of the rules in line with the OECD any kind of economic benefit granted for no or unreasonably low recommendations and suggestions. consideration, are generally deductible only up to a certain limited amount. The deductibility of entertainment expenses is subject to Even if deductibility is denied under the earnings stripping rules, the certain qualifications and a certain ceiling. Please also see questions relief under a treaty (i.e., the reduced withholding tax rate) available Japan 5.2 and 5.3. to the non-resident recipient of such interest, would nevertheless not be restricted. 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 3.8 Is there any withholding tax on property rental subsidiaries? payments made to non-residents? Yes. There are two categories of tax grouping rules under Japanese Generally, yes. Rental fees for leasing real property or rights to tax law: (1) the consolidated tax return rules; and (2) the group real property located within Japan and paid by a Japanese company taxation rules. to a non-resident (either a non-resident company or a non-resident (a) A group of Japanese companies, where a Japanese parent individual) are subject to Japanese withholding tax at the rate of company directly, or indirectly through other Japanese 20.42%, subject to certain exemptions. companies, owns no less than 100% of other Japanese subsidiaries, can elect to file, subject to the approval of the 3.9 Does your jurisdiction have transfer pricing rules? Commissioner of the National Tax Agency, a consolidated tax return. The consolidated tax is calculated on the basis of the aggregate net taxable income of the parent company and Yes. Japanese transfer pricing rules are applicable to both a Japanese all consolidated subsidiaries. With certain exceptions, when company and a Japanese branch of a non-resident company if either a company participates in the consolidated tax return group of them engage in transactions with any of their “foreign-related from outside, the participating company’s carry-forward persons” (measured by, in principle, a direct or indirect 50%-or- losses will be lost and cannot be used to offset the income of more share ownership). the existing companies in the consolidated tax return group. (b) Separate from the above-mentioned consolidated tax return system, there are special rules for intra-group transactions 4 Tax on Business Operations: General (the “Group Taxation Rules”), which apply to group companies in a 100% group (companies that have a direct or indirect 100% shareholding relationship), even if they 4.1 What is the headline rate of tax on corporate profits? do not elect to file a consolidated tax return. The Group Taxation Rules apply to Japanese companies wholly owned The nominal rate of Corporation Tax (national tax) is 23.2%, and by a foreign or Japanese company or an individual (to which the effective corporation tax rate – national and local combined – is: certain family members’ ownership is attributed). The Group (a) approximately 31% for large companies (i.e., companies with a Taxation Rules include the following rules, among others: (i) stated capital of more than 100 million yen); and (b) approximately deferral of capital gains/losses from transfer of certain assets 37% with a 22–25% favourable rate for up to the first 8 million between Japanese companies in a 100% group; and (ii) denial of deduction and exclusion of income on donations between yen for small and medium-sized companies (i.e., companies with a Japanese companies in a 100% group. Under the Group stated capital of 100 million yen or less), operating in Tokyo for the Taxation Rules, the losses of one company are not allowed to fiscal year beginning on or after April 1, 2018. be used to offset income of other group companies. In Japan, neither the consolidation rules nor Group Taxation Rules 4.2 Is the tax base accounting profit subject to allow for relief for losses of overseas subsidiaries. adjustments, or something else?

4.5 Do tax losses survive a change of ownership? Yes. The tax base for corporation tax is the net taxable income; such net taxable income is calculated based on the results reflected in the taxpayer company’s profit and loss statements, prepared in Generally, yes. accordance with Japanese generally accepted accounting principles. (a) A change of ownership does not restrict a corporation from utilising its accumulated tax losses that the corporation If a taxpayer company’s stated capital is more than 100 million yen, incurred in prior years, in general. However, for a company the tax base for the local Enterprise Tax is determined by certain under certain specified events which shall take place within factors; specifically, by a combination of (a) the net taxable income, five years from the date of the ownership change (measured, (b) the amount of value added as determined by the compensation in principle, by more-than-50% of the issued and outstanding paid to employees, the net interest paid, the net rental fees paid and shares), utilisation of the tax losses of the company may be the net profit or loss in each fiscal year, and (c) the stated capital of restricted. The restriction applies, for example: (i) when a such taxpayer company, with certain exceptions for electricity, gas company was dormant before the ownership change and and insurance businesses. begins its business after the ownership change; or (ii) when a company ceases its original business after the ownership change and receives loans or capital contributions, the amount of which exceeds five times the previous business scale.

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(b) In respect of a merger, a surviving company is able to utilise However, with respect to dividends paid to a Japanese company the carried-forward losses of a merging company: by its foreign subsidiary, a participation exemption from Japanese (i) if the merger falls under a “qualified merger”; and income taxation is granted for a 95% portion of such dividends if the (ii) if the merger takes place five years after there is a relevant Japanese company owns at least 25% of such foreign subsidiary’s more-than-50% change in issued and outstanding shares issued and outstanding shares or voting shares for at least six or, months. The 25% threshold requirement may be altered if a tax the merger satisfies “joint-business” requirements. treaty explicitly so provides or if a particular taxpayer is eligible for treaty benefits under an applicable tax treaty in which a lower (c) In general, the tax losses of the past fiscal years can be carried forward to offset (by deduction) the taxable income threshold is required for a treaty-based indirect foreign tax credit

Japan of the current fiscal year, while such deduction is limited to a eligibility (for example, a 10% shareholding threshold is provided maximum of 80% (to be amended to 65% from April 1, 2015, under Article 23(1)(b) of the Japan/US Treaty). and to 50% from April 1, 2017) of the taxable income (before the deduction). Losses survive for nine years (or 10 years from April 1, 2017). Please note that these limitations are 5.3 Is there any special relief for reinvestment? not applicable (thus, deduction of losses up to 100% of the income is available) to a small and medium-sized company Generally, yes. Dividends received by a Japanese company from as stipulated under Japanese tax law, which is a company another Japanese company may be either 100%, 50% or 20% (subject with stated capital of 100 million yen or less that is not a to certain adjustments) excluded from the recipient company’s wholly-owned subsidiary of a company (Japanese or non- taxable income, depending on whether or not the recipient Japanese Japanese) with stated capital of 500 million yen or more. company owns more than a third, more than 5%, or 5% or less of the total issued and outstanding shares of the dividend-paying Japanese 4.6 Is tax imposed at a different rate upon distributed, as company. Such dividend-received exclusion is also available to a opposed to retained, profits? Japanese branch of a foreign corporation with respect to dividends received by such branch from any Japanese company. (a) Japanese corporation tax is generally imposed at the same rate upon all corporate taxable profits regardless of whether 5.4 Does your jurisdiction impose withholding tax on the such profits are distributed or retained. As an exception, a proceeds of selling a direct or indirect interest in local certain additional surtax (at the rate of 10%, 15% or 20%) assets/shares? may be imposed on certain portions of retained earnings of certain types of so-called family companies, unless such family company is a small and medium-sized company as Generally, no. However, Japan imposes withholding tax on the stipulated under Japanese tax law, which is a company with proceeds of selling a direct interest in real property located within stated capital of 100 million yen or less that is not a wholly- Japan. See questions 8.1 and 8.2 below. With respect to capital owned subsidiary of a company (Japanese or non-Japanese) gains from shares of a company, when a non-resident shareholder with stated capital of 500 million yen or more. (either a non-resident company or a non-resident individual) having (b) There are certain special qualified corporate entities used no permanent establishment in Japan alienates its shares in a for investment purposes, including Investment Corporations Japanese company, such shareholder is not subject to any Japanese and Tokutei Mokuteki Kaisha (“TMK”), which can deduct taxation, with certain exceptions, including the case where such as expenses dividends paid to their shareholders if they shareholder owns 25% or more of the issued shares of a Japanese distribute more than 90% of their distributable profits. company in a three-year window period and sells 5% or more of the issued shares in aggregate in a single fiscal year, in which case such 4.7 Are companies subject to any significant taxes not non-resident alienator is required to file a tax return in Japan and is covered elsewhere in this chapter – e.g. tax on the subject to Japanese personal income tax or corporation tax (but not occupation of property? withholding tax), as the case may be, on a net income basis.

Yes. Among local taxes, other than those already mentioned above, Prefectural Inhabitant Tax per capita levy, Municipal Inhabitant 6 Local Branch or Subsidiary? Tax per capita levy, Fixed Assets Tax and Automobile Tax may be of general application to the business operations in general of a 6.1 What taxes (e.g. capital duty) would be imposed upon company in Japan. the formation of a subsidiary?

5 Capital Gains In order to form a Japanese subsidiary, the articles of incorporation of such subsidiary must be prepared, which is subject to Stamp Tax in the amount of 40,000 yen. Further, such subsidiary must 5.1 Is there a special set of rules for taxing capital gains be registered in the commercial register kept at the competent and losses? office of the legal affairs bureau of the Ministry of Justice, subject to Registration and Licence Tax at the rate of seven-thousandths Generally, no. For purposes of income taxes imposed on a company (7/1,000) of its stated capital amount, but no less than 150,000 yen (not an individual) in Japan, generally all of the taxable income in the case of a joint-stock company (Kabushiki Kaisha). of a company is aggregated, regardless of whether such income is If a non-resident company forms a subsidiary in Japan (i.e., classified as capital gains or ordinary/business profits. establishing a company incorporated under the laws of Japan) by making a capital contribution in cash, the formation of the subsidiary 5.2 Is there a participation exemption for capital gains? is not a taxable event for corporation tax purposes.

There is no participation exemption for taxation on capital gains.

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6.2 Is there a difference between the taxation of a local 7 Overseas Profits subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 7.1 Does your jurisdiction tax profits earned in overseas branches? Yes. If a foreign parent forms a Japanese subsidiary which is a corporation, such Japanese subsidiary will be treated as a Japanese Yes. A Japanese company is generally subject to Japanese taxpayer and will be subject to Japanese corporation tax on its corporation taxes with respect to its worldwide income, with worldwide income in the same manner as any other domestic exclusion of a 95% portion of dividends from certain overseas Japanese corporation, subject to 95% exclusion of dividends from subsidiaries. Please see question 7.2 below. Japan certain foreign subsidiaries (see question 5.2 above). A branch of a non-resident corporation, by contrast, is generally only subject to Japanese corporation tax on the profits attributable to its permanent 7.2 Is tax imposed on the receipt of dividends by a local establishment in Japan under an applicable tax treaty or under the company from a non-resident company? Japanese domestic tax law. There is no branch profits tax or other similar tax to which a branch of a non-resident company, but not a The 95% portion of the dividends paid to a Japanese company by subsidiary, is subject. its overseas subsidiaries is excluded from Japanese corporation tax, subject to certain shareholding threshold and holding period requirements. Please see question 5.2 above. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 7.3 Does your jurisdiction have “controlled foreign Under the Corporation Tax Act, if a non-resident company which company” rules and, if so, when do these apply? has its branch in Japan earns profits attributable to its permanent establishment in Japan such business profits constitute Japanese Yes. Japan has its own CFC rules and if such CFC rules are applied to source income taxable in Japan in line with the Authorised OECD any particular overseas subsidiary, such CFC subsidiary’s net profits Approach. The rules similar to the transfer pricing regulations for (but not its net losses) shall be deemed to constitute the Japanese foreign-related persons are applicable to the branch. With respect parent company’s taxable income in proportion to their shareholding to the question of how the amount of such business profits should percentages, regardless of whether or not such profits are distributed be determined, certain specific rules are provided in the relevant to the parent. These apply to Japanese companies which own 10% regulations. With respect to the detailed method of calculating or more of shares in a certain overseas subsidiary more-than-50% taxable income, the rules applicable to a Japanese company are, owned by Japanese resident individuals or companies directly or in principle, also made applicable to a branch of a non-resident indirectly, and located in a jurisdiction where its effective tax rate company, mutatis mutandis. In calculating the taxable income is less than 20% (applicable for relevant subsidiaries’ fiscal year of a branch, only such expenses as are related to business carried beginning on or after April 1, 2015, amended from “20% or less”). on through the branch (permanent establishment), are treated as The Japanese CFC rules were overhauled in 2017 in line with BEPS deductible expenses. Specifically, expenses of a relevant foreign Action 3, “Designing Effective Controlled Foreign Company Rules”, corporation must be allocated to (a) the business carried on through and the new rules will be applicable for relevant subsidiaries’ fiscal the branch, and (b) other business in accordance with a reasonable years beginning on or after April 1, 2018. Under the new rules: criterion, such as revenue, value of assets, number of employees, etc. (1) profits of the foreign subsidiaries which are either a (a) “paper company”, (b) “cash box company”, or (c) “company located 6.4 Would a branch benefit from double tax relief in its in the black-list jurisdictions” will be included in the taxable jurisdiction? income of the Japanese parent unless the effective tax rate for the relevant subsidiaries is “30%” or higher; A branch of a company which is a resident in such treaty country can (2) profits of the foreign subsidiaries falling out of the foregoing benefit from the treaty provisions to some extent. However, with categories (1)(a)–(c), but not satisfying the “Economic Activity Test” (i.e., the test to see whether the subsidiary is respect to the treaty relief given to passive income such as dividends, engaged in active business by examining the subsidiary’s interest and royalties, a branch of a non-resident company would (a) category of business, (b) fixed facility, (c) management, not be allowed to enjoy such treaty relief since most of the income and (d) volume of unrelated sales/purchases or place of tax treaties currently in force in Japan include provisions similar to manufacture) will be included in the taxable income of the Articles 10(4), 11(4) and 12(3) of the OECD Model Convention, Japanese parent, unless the effective tax rate for the relevant which deny treaty benefits to the beneficial owner of dividends, subsidiaries is “20%” or higher; and interest, or royalties who carries on business through a permanent (3) even if the foreign subsidiaries satisfy the “Economic establishment situated in the source country if its relevant shares, Activity Test”, its “passive income” will be included in the debt-claim, or intellectual property is effectively connected with taxable income of the Japanese parent, unless the effective such permanent establishment. tax rate for the relevant subsidiaries is “20%” or higher.

6.5 Would any withholding tax or other similar tax be 8 Taxation of Commercial Real Estate imposed as the result of a remittance of profits by the branch? 8.1 Are non-residents taxed on the disposal of Generally, no. Banks are obligated to file a report with the commercial real estate in your jurisdiction? competent tax office regarding any remittance to a foreign country in the amount of more than 1 million yen. Generally, yes. If real property (land or any right on land or any building or auxiliary facility or structure), commercial or otherwise,

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which is located within Japan is alienated by a non-resident (either deductible by the GK but subject to withholding tax at the rate of a non-resident individual or a non-resident company), the gross 20.42% under the Japanese domestic tax law. amount of the consideration received by such non-resident from such alienation is subject to Japanese withholding tax at the rate of 10.21% if it is paid, or deemed paid, within Japan, with certain 9 Anti-avoidance and Compliance exceptions (including no withholding tax for the sale to an individual for use as a personal or family residence in consideration for 100 9.1 Does your jurisdiction have a general anti-avoidance million yen or less) and exemptions. or anti-abuse rule? Regardless of the imposition of the aforementioned withholding Japan tax, if a non-resident (either a non-resident individual or a non- No. Japanese tax law does not have a general anti-avoidance rule. resident company) alienates real property located within Japan, However, Japanese tax law includes a so-called “specific” anti- such non-resident alienator is required to file a tax return in Japan avoidance rule for a family company (i.e., a company where more and is subject to Japanese personal income tax or corporation than 50% of its shares are held by three or fewer shareholders and tax, as the case may be, on a net income basis with respect to any certain related persons). Japanese tax law also has specific anti- capital gains (after cost basis and expenses deducted) derived from avoidance rules that involve corporate reorganisation transactions such alienation. In the case where such non-resident alienator is and consolidated tax return filing. In addition, an anti-avoidance subject to the aforementioned withholding tax, the amount of rule was introduced for transactions regarding income attributable such withholding tax may be credited against such income tax or to a permanent establishment of overseas corporations, which corporation tax, subject to certain procedural requirements. is applicable to, among others, internal dealings between a non- Japanese company and its Japanese branch. Under these specific 8.2 Does your jurisdiction impose tax on the transfer of anti-avoidance rules, if transactions are viewed as “unjust”, the an indirect interest in commercial real estate in your transactions can be recharacterised and reconstructed to a “normal” jurisdiction? or “natural” form of transactions having different tax implications (presumably higher tax burdens). Yes. When a non-resident individual or a non-resident company and his/her/its special related parties, in aggregate, hold: 9.2 Is there a requirement to make special disclosure of (i) more than 5% of the shares issued by a company with 50% avoidance schemes? or more of its assets’ value attributable directly or indirectly to real property (land or any right on land or any building No. Japanese tax law does not have a disclosure rule that imposes or auxiliary facility or structure), commercial or otherwise, a requirement to disclose avoidance schemes. The Japanese tax which is located within Japan (“Real Property Related authorities are studying a potential adoption of mandatory disclosure Company”) where such shares are either listed on a stock exchange or traded over-the-counter; or rules in line with BEPS Action 12. However, given the ambiguity of the scope of the “avoidance schemes”, the tax authorities are (ii) more than 2% of the shares issued by a Real Property Related apparently being cautious in introducing new rules and a specific Company not so listed, proposal has yet to be seen as of October 1, 2018. the special rules apply. When the special rules are applicable, if the non-resident individual 9.3 Does your jurisdiction have rules which target not or the non-resident company transfers the Real Property Related only taxpayers engaging in tax avoidance but also Company shares, such non-resident company or the non-resident anyone who promotes, enables or facilitates the tax individual is required to file a tax return in Japan and is subject to avoidance? Japanese income tax or corporation tax, as the case may be, on a net income basis with respect to any capital gains (after cost basis and No. The Japanese tax authorities are studying a potential adoption expenses deducted) derived from such transfer. of mandatory disclosure rules applicable to promoters, enablers or facilitators of tax avoidance in line with BEPS Action 12. However, 8.3 Does your jurisdiction have a special tax regime the tax authorities are apparently being cautious in introducing new for Real Estate Investment Trusts (REITs) or their rules, and a specific proposal has yet to be seen as of October 1, equivalent? 2018.

REITs structured in Japan (“J-REITs”) are generally structured in 9.4 Does your jurisdiction encourage “co-operative the form of a company, although it is legally possible to structure compliance” and, if so, does this provide procedural J-REITs in the form of a trust under Japanese law. Thus, dividends benefits only or result in a reduction of tax? from J-REITs are, practically, subject to the same taxation as dividends paid by a local resident company to a non-resident Yes. The Japanese tax authorities encourage corporations to (please see question 3.1 above), and transfers of investment equity cooperate with the tax authorities and to voluntarily disclose to J-REITs are subject to the same taxation as transfers of Real certain information for compliance purposes. As an incentive, Property Related Company shares (please see question 8.2), in if the authorities acknowledge that a certain taxpayer is well in general. J-REITs are often structured in the form of certain special compliance with tax laws, the authorities may refrain from auditing qualified corporate entities established under Japanese law, such as that taxpayer for one year in addition to the period that the authorities Investment Corporations and TMK, which can deduct as expenses customarily took to audit that taxpayer in the past. However, it is dividends paid to their shareholders if they distribute more than up to the discretion of the authorities and a voluntary disclosure will 90% of their distributable profits. As another alternative, real not necessarily entail exemption or relaxation of any tax audit or estate investments are made in the form of a Godo Kaisha (“GK”) other procedural requirements. It will not reduce any tax either. corporation contributed to by silent partners through a Tokumei Kumiai (“TK”), under which dividends to investors are fully

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(a) The local file (reporting specifically material transactions of 10 BEPS and Tax Competition the local taxpayer) is mandated to be prepared simultaneously with the filing of the relevant corporation tax return (and to be presented to the local tax authority upon instruction 10.1 Has your jurisdiction introduced any legislation within a maximum of 45 days of receiving such instruction) in response to the OECD’s project targeting Base for transactions with a certain foreign-affiliated person, Erosion and Profit Shifting (BEPS)? with whom either (1) the sum of payments and receipts is 5 billion yen or more, or (2) the sum of payments and receipts Yes. Japan has introduced legislation, in response to BEPS for intangible transactions is 0.3 billion yen or more, in the Action 2 Report, “Neutralising the Effects of Hybrid Mismatch previous fiscal year. In addition, presentation of the local file

Arrangements”, which denies exclusion for dividends received for any transaction, the value of which is below the foregoing Japan from 25%-owned non-Japanese companies (see question 5.2) as threshold amounts, is also to be made with the local tax long as they are deductible in the payer country, including dividends authority, upon instruction by the auditor, within a certain on Mandatory Redeemable Preference Shares (“MRPS”) issued in period designated by the auditor, which is no more than 60 Australia and dividends from a Brazilian company. The new rules days. are effective for any dividends received by a Japanese corporate In the local file, a taxpayer is required to report the items taxpayer whose fiscal year begins on or after April 1, 2016, subject as described in Annex II to Chapter 5 of the revised OECD to a certain grandfathering rule. Guidelines, which includes a description of the local entity, a description of controlled transactions, and financial In addition, in response to Action 13, “Guidance on Transfer Pricing information. Documentation and Country-by-Country Reporting”, the Japanese (b) In the master file, a taxpayer is required to report the items government introduced new transfer pricing legislation to adopt the as described in Annex I to Chapter 5 of the revised OECD three-tiered documentation approach consisting of a country-by- Guidelines, which includes a description of the businesses of country report, a master file and a local file, which is applicable the MNE, the MNE’s intangibles, the MNE’s intercompany to any fiscal year beginning on or after April 1, 2016. Please see financial activities, and the MNE’s financial and tax positions. question 10.3. (c) In the country-by-country report, a taxpayer is required to report the items as described in Annex III to Chapter 5 of the revised OECD Guidelines, which includes an overview 10.2 Does your jurisdiction intend to adopt any legislation of allocation of income, taxes and business activities by to tackle BEPS which goes beyond what is tax jurisdiction, and a list of all the constituent entities of recommended in the OECD’s BEPS reports? the MNE group included in each aggregation per tax jurisdiction. No. The Japanese tax authorities appear to intend to adopt legislation Notification as to the ultimate parent entity (to be filedby to tackle BEPS in line with, but not beyond, the OECD’s BEPS the last fiscal day of the ultimate parent), a master file and reports. In addition to the new rules in line with Actions 2 and 13 set a country-by-country report (to be filed within one year of forth in question 10.1 above, the Japanese government introduced the last fiscal day of the ultimate parent) are applicable for the new CFC rules in line with BEPS Action 3, “Designing Effective fiscal years of the ultimate parent beginning on or after April Controlled Foreign Company Rules”. Further, the government is 1, 2016. The new rules for a local file (to be prepared by the expected to revise the current transfer pricing regulations in line with time of the filing of a relevant corporation tax return) will be the revised OECD Transfer Pricing Guidelines under BEPS Actions effective for corporation tax in fiscal years beginning on or 8–10, “Aligning Transfer Pricing Outcomes with Value Creation”, after April 1, 2017. although the new transfer pricing rules have yet to be seen as of October 1, 2018. It is possible that Japan will introduce new transfer 10.4 Does your jurisdiction maintain any preferential tax pricing rules for transfers of hard-to-value intangibles (“HTVI”) regimes such as a patent box? aimed at preventing base erosion and profit shifting by moving intangibles among group members in line with the “Guidance for No. Japan does not maintain any preferential tax regimes such as Tax Administrations on the Application of the Approach to Hard-to- a patent box. Value Intangibles” published by the OECD on June 21, 2018. Japanese tax law does, however, provide for special tax credits and deductions on certain research and development costs. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 11 Taxing the Digital Economy Yes. In line with BEPS Action 13, in 2016, the Japanese government introduced new transfer pricing legislation in which 11.1 Has your jurisdiction taken any unilateral action to tax it adopted the three-tiered documentation approach, under which digital activities or to expand the tax base to capture a separate “master file” and a “local file” as well as a “country- digital presence? by-country report” are required. Any Japanese corporations and foreign corporations with permanent establishments in Japan that No. No specific legislation has been taken to capture digital presence are a constituent entity of a multinational enterprise (“MNE”) group so far. However, in enforcement, the Japanese tax authority appears with total consolidated revenues of 100 billion yen or more in the to be eager to capture digital presence. For example, in 2009, it previous fiscal year (“Specified MNE Group”) are subject to the new was reported that the Japanese tax authority made adjustments on documentation rules. Such corporations must file (i) notification as a certain Japanese affiliate of Amazon.com for the reason that such to the ultimate parent entity, (ii) a country-by-country report, and affiliate was a permanent establishment of Amazon based on the (iii) a master file with the tax authority online (“e-Tax”).

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finding that Amazon US’s computers were used in Japan, Japanese employees were instructed by Amazon US and the Japanese affiliate Shigeki Minami functioned for more than mere logistics. Amazon sought relief Nagashima Ohno & Tsunematsu from a mutual agreement procedure with competent authorities JP Tower 2-7-2 Marunouchi, Chiyoda-ku and the US and Japanese tax authorities reached an agreement in Tokyo 100-7036 2010 with a result of no significant tax expense to Amazon. If the Japan OECD makes specific recommendations for taxing digital activities, Tel: +81 3 6889 7177 the Japanese government may move to enforce or take legislative Email: [email protected] actions in line with them. URL: www.noandt.com Japan

11.2 Does your jurisdiction support the European Shigeki Minami is a partner at Nagashima Ohno & Tsunematsu in Commission’s interim proposal for a digital services Tokyo, Japan. Mr. Minami is an expert in general tax law matters, tax? including transfer pricing, international reorganisations, anti-tax- haven rules, withholding tax issues and other international and domestic tax issues. He regularly represents major Japanese and No, it does not. foreign companies in tax audits, tax disputes and competent authority procedures (including advance pricing agreements and mutual agreement procedures) with Japanese and foreign tax authorities and he has litigated tax cases in the National Tax Tribunal of Japan and in Japanese courts. His recent achievements include cancellation of transfer pricing and international reorganisation assessments in the amount of more than USD 100 million, representing major Japanese and international companies. Mr. Minami serves as the Chair of the Asia-Pacific Region Committee of the International Fiscal Association (“IFA”) and as a member of the Practice Council of the International Tax Program at New York University School of Law.

Nagashima Ohno & Tsunematsu is the first integrated full-service law firm in Japan and one of the foremost providers of international and commercial legal services based in Tokyo. The firm’s overseas network includes offices in New York, Singapore, Bangkok, Ho Chi Minh City, Hanoiand Shanghai, associated local law firms in Jakarta and Beijing where our lawyers are on-site, and collaborative relationships with prominent local law firms throughout Asia and other regions. In representing our leading domestic and international clients, we have successfully structured and negotiated many of the largest and most significant corporate, finance and real estate transactions related to Japan. The firm has extensive corporate and litigation capabilities spanning key commercial areas such as antitrust, intellectual property, labour and taxation, and is known for path- breaking domestic and cross-border risk management/corporate governance cases and large-scale corporate reorganisations. The 400+ lawyers of the firm, including over 20 experienced foreign attorneys from various jurisdictions, work together in customised teams to provide clients with the expertise and experience specifically required for each client matter.

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Kosovo Genc Boga

Boga & Associates Alketa Uruçi

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

1.1 How many income tax treaties are currently in force in your jurisdiction? The test of residence of a company is whether a company: (i) is established in Kosovo; or (ii) has its place of effective management in Kosovo. Kosovo, as an independent country, has concluded several new tax treaties, such as those with: (i) the Republic of Albania (2016); (ii) the Republic of Macedonia (2014); (iii) the Republic of Turkey 2 Transaction Taxes (2016); (iv) Slovenia (2015); (v) the Czech Republic (published in the Official Gazette on 27 March 2015); (vi) the United Kingdom (2016); (vii) Hungary (2015); (viii) Republic of Croatia (2018); (ix) 2.1 Are there any documentary taxes in your jurisdiction? Switzerland (published in the Official Gazette on 17 August 2017, not yet applicable); (x) United Arab Empire (2017); (xi) Republic of No, there are no documentary taxes in Kosovo. Austria (published in the Official Gazette on 1 August 2018); and (xii) Grand Duchy of Luxembourg (published in the Official Gazette on 18 2.2 Do you have Value Added Tax (or a similar tax)? If so, January 2018, not yet applicable). Kosovo has also acceded to other at what rate or rates? tax treaties on the avoidance of double taxation with respect to taxes on income and capital from the former Yugoslavia (with Germany, Kosovo introduced VAT in 2001. A new Law “On VAT” entered Belgium, the Netherlands and Finland, as well as with the Czech into force on 1 September 2015. The standard rate of VAT is 18%; Republic for the avoidance of double taxation on inheritance tax). the reduced rate of VAT is 8%; and exports are zero-rated. The turnover threshold for registration purposes is set to EUR 30,000. 1.2 Do they generally follow the OECD Model Convention or another model? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Kosovo tax treaties generally follow the OECD model. The following activities are VAT-exempt: 1.3 Do treaties have to be incorporated into domestic law ■ insurance and reinsurance transactions; before they take effect? ■ financial services; ■ the supply of postage stamps; The new tax treaties must be ratified by Parliament. A treaty ratified by Parliament becomes part of the Kosovo legal system after ■ the supply at face value of fiscal stamps and other similar publication in the Official Gazette and prevails over any law which stamps; differs from the treaty’s provisions. ■ betting, lotteries and other forms of gambling; ■ the supply of land; 1.4 Do they generally incorporate anti-treaty shopping ■ the supply of houses, apartments or other accommodation rules (or “limitation on benefits” articles)? used for residential purposes; and ■ the leasing or letting of immovable property. The treaties do not incorporate anti-treaty shopping rules. 2.4 Is it always fully recoverable by all businesses? If not, 1.5 Are treaties overridden by any rules of domestic what are the relevant restrictions? law (whether existing when the treaty takes effect or introduced subsequently)? Generally, taxpayers registered for VAT are entitled to recover the input VAT, provided that the VAT is charged in relation to their A treaty prevails over domestic law regardless of whether the domestic taxable activity. When taxpayers perform both taxable and exempt legislation existed previously or is introduced subsequently to it. supplies, VAT may be partially reclaimed. VAT cannot be reclaimed

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

2.5 Does your jurisdiction permit VAT grouping and, if so, No, there are no other restrictions on tax relief for interest payments is it “establishment only” VAT grouping, such as that by a local company to a non-resident. applied by Sweden in the Skandia case?

No, Kosovo does not permit VAT grouping. 3.8 Is there any withholding tax on property rental payments made to non-residents? Kosovo

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

There is an excise tax which applies to a limited number of goods such as coffee, tobacco, alcoholic drinks, soft drinks, derivatives 3.9 Does your jurisdiction have transfer pricing rules? of petroleum, and motor vehicles used mainly for the transport of passengers. The Corporate Income Tax Law provides that the prices between related parties should be set at open market value. Such value should be determined under the uncontrolled price method, and when this is 2.7 Are there any other indirect taxes of which we should not possible, under the resale price method or the cost-plus method. be aware? Additional rules are provided in an administrative instruction. Except for VAT and excise, there are no other indirect taxes. 4 Tax on Business Operations: General 3 Cross-border Payments 4.1 What is the headline rate of tax on corporate profits?

3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? The Kosovo Corporate Income Tax Law provides for a rate of 10%.

No, there is no withholding tax on dividends distributed from a 4.2 Is the tax base accounting profit subject to Kosovo-resident company. adjustments, or something else?

The taxable base is calculated starting from the profit shown in 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? the financial statements, and is adjusted in accordance with the limitations provided in the Corporate Income Tax Law. Yes. There is withholding tax at a rate of 10% on royalties paid by a Kosovo company to a non-resident. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments?

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

3.6 Would any such rules extend to debt advanced by a ■ representation costs (these include publicity, advertising, third party but guaranteed by a parent company? entertainment and representation) which exceed 1% of the total gross income; and There are no such rules in place. ■ accrued expense for which the withholding tax should be paid, unless such expense is paid on or before 31 March of the subsequent tax period.

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4.4 Are there any tax grouping rules? Do these allow 6 Local Branch or Subsidiary? for relief in your jurisdiction for losses of overseas subsidiaries? 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? No, there are no tax grouping rules. There are no taxes payable upon the formation of a subsidiary. 4.5 Do tax losses survive a change of ownership?

6.2 Is there a difference between the taxation of a local As a general rule, the losses may be carried forward for six years, subsidiary and a local branch of a non-resident Kosovo but they do not survive a change of more than 50% in ownership or company (for example, a branch profits tax)? a change in the legal form of the entity. There is no difference between the taxation of a locally formed 4.6 Is tax imposed at a different rate upon distributed, as subsidiary and the branch of a non-resident company. opposed to retained, profits? 6.3 How would the taxable profits of a local branch be No, there is no difference in this regard. determined in its jurisdiction?

4.7 Are companies subject to any significant taxes not Branches are taxed only on the taxable income from a Kosovo covered elsewhere in this chapter – e.g. tax on the source of income. The taxable income is determined in the same occupation of property? manner as for resident companies. Taxable income of branches is subject to Corporate Income Tax at the same rate of 10%. Yes, there is a property tax in Kosovo. All persons who own, use or occupy immovable property are subject to tax on real estate. 6.4 Would a branch benefit from double tax relief in its The Municipal Assembly of each Municipality shall set property jurisdiction? tax rates for all property categories except for the public property category, at the rate of 0.15% to 1% of the market property value. Branches have the same treatment under the local legislation.

5 Capital Gains 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? 5.1 Is there a special set of rules for taxing capital gains and losses? No, there is no withholding tax or other tax with regard to the remittance of profits by the branch. The Corporate Income Tax Law indicates the rules applicable to capital gains. As a general rule, capital gains and losses are treated as ordinary income/losses from economic activity. Capital gains are 7 Overseas Profits not recognised for fixed assets which are depreciated in a pool and purchased prior to 1 January 2010. 7.1 Does your jurisdiction tax profits earned in overseas branches? 5.2 Is there a participation exemption for capital gains? Foreign-sourced income is taxable in Kosovo. However, tax credit No, there is no participation exemption for capital gains. is allowable for the amount of income tax paid overseas for the income derived abroad. 5.3 Is there any special relief for reinvestment? 7.2 Is tax imposed on the receipt of dividends by a local No, there is no relief for reinvestment. company from a non-resident company?

No, dividends distributed by a non-resident to a local company are 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local considered as exempt income. assets/shares? 7.3 Does your jurisdiction have “controlled foreign There is no withholding tax on the proceeds of selling a direct or company” rules and, if so, when do these apply? indirect interest in local assets/shares. There are no “controlled foreign company” rules.

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8 Taxation of Commercial Real Estate 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? There are no provisions encouraging “co-operative compliance”. Non-residents are taxed on the disposal of commercial real estate in Kosovo, at a rate of 10% of the realised profit. 10 BEPS and Tax Competition

Kosovo 8.2 Does your jurisdiction impose tax on the transfer of 10.1 Has your jurisdiction introduced any legislation an indirect interest in commercial real estate in your in response to the OECD’s project targeting Base jurisdiction? Erosion and Profit Shifting (BEPS)?

There is no tax on the transfer of an indirect interest in commercial Kosovo has not introduced any legislation in response to the real estate located in Kosovo. OECD’s project targeting BEPS.

8.3 Does your jurisdiction have a special tax regime 10.2 Does your jurisdiction intend to adopt any legislation for Real Estate Investment Trusts (REITs) or their to tackle BEPS which goes beyond what is equivalent? recommended in the OECD’s BEPS reports?

Kosovo does not have any special regime for REITs or their There is no any expressed intention of Kosovo to adopt any equivalent. legislation to tackle BEPS.

9 Anti-avoidance and Compliance 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

9.1 Does your jurisdiction have a general anti-avoidance Kosovo does not support public CBCR. or anti-abuse rule?

The Tax Procedure Law provides for the right of tax authorities 10.4 Does your jurisdiction maintain any preferential tax to disregard and re-characterise a transaction or element of the regimes such as a patent box? transaction that does not have a substantial economic effect, where the form of the transaction does not reflect its economic substance Kosovo does not maintain any preferential tax regimes. and where it was entered into as part of a scheme to avoid a tax liability. 11 Taxing the Digital Economy

9.2 Is there a requirement to make special disclosure of avoidance schemes? 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? There are no requirements to disclose avoidance schemes.

Kosovo has not taken unilateral action with regard to tax digital 9.3 Does your jurisdiction have rules which target not activities. only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services There are no such rules. tax?

Kosovo has not expressed support for the proposal for a digital services tax.

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Genc Boga Alketa Uruçi Boga & Associates Boga & Associates 27/5 Nene Tereza Str. 27/5 Nene Tereza Str. 10000 Pristina 10000 Pristina Kosovo Kosovo

Tel: +383 38 223 152 Tel: +383 38 223 152 Email: [email protected] Email: [email protected] URL: www.bogalaw.com URL: www.bogalaw.com Kosovo Genc Boga is the founder and Managing Partner of Boga & Alketa is a Partner at Boga & Associates, which she joined in 1999. Associates, which operates in the jurisdictions of both Albania and She practises in the areas of concession and energy, where she Kosovo. Mr. Boga’s fields of expertise include business and company manages energy assignments on any regulatory, corporate and law, concession law, energy law, corporate law, banking and finance, commercial aspects, including international arbitration proceedings. taxation, litigation, competition law, real estate, environment protection law, etc. Alketa has extensive experience in providing regular tax advice to commercial companies, for corporate tax, VAT, employees’ taxation Mr. Boga has solid expertise as an advisor to banks, financial matters, involvement in the management of several tax aspects of institutions and international investors operating in major projects in mergers and acquisitions transactions, tax planning and restructuring. energy, infrastructure and real estate. Thanks to his experience, Boga & Associates is retained as a legal advisor on a regular basis by the In addition, Alketa has assisted clients in their acquisitions of Albanian most important financial institutions and foreign investors. and Kosovo targets, including tax and legal due diligences, structuring of the acquisition transaction, assisting in the preparation of the He regularly advises EBRD, IFC and World Bank in various investment transaction documents and the respective closing. projects in Albania and Kosovo. Alketa is fluent in English and Italian. Mr. Boga is continuously ranked as a leading lawyer by major legal directories: Chambers Global; Chambers Europe; The Legal 500; and IFLR1000. He is fluent in English, French and Italian.

Boga & Associates, established in 1994, has emerged as one of the premier law firms in Albania, earning a reputation for providing the highest quality of legal, tax and accounting services to its clients. The firm also operates in Kosovo (Pristina) offering a full range of services. Until May 2007, the firm was a member firm of KPMG International and the Senior Partner/Managing Partner, Mr. Genc Boga, was also the Senior Partner/Managing Partner of KPMG Albania. The firm’s particularity is linked to the multidisciplinary services it provides to its clients, through an uncompromising commitment to excellence. Apart from the widely consolidated legal practice, the firm also offers the highest standards of expertise in tax and accounting services, with keen sensitivity to the rapid changes in the Albanian and Kosovo business environment. The firm delivers services to leading clients in major industries, banks and financial institutions, as well as to companies engaged in insurance, construction, energy and utilities, entertainment and media, mining, oil and gas, professional services, real estate, technology, telecommunications, tourism, transport, infrastructure and consumer goods. The firm is continuously ranked as a “top tier firm” by major directories: Chambers Europe; The Legal 500; and IFLR1000.

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Liechtenstein

Sele Frommelt & Partners Attorneys at Law Ltd. Heinz Frommelt

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? International treaties ratified by Liechtenstein rank higher than domestic law. Consequently, a treaty override is not conceivable. To date, Liechtenstein has signed 20 Double Taxation Agreements (DTAs), two of which are not yet in force. Liechtenstein has concluded DTAs with the following countries (in alphabetical 1.6 What is the test in domestic law for determining the order): Andorra (2015); Austria (1955, amended in 1969 and 2013); residence of a company? Bahrain (2012, not yet in force); the Czech Republic (2014); Georgia (2015); Germany (2011); Guernsey (2014); Hong Kong SAR PRC Any legal entity having its registered seat or its place of effective (2010); Hungary (2015); Iceland (2016); Jersey (2018, not yet in management in Liechtenstein is subject to unlimited corporate tax force); Luxembourg (2009); Malta (2013); Monaco (2017); San liability in Liechtenstein (Art. 44 para. 1 Tax Act). The registered Marino (2009); Singapore (2013); Switzerland (1995, amended seat is the place defined as such in the statutes of the legal entity 2015); the United Arab Emirates (2015); the United Kingdom and determines the substantive law applicable to the same, whereas (2012); and Uruguay (2010). the place of effective management is deemed as the place where the Liechtenstein is keen on expanding its DTA network. As a result, central entrepreneurial activity for the entity is undertaken (Art. 2 negotiations are ongoing with several jurisdictions, in particular para. 1 lit. d) Tax Act), i.e. the place where the strategic management with major European countries, with a view to signing further DTAs. decisions are made. Such is not the place where the day-to-day administration of the entity is carried out.

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

All DTAs concluded by Liechtenstein follow the OECD Model 2.1 Are there any documentary taxes in your jurisdiction? Convention.

Liechtenstein is part of the Swiss customs area, for which reason 1.3 Do treaties have to be incorporated into domestic law the Swiss federal legislation on stamp duties (including formation before they take effect? duty, duty on insurance premiums and securities transfer stamp tax) is directly applicable in Liechtenstein. DTAs are concluded and signed by the Government. In order to Swiss formation (or issuance) duty is levied upon a company limited come into effect and become law, they must be approved by the by shares, a limited liability company or a co-operative at a rate of Liechtenstein Parliament and be published in the Official Gazette. 1% with an allowance of CHF 1 million upon formation or increase of the statutory capital of the entity or in the case of a non-repayable 1.4 Do they generally incorporate anti-treaty shopping equity contribution by the shareholder. Certain transactions (e.g. rules (or “limitation on benefits” articles)? restructuring within a corporate group) are tax-exempt. The Swiss duty on insurance premiums applies upon insurance Yes. In general, the DTAs concluded so far contain anti-treaty contracts concluded by a Liechtenstein-based insurance company shopping rules, and all future DTAs shall contain such rules in or between a Liechtenstein-resident policyholder and a non- light of Liechtenstein’s commitment to implement BEPS Action Liechtenstein-based insurance company. The standard rate amounts Point 6 (see question 10.1 below). Currently, the DTAs with Hong to 5% of the premium; the rate for life insurance is 2.5%. Several Kong SAR PRC, Luxembourg, Malta and Singapore do not contain types of insurance are exempt. limitation-on-benefits (LOB) clauses. However, with respect to Swiss securities transfer stamp tax applies upon the sale of certain Luxembourg, the two Governments have agreed that LOB shall securities, viz. mainly bonds, shares (in companies or funds) or nevertheless apply in respect of privileged taxed entities (i.e. subject other participating rights, provided one of the directly or (as an to merely the minimum income tax; see question 4.1 below).

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intermediary) indirectly involved parties is a Swiss- or Liechtenstein- resident stockbroker. In particular, Swiss or Liechtenstein banks or 2.4 Is it always fully recoverable by all businesses? If not, securities dealers are deemed as stockbrokers, as are any corporate what are the relevant restrictions? entity with more than CHF 10 million worth of taxable securities in their books. The applicable rates vary between 0.15% and 0.30%, VAT is, in principle, recoverable for all entrepreneurs in relation depending on the residency of the entity having issued the taxable to the VAT paid on all goods and services (including the import security. service VAT). In case the taxpayer uses the goods or services both for entrepreneurial and non-entrepreneurial purposes, the VAT is In all those cases where the Swiss federal legislation on stamp duties recoverable only to a certain extent. Analogous provisions apply in is not applicable, a special Liechtenstein formation duty or a duty on the case of privately used goods or services. insurance premiums is levied (Art. 66 and 67 Tax Act). The Liechtenstein formation duty is levied upon the formation of a legal entity, transfer of its registered seat into Liechtenstein or 2.5 Does your jurisdiction permit VAT grouping and, if so, Liechtenstein increase of the statutory capital, unless the Swiss legislation on is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? stamp duties is already applicable. Thus, such duty applies, e.g. in the case of the setting up of a Liechtenstein foundation or a Entities having their registered seat or permanent establishment in Liechtenstein establishment (Anstalt). The standard rate is 1% with Liechtenstein, which are connected under a uniform direction of a an allowance of CHF 1 million, which decreases to 0.5% for capital single entity, may apply to be treated as a single VAT-taxable entity above CHF 5 million and to 0.3% for capital above CHF 10 million. (VAT group). The group can also comprise entities, which do not Foundations are subject to a formation duty at a rate of 0.2% on their pursue a commercial activity, as well as individuals. The pooling statutory capital; at least 200 CHF. The same charge applies upon to a VAT group can be activated as of the beginning of each taxable the setting up of a trust. year and be terminated as of the end of the respective taxable year The Liechtenstein duty on insurance premiums is charged on (Art. 13 VAT Act). insurance contracts, provided the insured risk is located in A VAT group can be formed by any legal entity, partnership Liechtenstein and unless the Swiss legislation on stamp duties is or individual as long as they have their registered seat or a already applicable. The provision is very much coined after the permanent establishment in Liechtenstein. Entities having their Swiss equivalent, thus the same rates apply (standard rate 5%, life registered seat abroad can be part of a VAT group provided they insurance 2.5%). Several types of insurance are exempt. have a permanent establishment in Liechtenstein. Liechtenstein Moreover, Liechtenstein has a capital gains tax which is levied upon permanent establishments of Swiss-incorporated companies are the transfer of real estate (see question 8.1 below). attributed to the Swiss headquarters and can therefore form part of a Swiss VAT group. Conversely, Swiss permanent establishments 2.2 Do you have Value Added Tax (or a similar tax)? If so, of Liechtenstein-incorporated companies are attributed to the at what rate or rates? Liechtenstein headquarters and can thus not be part of a Swiss VAT group, but only a Liechtenstein VAT group. Because of the customs area with Switzerland, Liechtenstein is part of the Swiss VAT area and applies the substantive Swiss VAT regime. 2.6 Are there any other transaction taxes payable by Liechtenstein has thus enacted its own VAT Act (2009) and a VAT companies? Ordinance (2009), which are modelled upon the Swiss legal basis. The standard VAT rate has been 7.7% since 01.01.2018. A reduced No, there are no other transaction taxes apart from the stamp duties rate of 2.5% applies for certain goods like food, medicaments, (see question 2.1 above) and real estate capital gains tax (see books and newspapers, inter alia. A special rate of 3.7% applies for question 8.1 below). bed and breakfast facilities (see Art. 25 VAT Act).

2.7 Are there any other indirect taxes of which we should 2.3 Is VAT (or any similar tax) charged on all transactions be aware? or are there any relevant exclusions? No, there are not. The general principle is that all services within the meaning of the VAT Act (i.e. supply of goods and provision of services), which are rendered within Switzerland or Liechtenstein by an entrepreneur 3 Cross-border Payments resident in Liechtenstein, are subject to VAT. In addition, VAT is levied by a reverse charge procedure upon services imported from 3.1 Is any withholding tax imposed on dividends paid by an entrepreneur based outside the VAT area (i.e. Switzerland and a locally resident company to a non-resident? Liechtenstein), provided the annual aggregate amount exceeds CHF 10,000. The import of goods from outside Switzerland is subject to As a rule, Liechtenstein does not levy any withholding tax on import duty VAT. The VAT Act lists several transactions which are dividends. However, under the terms of a Tax Cooperation not taxable. The most important are services by medical doctors, Agreement with Austria concluded in 2013, Liechtenstein paying dentists and other medical practitioners, children and youth care, agents, e.g. banks, are obliged to withhold a tax in the amount of services in the area of education and training, artistic performances, 27.5% on dividends (as well as on capital gains) paid to a trust, insurance and reinsurance transactions, dealing with securities and foundation or establishment deemed transparent for tax purposes fund shares, transfer of real estate, letting of real estate and sale of with a beneficial owner resident in Austria, unless the bank’s agricultural products. client and beneficial owner have waived the banking secrecy and An entrepreneur with an annual turnover below CHF 100,000 is out- instructed the bank to notify the income payment directly to the of-scope of VAT. Austrian Tax Authority.

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has been defined as relatively far-reaching, including not only 3.2 Would there be any withholding tax on royalties paid participating entities, entities of which the taxpayer is a beneficiary, by a local company to a non-resident? and members of the board of the taxpayer, but even persons to whom the taxpayer is connected by personal bonds of family relationship or Liechtenstein does not levy any withholding tax on royalties. friendship (Art. 31a Tax Ordinance). Taxpayers are further obliged to keep appropriate transfer pricing documentation and to apply the 3.3 Would there be any withholding tax on interest paid OECD Transfer Pricing Guidelines for Multinational Enterprises by a local company to a non-resident? (Art. 31b Tax Ordinance). In determining the appropriate transfer pricing method, taxpayers have to consider the effective facts As a rule, Liechtenstein does not levy any withholding tax on and circumstances of the respective transaction, and may choose interest. However, under the terms of a Tax Cooperation Agreement between the comparable uncontrolled price method, the resale

Liechtenstein with Austria concluded in 2013, Liechtenstein paying agents, e.g. price method, the cost plus method, the transactional net margin banks, are obliged to withhold a tax in the amount of 25% on interest method, the transactional profit split method or another method in paid to a trust, foundation or establishment deemed transparent for case the other available methods are not suitable for reflecting the tax purposes with a beneficial owner resident in Austria, unless the transfer price objectively. Taxpayers which are part of a group with bank’s client and beneficial owner has waived the banking secrecy a consolidated turnover in excess of 900 million CHF are obliged and has instructed the bank to notify the income payment directly to to document the appropriateness of the transfer price by way of a the Austrian Tax Authority. Master File and a Local File pursuant to the OECD-Guidelines. It is possible, and also general practice, to obtain an Advance Pricing Agreement (APA) from the Tax Authority in relation to the 3.4 Would relief for interest so paid be restricted by applicable transfer price. reference to “thin capitalisation” rules?

Liechtenstein does not have thin capitalisation rules. However, with 4 Tax on Business Operations: General respect to interest-bearing liabilities between related parties booked in Swiss francs, the Liechtenstein Tax Authority currently allows a maximum interest rate of 1.5%. For liabilities in other currencies, 4.1 What is the headline rate of tax on corporate profits? other rates apply (e.g. 1.75% for EUR, 2.75% for GBP). Corporate profits are taxed at a flat rate of 12.5% p.a., whereby a minimum annual tax of CHF 1,800 is payable irrespective of gains 3.5 If so, is there a “safe harbour” by reference to which made by the legal entity. tax relief is assured? A special tax regime applies for legal entities qualifying as so-called Private Asset Structures (basically a holding or investment vehicle Please see question 3.4 above. – very often a private foundation – used for the management of an individual’s private wealth without pursuing an economic activity). 3.6 Would any such rules extend to debt advanced by a Those entities pay merely the minimum annual tax irrespective of third party but guaranteed by a parent company? their effective income and are not required to file a tax return.

Generally no, as the administrative practice illustrated in question 3.4 above applies only between related entities. However, each 4.2 Is the tax base accounting profit subject to adjustments, or something else? case must be looked at individually as further utilisation of the loaned amount may have an influence on the assessment by the Tax Yes, that may be the case. The relevant tax base is the annual profit Authority. pursuant to the financial statements drawn up under the applicable commercial and accounting rules. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? No, there are not. The main adjustments leading to an increase in the net profit are: depreciations, value adjustments and reserves which are 3.8 Is there any withholding tax on property rental not commercially justified; profit distributions and hidden profit payments made to non-residents? distributions to shareholders or related persons; disallowance of tax expenses; and income generated from capital made available to There is no withholding tax on property rental payments made to shareholders or related persons which does not correspond to the non-residents. However, real estate located in Liechtenstein which “arm’s length” principle. is owned by a non-resident individual is subject to limited wealth tax. 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 3.9 Does your jurisdiction have transfer pricing rules? subsidiaries?

The Liechtenstein Tax Act contains a general “arm’s length” The Tax Act provides for group taxation upon request (Art. 58 Tax principle in its Art. 49, which states that commercial transactions Act). A tax group is possible with a parent subject to unlimited tax between related persons must correspond to the terms generally liability in Liechtenstein, and affiliated group members subject to tax applied between unrelated parties. The term “related person” in Liechtenstein or abroad. Group taxation allows the proportionate

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offset of losses from the subsidiaries to the group parent, or from the group parent to any group member subject to unlimited tax liability 5.3 Is there any special relief for reinvestment? in Liechtenstein. No, there is not.

4.5 Do tax losses survive a change of ownership? 5.4 Does your jurisdiction impose withholding tax on the Yes. Losses may be carried forward for an indefinite period of proceeds of selling a direct or indirect interest in local assets/shares? time, but the carryover is limited to 70% of the taxable net gain. Special rules apply in relation to losses from a foreign permanent establishment. The sale of real estate located in Liechtenstein is subject to real estate capital gains tax, payable by both resident and non-resident owners.

The applicable rate is equal to the income applicable for Liechtenstein 4.6 Is tax imposed at a different rate upon distributed, as unmarried individuals plus a municipality surcharge of 200%. The opposed to retained, profits? sale of shares of a real estate holding company owning real estate in Liechtenstein is treated for tax purposes as if the real estate was sold No; Liechtenstein taxes profits on an annual arising basis. directly. The tax is owed by the seller. The sale of shares of local companies is not subject to any 4.7 Are companies subject to any significant taxes not withholding tax. covered elsewhere in this chapter – e.g. tax on the occupation of property? 6 Local Branch or Subsidiary? No; there is no such tax on the occupation of property. Foundations and trusts with settlors and/or beneficiaries resident in Liechtenstein 6.1 What taxes (e.g. capital duty) would be imposed upon may be subject to endowment tax if assets are transferred to a the formation of a subsidiary? foundation or trust which is deemed opaque for wealth tax purposes. Endowment tax is not applied to companies limited by shares and Any Liechtenstein company formed as a subsidiary of a resident or other types of corporate entities. non-resident parent company will be subject to the same formation duties applied to all resident legal entities, i.e. depending on 5 Capital Gains the legal form, either the Swiss formation (issuance) duty or the Liechtenstein formation duty (see question 2.1 above).

5.1 Is there a special set of rules for taxing capital gains and losses? 6.2 Is there a difference between the taxation of a local subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? Capital gains on the sale of participations in Liechtenstein or abroad, as well as the sale of real estate located outside of Liechtenstein, are A subsidiary locally formed or having its seat transferred into tax-exempt. However, as from 01.01.2019, the gain on participations Liechtenstein is subject to taxation on its worldwide income. is taxable if the owned foreign company generates more than 50% The branch of a non-resident company is taxed as a permanent of its income from passive income and is taxed at a low rate (i.e. less establishment only on its Liechtenstein-sourced income, which is than half of the Liechtenstein corporate tax rate (i.e. 6.25%) in case deemed as the income from agricultural and silvicultural land in of ownership below 25% or in case of ownership above 25% if the Liechtenstein, rental income from real estate located in Liechtenstein effective tax charge of the foreign company is less than half of the and the taxable net income from a permanent establishment located effective tax charge of the local company (switch-over principle)). in Liechtenstein. The definition of “permanent establishment” With regard to existing participations as of 31.12.2018, this second contained in the Tax Act is akin to the definition used in the OECD rule will apply from 2022 only. Model Tax Convention. Gains realised upon the sale of any other assets are subject to ordinary corporate income tax. Gains from the sale of real estate located in Liechtenstein are subject to special rules (see question 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 5.4 below). Capital losses are tax-deductible until end of 2018. With effect A local branch is subject to limited tax liability in relation to its from 01.01.2019, such provision will be abolished. Liechtenstein-sourced income. The branch is obliged to follow the same accounting rules which exist for other entities, and its taxable 5.2 Is there a participation exemption for capital gains? profits are thus determined in accordance with the applicable accounting provisions. Capital gains on the sale of shares in participations are tax-exempt, irrespective of the quota held and the duration of time for which the 6.4 Would a branch benefit from double tax relief in its shares are held. However, the exemption will not apply in case of jurisdiction? a foreign company which generates more than 50% of its income from passive income and whose net gain is taxed at a rate which is A branch is not deemed as a separate legal entity under domestic less than half of the Liechtenstein corporate tax rate (i.e. 6.25%) (see law. The branch can therefore not benefit directly from double tax question 5.1 above). relief, but only its head office or entrepreneur, depending on the terms of the applicable DTA.

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6.5 Would any withholding tax or other similar tax be 8.2 Does your jurisdiction impose tax on the transfer of imposed as the result of a remittance of profits by the an indirect interest in commercial real estate in your branch? jurisdiction?

Liechtenstein does not impose any withholding tax or similar tax The Tax Act lists certain transactions concerning real estate, which with respect to the remittance of profits by the branch. are deemed as transfer of real estate for capital gains tax purposes. These are: the transfer of real estate by way of forced execution or expropriation; the change of ownership by means of transactions 7 Overseas Profits having the same effect as a disposal; the encumbrance of a piece of real estate if this influences the saleability or the sale value of the real estate considerably and consideration is charged for; and the Liechtenstein 7.1 Does your jurisdiction tax profits earned in overseas branches? transfer of shares in a real estate holding company (Art. 35 para. 3 Tax Act). The earnings of the foreign branch of a Liechtenstein company are exempt from tax in Liechtenstein. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their equivalent? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? No, it does not. Generally, dividend income is exempt from income tax. However, as from 01.01.2019, dividends are taxed upon the local company 9 Anti-avoidance and Compliance if and insofar as (i) the receiving company holds at least 25% of the dividend-paying company and the dividend payment has been treated as a tax allowance at the level of the dividend-paying 9.1 Does your jurisdiction have a general anti-avoidance company (correspondence principle); or (ii) in case the dividend- or anti-abuse rule? paying company generates more than 50% of its income from passive income and its net gain is taxed at a low rate (i.e. less than Yes. Art. 3 Tax Act stipulates when a tax arrangement can be half of the Liechtenstein corporate tax rate (i.e. 6.25%)) in case of deemed abusive. A legal or factual arrangement, which can be ownership below 25% or in case of ownership above 25% if the deemed inadequate in relation to its economic reality and whose only effective tax charge of the dividend-paying company is less than aim is to obtain a tax advantage, is deemed abusive if the granting of half of the effective tax charge of the local company (switch-over tax advantages could collide with the rationale of the Tax Act and if principle). With regard to existing participations as of 31.12.2018, the taxpayer cannot indicate any economic or otherwise significant this second rule will apply from 2022 only. arguments for such arrangement and the same does not show any of their own economic consequences. All mentioned requirements must be met in order to affirm the application of the anti-avoidance 7.3 Does your jurisdiction have “controlled foreign provision. If the anti-avoidance rule is applied, the Tax Authority is company” rules and, if so, when do these apply? empowered to disregard the tax planning and to assess the taxes as they would be levied in the case of an appropriate legal arrangement No; Liechtenstein does not have “controlled foreign company” in compliance with the respective business transactions, facts and legislation. However, for individuals resident in Liechtenstein, circumstances. In practice, this rule has so far been used in just a a comparable provision is applied in respect of foundations small number of cases. or trusts used as wealth holding vehicles. These are generally deemed as tax transparent by the Tax Authority and their assets are Moreover, with effect from 01.01.2019, new anti-abuse provisions consequently subject to wealth taxation in respect of the settlors in relation to the notional equity interest deduction will become or the beneficiaries resident in Liechtenstein. This provision does applicable. not apply to foundations or trusts with settlors and/or beneficiaries resident outside of Liechtenstein. 9.2 Is there a requirement to make special disclosure of avoidance schemes?

8 Taxation of Commercial Real Estate No, there is not.

8.1 Are non-residents taxed on the disposal of 9.3 Does your jurisdiction have rules which target not commercial real estate in your jurisdiction? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Yes. Capital gains realised by a non-resident on the disposal of real avoidance? estate located in Liechtenstein are subject to capital gains tax. The applicable rate is equal to the income tax bracket applicable for No; tax avoidance (as opposed to tax evasion) is not a crime under unmarried individuals plus a municipality surcharge of 200%. The Liechtenstein law. tax is owed by the seller.

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■ Country-by-Country Reporting (CBCR): Liechtenstein has 9.4 Does your jurisdiction encourage “co-operative implemented this BEPS recommendation as per Action compliance” and, if so, does this provide procedural Point 13. The duty to file the relevant report applies toa benefits only or result in a reduction of tax? parent company of a multinational group of companies with an annual turnover exceeding CHF 900 million. The report The Tax Act provides for the possibility of a voluntary disclosure will be exchanged with those countries that have ratified which allows the regularisation of undeclared income or assets the Multilateral Competent Authority Agreement on the without incurring in penalties. Exchange of CBC Reports, in which any of the members of the multinational group are subject to tax either by virtue of residency or on the grounds of a permanent establishment. 10 BEPS and Tax Competition ■ Anti-treaty abuse: In accordance with BEPS Action Point 6, Liechtenstein has committed to include LOB clauses and

anti-abuse clauses in all its DTAs. Liechtenstein 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? Liechtenstein applies all the Minimum Standards of the BEPS proposal and has therefore implemented – at this stage – four of No. From today’s standpoint, Liechtenstein’s plan is to implement the 15 BEPS Action Points. The following amendments came into the Minimum Standards requested by the BEPS Action Points. force on 01.01.2017: ■ Hybrid arrangements: The so-called “correspondence principle” was introduced with regard to the taxation of 10.3 Does your jurisdiction support public Country-by- dividends. Under the new regime, dividend income from Country Reporting (CBCR)? participations above 25% are no longer tax-free, if the dividend paid has been treated as a tax allowance at the level Yes. CBCR has been introduced from 01.01.2017 onwards (see of the dividend-paying company. The idea is to combat question 10.1 above). hybrid arrangements which can lead to a double non-taxation. ■ Exchange of Tax Rulings: Liechtenstein has introduced a duty to exchange Tax Rulings with foreign jurisdictions in 10.4 Does your jurisdiction maintain any preferential tax accordance with BEPS Action Point 5. The exchange is regimes such as a patent box? carried out based on the principles of spontaneous exchange of tax information. Rulings are exchanged in relation to: Liechtenstein has had a preferential tax regime for income from IP preferential tax situations, transfer-pricing issues, cross- rights since 2011, which taxed income from the exploitation or sale border decrease of taxable gains not evidenced in the of patents, trademarks and designs, as well as software and scientific financial accounts, existence of a permanent establishment or databases at a preferred rate of 2.5%. Because the IP-box regime attribution of gains to a permanent establishment, income or was deemed not to comply with the OECD’s nexus approach, the tax money-flow to associated companies routed via other legal regime was abolished with effect from 01.01.2017. Grandfathering entities. provisions until the calendar year 2020 apply for companies, which Only Tax Rulings concluded after 31.12.2016 or those concluded were already making use of this tax regime up to the end of 2016. before such date and still in force as of 01.01.2017 are subject to the exchange. The jurisdiction(s) with whom an exchange occurs will depend 11 Taxing the Digital Economy upon the type of Tax Ruling concluded.

■ Intellectual Property box (IP-box) regime: Liechtenstein has 11.1 Has your jurisdiction taken any unilateral action to tax had an IP-box regime since 2011. The current regime was digital activities or to expand the tax base to capture deemed not to comply with BEPS Action Point 5 insofar as digital presence? the list of IP rights eligible for preferred taxation was rather wide (including, e.g. trademarks) and the provisions did not reflect the “nexus approach” required by the OECD. The No, it has not. tax regime has therefore been abolished with effect as of 01.01.2017. Grandfathering provisions until the calendar 11.2 Does your jurisdiction support the European year 2020 apply for companies, which were already making Commission’s interim proposal for a digital services use of this tax regime up to the end of 2016. tax? ■ Transfer pricing documentation: Following BEPS Action Point 13, a duty to establish transfer pricing documentation Liechtenstein is not a Member of the EU and is therefore following on significant transactions with related persons has been the European Commission’s proposal in a mere passive role. So introduced. The assessment of the transfer prices is to be made far, the Government has not taken an official stand on the digital in accordance with the internationally recognised Transfer services tax. Pricing Rule, e.g. the OECD Transfer Price Guidelines for Multinational Enterprises and Tax Administrations.

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Heinz Frommelt Sele Frommelt & Partner Attorneys at Law Ltd. P.O. Box 1617, Meierhofstrasse 5 FL-9490 Vaduz Liechtenstein

Tel: +423 237 11 55 Email: [email protected] URL: www.sfpartner.li

Heinz Frommelt is a partner with Sele Frommelt & Partner Attorneys

Liechtenstein at Law Ltd. and of NSF Services Trust reg. Heinz Frommelt studied law at the University of Zurich, graduating in 1988 (Dr. iur.) and was admitted to the Bar in 1992. Heinz Frommelt acted as Minister of Justice in the Government of the Principality of Liechtenstein from 1997 to 2001. His practice focuses on tax planning and asset structuring, but also on banking, investment funds and insurance law. Heinz Frommelt publishes on a range of tax issues and is active in various think tanks. He is Secretary of the International Fiscal Association (IFA), Liechtenstein branch, a member of Liechtenstein Chamber of Lawyers, AIJA (International Association of Young Lawyers) and DACH Europäische Anwaltsvereinigung (European Lawyers’ Association).

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

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Luxembourg Mathilde Ostertag

GSK Stockmann Katarzyna Chmiel

parliament (Chambre des députés). The parliament’s approval takes 1 Tax Treaties and Residence the form of a law (loi d’approbation). After the aforementioned procedure is completed, the treaty will take effect once it is ratified 1.1 How many income tax treaties are currently in force in by the Grand Duke. The treaty must then be published in the your jurisdiction? Mémorial in order to be in force in Luxembourg. Tax treaties signed by Luxembourg generally specify an exact date As at September 2018, Luxembourg has 83 tax treaties currently on which the treaty enters into force. in force and an additional 12 under negotiation.

In addition, Luxembourg was one of 68 jurisdictions that signed 1.4 Do they generally incorporate anti-treaty shopping the Multilateral Convention to Implement Tax Treaty Related rules (or “limitation on benefits” articles)? Measures to Prevent BEPS (the “MLI”) during the signing ceremony held by the OECD in Paris on 7 June 2017. The Bill As a general rule, tax treaties concluded by Luxembourg do not n° 7333 was submitted to the Luxembourg parliament on 3 July include anti-treaty shopping rules. However, a limitation on benefits 2018. It is expected that the MLI will become effective for (“LOB”) clause is used in the treaties signed with i.a. Hong Kong, Luxembourg purposes in 2020. Poland, Senegal, Singapore, Trinidad and Tobago, and the USA. Interestingly, the new treaty signed with France contains a specific 1.2 Do they generally follow the OECD Model Convention anti-treaty shopping rule in its new Article 28 (“Denial of benefits or another model? under the Convention”). In addition the MLI signed by Luxembourg contains a general Tax treaties concluded by Luxembourg are usually based on the anti-abuse provision in the preamble to all of its tax treaties, which OECD Model Tax Convention (the “OECD MC”). Luxembourg includes the express statement to eliminate double taxation without has agreed with most of the treaty countries to implement a provision creating opportunities for reduced taxation or non-taxation. Such on the exchange of information in line with Article 26 of the OECD provision is a minimum standard and cannot be opted out by any of MC. Although not yet ratified, the new tax treaty signed with the signatories to the MLI. In the context of Article 7 (prevention France on 20 March 2018 reflects all the post-BEPS changes and of treaty abuse) countries may choose to apply either the Principle the 2017 version of the OECD MC; inter alia, the treaty changes the Purpose Test (“PPT”) or the detailed LOB provisions. Like most definition of a permanent establishment to include commissionaire of the signatories to the MLI, Luxembourg chose to apply the PPT. arrangements and restricts the scope of the “preparatory and auxiliary” activities. It further changes the distributive rules for 1.5 Are treaties overridden by any rules of domestic payments of dividends, interest and royalties in line with the 2017 law (whether existing when the treaty takes effect or OECD MC. introduced subsequently)? A few treaties signed by Luxembourg deviate from the OECD MC. A notable example is the treaty concluded with the USA which Luxembourg applies the hierarchy of norms. The constitution is follows the US Model Income Tax Convention. A more recent the highest source of law, followed by laws and regulations. It example is the treaty signed with Senegal which more closely is worth noting that relationship between international law and resembles the UN model. domestic law is governed entirely by case law. Such established case law states that tax treaties incorporated into internal legislation 1.3 Do treaties have to be incorporated into domestic law by a ratification law should constitute a superior law. Therefore, if before they take effect? a conflict between the provisions of an international treaty and those of a national law occurs, international law should take precedence All tax treaties are incorporated into domestic law pursuant to the over the national law. following procedure: the legislator adopts a consenting law (loi Further to the above and under the general principles of Luxembourg d’adaptation) that authorises the Grand Duke to ratify the tax treaty. public law, treaties are considered a “lex specialis” and therefore Before the treaty takes effect, it is submitted for approval by the take precedence over the national provisions.

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Directive”). Such exemptions are granted i.a. in the context of 1.6 What is the test in domestic law for determining the financial services, fund management or medical services. An residence of a company? important point to highlight is that Luxembourg does not allow for an “opt in/opt out” mechanism for activities that are exempt, with According to Article 159 of the Luxembourg income tax law the exception of rent, in which case the taxable person can choose to (“LITL”), an entity is treated as a resident of Luxembourg for either apply VAT or not. direct tax purposes if it has (i) its registered office (siège statutaire) in Luxembourg, or (ii) its central administration (administration centrale, i.e. the place of effective management) located in 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? Luxembourg.

In accordance with EU VAT rules, companies registered for VAT can Luxembourg 2 Transaction Taxes deduct input VAT to the extent it is linked with their output VATable economic activity. In the past a pro rata deduction was used based on the percentage of VATable and non-VATable activities. However, 2.1 Are there any documentary taxes in your jurisdiction? after the judgment of the Court of Justice of the European Union (the “CJEU”) in BLC Baumarkt GmbH & Co. KG (C-511/10) the Under Luxembourg law, certain acts such as official acts, acts VAT directive must be interpreted as allowing Member States to use of estate agents and transfer of ownership of certain goods are a more accurate method than the one of the general pro rata. In required to be registered with the Luxembourg Administration de Circular n° 765 of 15 May 2013, the Luxembourg VAT authorities l’Enregistrement, des Domaines et de la TVA. Registration duties referred to a direct allocation or another key allocation method. The are fixed or proportional, depending on the nature of the acts and general pro rata deduction should not be used if a more precise transfers that are subject to them. A fixed fee of €12 is levied on allocation method can be applied. all acts which do not contain a movement of securities, while a As per the Circular n° 765-1 of 11 June 2018 the VAT tax proportional duty (ranging from 0.01% to 14.4% depending on the administration extended the regime applicable in Circular n° transaction and the nature of the underlying asset) is levied on acts 765 to persons carrying out both economic and non-economic and conventions involving a movement of securities. activities for VAT purposes. The former Circular referred only For instance, payment obligations are subject to a proportional to persons carrying out an economic activity partially exempt for 0.24% registration duty (which tax is calculated on the principal or VAT purposes. highest amount stated in the document), if stated in a loan agreement physically attached to a deed subject to mandatory registration (such as a notarial deed). 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that With regard to the transfer of real estate, the registration duty is applied by Sweden in the Skandia case? of 6% (or 9% for Luxembourg City), increased by an additional transcription tax of 1%. Should the real estate property be acquired In its judgment of 4 May 2017, the CJEU ruled that the Luxembourg for resale, the registration duty is increased to 7.2% (10.8% for real implementation of the VAT group regime was not compatible with estate located in Luxembourg City). A reduction of the registration the VAT Directive, as it extended the benefits of the exemption to duty is available in case of a resale within two to four years from taxable activities that were not directly necessary for the exempt or the acquisition. out-of-scope activities of the VAT group. In the light of the above In cases where Luxembourg real estate is contributed to a company decision, Luxembourg has repealed its old regime and implemented (whether Luxembourg resident or foreign) against the issuance of a new VAT group regime as per the law of 6 August 2018 (in line shares, a reduced real estate transfer tax of 1.1% is due (or 1.4% for with the Skandia case (C-7/13)). real estate located in Luxembourg city). The new VAT group regime treats all of the transactions between its members as “out of the scope” of the VAT. One of the major 2.2 Do you have Value Added Tax (or a similar tax)? If so, differences between the new and the former regime is that the VAT at what rate or rates? group regime is restricted to persons established in Luxembourg and Luxembourg branches of foreign companies, whereas the former Luxembourg applies Value Added Tax (“VAT”) pursuant to the law regime allowed for grouping with other Member States of the EU. of 12 February 1979 as amended (the “VAT Law”). Currently four rates are applicable: 17% standard rate; an intermediary rate of 14%; 2.6 Are there any other transaction taxes payable by a reduced rate of 8%; and a super-reduced rate of 3%. Annexes A, companies? B and C provide for a detailed list of services and goods that are subject to the reduced rates. Such Annexes are to be interpreted A fixed registration fee of €75 is due in some specific cases strictly. determined by law such as but not limited to: upon incorporation or subsequent capital increase and migration of a company to 2.3 Is VAT (or any similar tax) charged on all transactions Luxembourg. or are there any relevant exclusions? 2.7 Are there any other indirect taxes of which we should Luxembourg as a Member State of the EU follows the partially be aware? harmonised VAT system and applies exemptions as prescribed for by the Council Directive 2006/112/EC, as amended (the “VAT There are custom and excise duties applicable for certain goods.

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those payments and possible application of a 15% WHT (subject 3 Cross-border Payments to applicable tax treaty or participation exemption if applicable). Back-to-back financing is not subject to the abovementioned ratio. 3.1 Is any withholding tax imposed on dividends paid by As of 1 January 2019, Luxembourg will introduce interest deduction a locally resident company to a non-resident? limitation rules in its legislation (currently under the draft law n° 7318 submitted on 19 June 2018, implementing the ATAD 1 and i.a. Dividends paid to residents as well as non-residents are in principle introducing a new Article 168bis LITL). subject to a 15% withholding tax (“WHT”) in Luxembourg. It The interest limitation rule will be applicable to Luxembourg is possible, however, to benefit either from a reduced rate or corporate taxpayers which are subject to CIT, as well as to an exemption under a double tax treaty or from the domestic permanent establishments of foreign companies. According to the participation exemption regime. draft law “financial undertakings”, “standalone entities”, as well as Luxembourg Domestic participation exemption is granted if, at the time of the securitisation vehicles that are governed by Article 2(2) of the EU dividend distribution: Regulation (2017/2402), are excluded from the scope of application ■ the parent company is a Luxembourg fully taxable company, of the rule thereto. Loans that were concluded before 17 June 2016 or a resident company of a Member State of the EU as defined should as well be grandfathered (as long as the terms of the loans in Article 2 of the EU Parent-Subsidiary Directive 2011/96, have not been modified since). as amended (the “PSD”), or a Swiss resident capital company that is subject to an income tax in Switzerland without being exempt from tax, or a foreign joint-stock company which is 3.5 If so, is there a “safe harbour” by reference to which subject in its country of residence to an income tax regime tax relief is assured? corresponding to the Luxembourg corporate income tax (“CIT”); The only safe harbour rule is set out in the Circular n° 56/1-56bis/1 ■ said company holds or commits to hold a participation of at in relation to transfer pricing rules. The rule stipulates that for least 10% (or with an acquisition price of at least €1.2 million) entities providing financial services to group companies and acting in the nominal share capital of the distributing company; and as a simple intermediary, a minimum return of 2% after tax is ■ such qualifying participation has been held for an considered as a transaction performed at arm’s length. It should uninterrupted period of at least 12 months. be noted that the safe harbour rule applies only at the level of the If the shareholder is an EU company within the scope of the PSD, Luxembourg tax administration and other tax administrations may the exemption applies subject to the additional general anti-abuse consider the transaction as not at arm’s length. rule (“GAAR”) below: ■ the EU parent company is not used for the main purpose or 3.6 Would any such rules extend to debt advanced by a as one of the main purposes of obtaining a tax advantage that third party but guaranteed by a parent company? defeats the object of the PSD. Liquidation proceeds are not subject to dividend WHT. If properly Debts guaranteed by a parent company (other than pledging the structured a partial liquidation may as well not be subject to the shares of the Luxembourg debtor to the creditor) are treated as a WHT. shareholder loan and as a result, in the absence of a transfer pricing In addition dividend payments made by certain type of vehicles, e.g. report, the 85:15 debt-to-equity ratio will most likely be used. SPFs, SICAV, SICAR and securitisation vehicles are not subject to WHT. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? If the interest payments are made not at arm’s length or are paid under a profit participating debt instrument, there is a risk ofre- There has been no WHT on royalties in Luxembourg since 1 January classification of the interest payments as dividend payment, with the 2004. tax consequences set above under question 3.4.

3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 3.8 Is there any withholding tax on property rental payments made to non-residents?

There is no WHT on arm’s length interest payments in Luxembourg. Luxembourg does not levy any WHT on property rental payments Interest paid under certain hybrid instruments or not at arm’s length made to non-residents nor residents. may be subject to a 15% WHT if reclassified as dividend payments by the tax authorities. 3.9 Does your jurisdiction have transfer pricing rules? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? Luxembourg transfer pricing rules are embedded in the revised Article 56 LITL, which incorporates the concept of the arm’s length There is currently no legislation concerning the thin capitalisation principle based on Article 9 OECD MC. The amended provision, ratio specifically but, in practice, the tax administration uses a debt- however, goes further and reflects the spirit set out in BEPS actions to-equity ratio of 85:15 for the intra-group financing of participations. 8–10 such as the concept of comparability analysis and a GAAR In case a taxpayer fails to comply with this ratio, the surplus of that allows the disregarding of a transaction that has been made interest may be requalified as a hidden dividend distribution. without any valid commercial or business justification. Such requalification would result in a lack of deductibility for

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On 27 December 2016, the Luxembourg tax authorities issued the Circular n° 56/1-56bis/1 which has reshaped the transfer pricing 4.4 Are there any tax grouping rules? Do these allow framework for companies carrying out intra-group financing for relief in your jurisdiction for losses of overseas subsidiaries? activities in Luxembourg. The Circular provided additional guidance in terms of substance and transfer pricing requirements in line with the OECD Guidelines. In particular, it provided substantial Luxembourg allows a group of companies to apply a fiscal unity details on how to conduct the comparability and functional analyses (or tax consolidation). Under such regime, the respective taxable in a way consistent with the OECD principles. Furthermore, the profits of each company in the consolidated group are pooled or Circular requires the performance of a comprehensive risk analysis offset to be taxed on the aggregate amount, which means that the in order to determine the adequate level of equity capital. group is effectively treated as a single taxpayer. Generally, the conditions to qualify for a fiscal unity are as follows:

Luxembourg ■ each company that is part of the tax unity is a Luxembourg 4 Tax on Business Operations: General resident fully taxable company (the top entity may be a Luxembourg permanent establishment of a fully taxable non- resident company) (the “Eligible Company”); 4.1 What is the headline rate of tax on corporate profits? ■ at least 95% of each subsidiary’s capital is directly or indirectly held by an Eligible Company; Luxembourg levies CIT on the annual net worldwide profits of ■ each company’s fiscal year starts and ends on the same date; Luxembourg resident companies and on source-based profits of non- and resident companies. Income exceeding €30,000 is taxed at a rate of 18%. In addition a 7% solidarity surcharge for the employment ■ the fiscal unity is applied for at least five financial years. fund and a 6.75% municipal business tax (“MBT”) for companies The taxable income/loss of the fiscal unity is calculated as the sum of registered in Luxembourg City are levied. For companies located the taxable income/loss of each constitutive entity. The vertical fiscal outside of the Luxembourg City a different rate of MBT may apply. unity regime has been extended since 1 January 2016 in accordance The above amounts to an aggregate tax rate for Luxembourg-City with the CJEU case law in particular to allow horizontal integrations. domiciled companies of 26.01%. Eligible Companies (at least two Luxembourg companies) that are held by a common parent established in any EEA country and subject It is worth noting that in the past (from 1 January 2011 up until 31 to tax comparable to Luxembourg’s CIT in its country of residence are December 2015) companies were subject to a minimum CIT in the now also permitted to form a fiscal unity. Companies consolidated for amount of €3,210. However, since that provision was rendered as CIT are also automatically consolidated for MBT. However, there is incompatible with the EU PSD, Luxembourg abolished minimum no tax consolidation for net wealth tax (“NWT”) purposes. CIT and introduced a minimum net wealth tax as of 1 January 2016 which amounts to €4,815. Securitisation entities and venture capital companies are excluded from the possibility to form a fiscal unity in order to prevent tax evasion schemes. 4.2 Is the tax base accounting profit subject to adjustments, or something else? 4.5 Do tax losses survive a change of ownership? As a general rule, companies in Luxembourg follow Luxembourg general accounting principles (“LuxGAAP”) under which both Companies resident in Luxembourg can carry forward their losses upward and downward adjustments are allowed. for 17 years for financial losses realised as from the financial year closing after 31 December 2016 (before that, tax losses could be carried forward indefinitely; losses incurred between 1 January 4.3 If the tax base is accounting profit subject to 1991 and 31 December 2016 are, however, grandfathered in) and adjustments, what are the main adjustments? offset them against any future profits if the following conditions are met cumulatively: Profits in the commercial accounts differ from the taxable profits ■ the losses have not already been offset; mainly for the following reasons: ■ the company has maintained proper accounting in the loss- ■ tax-exempt profits (e.g. as per the participation exemption making period; and regime applicable for dividends and capital gains); ■ the losses are offset by the company that incurred them. ■ add-back expenses (e.g. interest expenses on assets generating tax-exempt income); Based on Luxembourg case law, companies should have a right ■ adjustment to the tax results from the transactions that were to carry forward tax losses in case of change of ownership, unless not at arm’s length (e.g. the interest rate set was not at market an abuse of law has been established. Such condition should be conditions, or interest payments were reclassified as hidden interpreted in the meaning of corporate law and not solely on dividend distribution and hence not tax deductible anymore); economic rationale. The right to offset the losses based on the and hereinabove conditions should only be interpreted in light of the ■ discrepancies between the application of different valuation definition of a company based on corporate law. As a consequence, rules in accounting and in tax (e.g. amortisation, rollover amendments to articles of association relating to sale of shares of relief). the company do not lead to the creation of a new legal entity and Under certain conditions a tax balance sheet may be prepared in a hence do not prohibit that entity from the carrying forward of losses. way which deviates from the statutory accounts. However, application of the tax carry forward may be denied if the transaction occurred purely for tax reasons; the so-called “Mantelkauf ” theory. It should be noted that the tax losses may be offset against CIT and MBT but not against NWT.

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4.6 Is tax imposed at a different rate upon distributed, as 5.3 Is there any special relief for reinvestment? opposed to retained, profits? Yes, Article 54 LITL provides for a reinvestment relief if fixed assets Luxembourg taxes retain and distribute profits in the same manner. consisting of a building or non-depreciable assets are disposed of However, distributed profits may be subject to withholding tax during the course of operations, provided that certain conditions are unless a domestic or treaty exemption applies. It should also be met. The purpose of this article is that the profit on the disposal of noted that undistributed profits might also be subject to NWT. assets should not be taxed if the funds released are retained in the business and will be used to invest in other capital assets. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 5.4 Does your jurisdiction impose withholding tax on the occupation of property? proceeds of selling a direct or indirect interest in local Luxembourg assets/shares? Yes, Luxembourg levies net wealth tax (“NWT”) on Luxembourg corporate tax residents. NWT is assessed on 1 January of each year Luxembourg does not impose WHT on the sale of a direct or indirect on the basis of the estimated realisable value of the company’s net interest in local assets/shares as such profits are taxed as capital operating assets (total assets minus total liabilities, the so-called gains. unitary value). There is a possibility of reduction of the NWT up to the CIT paid for the previous fiscal year. NWT of 0.5% is levied on the unitary value of up to €500 million (inclusive) and 0.05% for the 6 Local Branch or Subsidiary? unitary value exceeding this threshold.

A minimum NWT of €4,815 is due by Luxembourg corporate 6.1 What taxes (e.g. capital duty) would be imposed upon taxpayers holding financial assets representing at least 90% of their the formation of a subsidiary? total assets and having a balance sheet exceeding €350,000. Exemptions are available for securitisation vehicles, SICARs, A €75 registration duty is due upon formation of a subsidiary; the SEPCAVs, ASSEPs, and RAIFs that invest exclusively into risk same duty is paid in case its articles of association are amended. capital-related securities – which only pay the minimum flat NWT of €4,815. A Luxembourg resident company can also benefit from 6.2 Is there a difference between the taxation of a local a NWT exemption on qualifying participations under the same subsidiary and a local branch of a non-resident conditions applicable for the participation exemption on dividend company (for example, a branch profits tax)? income, except that no minimum holding period is required. Branch is a corporate law term; therefore the classification of an entity/ 5 Capital Gains activities as a branch is not imperative for the determination of its tax treatment. Instead tax law uses the term of permanent establishment to determine whether an entity is taxable in Luxembourg. 5.1 Is there a special set of rules for taxing capital gains Branches and subsidiaries fall under the same tax regime. In and losses? addition all transactions between the head office and the branch are disregarded for tax purposes, e.g. there is no WHT on any payments. In principle capital gains arising from the sale of assets are treated as ordinary income and taxed as such, unless participation exemption as specified in question 5.2 below applies. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

5.2 Is there a participation exemption for capital gains? In principle, Luxembourg branches of foreign companies should be taxed the same way as resident companies (subject to the provisions Capital gains exemption is available under the following conditions: of a relevant tax treaty) with the exception that transactions between At the time the capital gains are realised: a branch and a head office are disregarded. ■ the Luxembourg company has held a direct participation representing at least 10% of the nominal paid-up share capital 6.4 Would a branch benefit from double tax relief in its of its subsidiary (or if below 10%, a direct participation jurisdiction? having an acquisition price of at least € 6 million); ■ it has held such qualifying participation for an uninterrupted It depends on the domestic law of the jurisdiction where the head period of at least 12 months; and office is located and the applicable double tax treaty. However, ■ the subsidiary entity is (i) a Luxembourg resident entity fully as a general rule, a permanent establishment is not considered as subject to Luxembourg income taxes, or (ii) a non-resident a resident under a tax treaty and cannot claim the benefits of such capital company liable for an income tax in its country of treaty on its own. residence comparable to the Luxembourg CIT, or (iii) an entity resident in a Member State of the European Union (as defined in Article 2 of the PSD). 6.5 Would any withholding tax or other similar tax be It is important to note that the GAAR does not apply to capital imposed as the result of a remittance of profits by the branch? gains deriving from qualifying subsidiaries benefitting from the Luxembourg participation exemption, regardless of their location. No, transactions between the branch and the head office are not subject to WHT or any similar tax.

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7 Overseas Profits 8 Taxation of Commercial Real Estate

7.1 Does your jurisdiction tax profits earned in overseas 8.1 Are non-residents taxed on the disposal of branches? commercial real estate in your jurisdiction?

As a general rule, in the absence of a double tax treaty, profits Yes, non-residents are subject to capital gains tax upon disposal realised by an overseas branch would be included in the taxable of a real estate located in Luxembourg as per domestic law. Such basis of the Luxembourg head office (as it is taxed on its worldwide position might be overruled under double tax treaties signed with income). However, within the framework of double tax treaties, Luxembourg. Luxembourg generally exempts profit of a permanent establishment Luxembourg which are taxed in the other Contracting State. 8.2 Does your jurisdiction impose tax on the transfer of It should be noted that profits of an overseas branch would not be an indirect interest in commercial real estate in your subject to MBT, as this tax is applicable to commercial activities jurisdiction? carried on in Luxembourg only. Luxembourg does not impose such tax unless the sale is done by a tax transparent entity from a Luxembourg point of view; then 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? the non-resident company directly above the tax transparent entity is taxable on capital gains realised on the sale of the real estate in Yes, all dividends received from abroad are calculated in the taxable question. profits of a company. Such income might be exempt under the applicable tax treaty or the 8.3 Does your jurisdiction have a special tax regime domestic participation exemption. for Real Estate Investment Trusts (REITs) or their equivalent? Under the domestic participation exemption, dividend income (and liquidation proceeds) is exempt if, at the time the income is put at No, Luxembourg does not have any special tax regime for REITs. the disposal of the taxpayer: ■ the subsidiary entity is (i) a Luxembourg resident entity fully subject to Luxembourg income taxes, (ii) an entity resident in 9 Anti-avoidance and Compliance a Member State of the European Union (as defined in Article 2 of the PSD), or (iii) a non-resident capital company liable to an income tax in its country of residence comparable to the 9.1 Does your jurisdiction have a general anti-avoidance Luxembourg CIT; or anti-abuse rule? ■ the Luxembourg company holds a direct participation representing at least 10% of the nominal paid-up share Luxembourg has implemented the provisions of the Directive capital of its subsidiary (or if below 10%, a direct 2014/86/EC of 8 July 2014 amending the PSD introducing a participation having an acquisition price of at least €1.2 GAAR on the participation exemption regime. The rule denies the million); and benefits of the PSD to an arrangement, or series of arrangements, ■ it has held (or commits itself to hold) such qualifying which have been effected for the main purpose, or one of the main participation for an uninterrupted period of at least 12 purposes, of achieving a tax advantage that defeats the object or months. purpose of the PSD, and is/are not commercially genuine having If the dividends are distributed by an EU subsidiary which is listed regard to all relevant facts and circumstances. An arrangement is in Article 2 of the PSD, the exemption applies subject to the two considered as not genuine if it has not been put into place for valid additional conditions below: commercial reasons which reflect economic reality. ■ the EU subsidiary is not used for the main purpose or as one In light of the implementation of the GAAR rule as prescribed by of the main purposes of obtaining a tax advantage that defeats ATAD 1, the draft law n° 7318 will replace the existing abuse of law the object of the PSD (GAAR); and provision with the harmonised GAAR. Such provision reproduces ■ the dividend/profit distribution from the EU subsidiary have mutatis mutandis the GAAR deriving from the amended PSD. not been deducted from its taxable base (anti-hybrid rule). However, one shall remember that the GAAR is still subject to EU law and its interpretation by the CJEU. In this context the CJEU 7.3 Does your jurisdiction have “controlled foreign Cadbury Schweppes case-law and the notion of wholly artificial company” rules and, if so, when do these apply? arrangements should be taken into account when applying the GAAR. Based on the aforementioned draft law n° 7318 transposing ATAD 1, Luxembourg will introduce CFC rules. The ATAD 1 CFC rules 9.2 Is there a requirement to make special disclosure of are the mere implementation of BEPS Action 3. In a nutshell, the avoidance schemes? CFC rule redistributes income of a 50% owned direct or indirect foreign subsidiary or permanent establishment to Luxembourg (i.e. In accordance with DAC 6 (the fifth amendment to the Directive the jurisdiction of the controlling entity), in cases where the actual 2011/16/EU as regards to mandatory automatic exchange of corporate tax paid on that subsidiary’s or permanent establishment’s information in the field of taxation in relation to reportable cross- profits is lower than half the CIT that would have been paidin border arrangements), cross-border arrangements indicating a Luxembourg. The rule, however, excludes Luxembourg MBT from potential risk of tax avoidance should be disclosed to the tax the scope of the CFC provisions.

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authorities. The directive entered into force on 25 June 2018 and would go beyond othe recommendations of the BEPs report. The must be introduced into national law by 31 December 2019. interesting exception to that is the introduction of the mandatory binding arbitration, which is not required under the MLI instrument. Also, it is worth noting that the Luxembourg law on transfer pricing 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also expressly makes reference to the OECD transfer pricing guidelines, anyone who promotes, enables or facilitates the tax when interpreting the law. avoidance? 10.3 Does your jurisdiction support public Country-by- According to DAC 6, intermediaries, i.e. persons who design, market, Country Reporting (CBCR)? organise or make the arrangement available for implementation, are responsible for filing the information on reportable cross-border Yes, Luxembourg has transposed the EU Directive 2016/881 Luxembourg arrangements to the tax authorities. National law may give the concerning automatic and mandatory exchange of tax information intermediary the right to a waiver from filing information if the by the law of 23 December 2016 concerning the CbCR. The law reporting obligation would breach the legal professional privilege. requires the annual filing of a CbCR declaration by every ultimate For example, lawyers have a legal obligation to maintain professional parent company residing in Luxembourg for tax purposes (or a secrecy under the Luxembourg Criminal Code. designated reporting entity). The CbCR must be filed within 12 months from the last day of the fiscal year in question. There is 9.4 Does your jurisdiction encourage “co-operative also an obligation to submit a notification stating whether the compliance” and, if so, does this provide procedural entity is either the ultimate parent of the group, a substitute parent benefits only or result in a reduction of tax? or the designated reporting entity, and if it performs none of these functions, the notification shall clearly state the identity and fiscal A corporate entity may approach the tax administration and request residence of the reporting group entity no later than on the last an advance tax ruling, which constitutes a binding agreement with day of the fiscal year of the group. The notification is submitted the tax authorities and a confirmation of the tax treatment. electronically.

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

10.1 Has your jurisdiction introduced any legislation Yes, the law dated 22 March 2018 replaced the IP box regime that in response to the OECD’s project targeting Base was abolished in 2016. It introduced a new Article 50ter LITL Erosion and Profit Shifting (BEPS)? that provides for an 80% exemption on income derived from the commercialisation of certain intellectual property (“IP”) rights, as Luxembourg implemented many changes to align its law with the well as a full exemption from NWT. The new rules are applicable BEPS Action Plan: as from the fiscal year 2018. Qualifying assets include the following ■ Action 1: implementation of EU VAT directive addressing IP rights: VAT on business to customer’s digital services. ■ patents (broadly defined) and functionally equivalent rights ■ Actions 2–4: implementation of ATAD that addresses CFCs that are legally protected by utility models, extensions and interest deduction limitation rules, with effect as of of patent protection for certain drugs and phyto- 1 January 2019 (hybrid rules are to be implemented by 1 pharmaceutical products, plant breeder’s rights, and orphan January 2020). drug designations; and ■ Action 5: Luxembourg introduced a BEPS-compliant new IP ■ copyrighted software. box regime as of the fiscal year starting in 2018. In line with the BEPS – Action 5 recommendations, marketing- ■ Actions 8–10: introduction of the new Article 56bis to the related IPs can no longer benefit from the IP box regime. LITL (please refer to question 3.9 above). Qualifying income includes the following: ■ Action 12: as per the introduction into domestic law of DAC ■ income derived from the use of, or a concession to use, 6 (please refer to question 9.2 above). qualifying IP rights (i.e. royalty income); ■ Action 13: transfer pricing documentation as requested by ■ IP income embedded in the sales price of products or services the new transfer pricing rules (please refer to question 3.9 directly related to the eligible IP asset. The principles of above); country-by-country reporting (“CbCR”) which is Article 56bis ITL must be used to separate income unrelated applicable in Luxembourg for financial years starting on or to the IP (e.g. marketing and manufacturing returns); after 1 January 2016. ■ capital gains derived from the sale of the qualifying IP rights; ■ Action 14: Luxembourg chose to opt for mandatory and arbitration under the MLI. ■ indemnities based on an arbitration ruling or a court decision ■ Action 15: Luxembourg signed the MLI. directly linked to a breach of a qualifying IP right. The regime applies on a net income basis, meaning that expenses 10.2 Does your jurisdiction intend to adopt any legislation relating to the qualifying IP assets need to be deducted from the gross to tackle BEPS which goes beyond what is qualifying income. The proportion of qualifying net income entitled recommended in the OECD’s BEPS reports? to the benefits will be determined based on the ratio of qualifying expenditures and overall expenditures (nexus ratio). The previously- No, Luxembourg is implementing all the mandatory measures qualifying IP assets can continue to benefit from the old regime during which derive from the EU parliament initiative. However, as a the grandfathering period, running until 30 June 2021. competitive jurisdiction it does not plan to impose measures that

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11 Taxing the Digital Economy 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? Luxembourg does not support the digital service tax to be implemented only on the EU level as it may hurt its competitiveness. However, it believes that such tax should be consulted with the No, as any digital service tax would be detrimental to the fiscal USA and accepted on the OECD level. politics of Luxembourg. During his state visit to France, Luxembourg finance minister Pierre It is worth noting that the Luxembourg VAT Authorities issued Gramegna said that Luxembourg was in favour of taxation of digital Circular n° 787 of 11 June 2018 to extend the VAT exemption Luxembourg giants. However, he said that the initiative “alone”, without the applicable to financial transactions to virtual currencies (which consensus of the OECD countries (or G20) could harm the European follows the CJEU’s position in the Hedqvist case (C-264/14)). Union. Luxembourg’s finance minister believes that Europe should Concurrently therewith, the Luxembourg direct tax administration consult with the USA before going ahead with any taxation plans on issued Circular n° 14/5-99/3-99bis/3 of 26 July 2018 which large digital firms like Google. European authorities have said that classifies virtual currencies as intangible assets for CIT, MBT and the United States has demonstrated willingness to discuss the issue. NTW rather than a currency. It is an interesting point to note that Gramegna added that there is a “consensus inside the European both tax administrations have a diverging interpretation on the Union that we need to find a new model to address the issue of assessment of cryptocurrencies. digital economy”.

Mathilde Ostertag Katarzyna Chmiel GSK Stockmann GSK Stockmann 44, Avenue John F. Kennedy 44, Avenue John F. Kennedy L-1855 L-1855 Luxembourg Luxembourg

Tel: +352 2718 0200 Tel: +352 2718 0200 Email: [email protected] Email: [email protected] URL: www.gsk-lux.com URL: www.gsk-lux.com

Mathilde Ostertag heads the tax practice at GSK Stockmann in Katarzyna Chmiel is an Associate at GSK Stockmann in Luxembourg. Luxembourg. She practised within a Benelux and an international She graduated from Maastricht University with an LL.B. (“European law firm in Luxembourg for the past nine years prior to joining GSK Law School”) and an LL.M. in International and European Tax Law. Stockmann (Luxembourg bar, 2008). Her areas of expertise include Prior to joining GSK Stockmann Katarzyna gained experience in BIG 4 domestic and international tax law, in particular tax planning, private advisory firms in Luxembourg and Poland and completed a traineeship equity, real estate, start-ups and other foreign investment structures. at the European Parliament in Brussels. She also has in-depth knowledge on capital market transactions, Practice areas of Katarzyna include international and European tax cross-border restructurings, i.a. inbound and outbound migrations, law, domestic Luxembourg taxation, tax planning and restructuring. mergers and acquisitions and debt restructuring. Mathilde holds a She is passionate about the taxation of sharing economy and virtual Master’s degree from the Université Robert Schuman, Strasbourg and property. a postgraduate degree in Corporate and Tax Law (DJCE). Katarzyna is a member of the International Fiscal Association (“IFA”) Mathilde is a board member of the Ladies in Law Luxembourg and speaks English, Polish, and French. Association (“LILLA”) which aims at actively promoting gender diversity and women in senior positions in the legal sector. She is Web: https://www.gsk.de/en/person/en.katarzyna.chmiel. also a member of the International Fiscal Association (“IFA”) and the International Bar Association (“IBA”); she publishes regularly. Mathilde is fluent in French, English, German and Portuguese. Web: https://www.gsk.de/en/person/en.mathilde.ostertag.

GSK Stockmann is a leading, independent business law firm with international reach and offices in Berlin, Frankfurt am Main, Hamburg, Heidelberg, Munich and Luxembourg. We advise international and domestic clients across a wide range of areas in relation to Corporate/M&A, Private Equity, Investment Funds, Tax, Capital Markets and Banking and Finance. GSK Stockmann is the trusted advisor of leading financial institutions, asset managers, private equity houses, insurance companies, corporates and innovative FinTech and start-up companies, having both a local and global reach. GSK Stockmann thrives to provide the highest quality legal advice and responsiveness combined with a pragmatic approach to the transactions. Solution driven, we tailor our services to the exact business needs of our clients. Teamwork is one of our core values, as is respect, solidarity and integrity. This combination ensures that we work efficiently for the benefit of our clients.

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Malaysia

Wong & Partners Yvonne Beh

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Under Malaysian law, the test to determine the tax residence of a company is based on the “control and management” test. A company carrying on a business is resident in Malaysia for a year As of 5 September 2018, Malaysia has treaties in effect with of assessment if at any time during that year, the management and approximately 77 countries. However, the treaties with Argentina control of its business is exercised in Malaysia. and the United States of America are of limited application, and only apply to profits from shipping and air transport undertakings. Malaysia has also concluded Tax Information Exchange 2 Transaction Taxes Agreements with a number of countries, such as the United Kingdom, Qatar and South Africa. 2.1 Are there any documentary taxes in your jurisdiction? Malaysia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Yes, stamp duty is imposed on instruments identified in the Stamp Shifting (“MLI”). Malaysia has yet to complete its domestic Act. The rate of stamp duty will depend on the type of instrument, ratification process, and it is anticipated that the MLI for Malaysia and may be a fixed rate or anad valorem rate. will enter into force in the latter part of 2019. Stamp duty relief may be available in limited circumstances, e.g., for the transfer of property between associated companies. 1.2 Do they generally follow the OECD Model Convention or another model? 2.2 Do you have Value Added Tax (or a similar tax)? If so, Malaysia’s income tax treaties generally follow the OECD Model at what rate or rates? Convention. Effective from 1 September 2018, the goods and services tax (“GST”) regime was repealed and replaced with a new sales tax and 1.3 Do treaties have to be incorporated into domestic law service tax framework. before they take effect? Sales tax is chargeable on the manufacture of taxable goods in Yes. A treaty will take effect domestically once it has been ratified Malaysia and the importation of taxable goods into Malaysia, at and the effective date has been declared by way of a statutory order. the rate of either 5% or 10% or a specified rate depending on the category of taxable goods. Service tax is imposed at 6% on the provision of taxable services 1.4 Do they generally incorporate anti-treaty shopping by a registered person in the course or furtherance of a business rules (or “limitation on benefits” articles)? in Malaysia. The scope of taxable services include, among others, the provision of accommodation services, food and beverage No, there are generally no specific anti-treaty shopping provisions preparation services, consultancy and management services, courier in the treaties. services, information technology (“IT”) services and advertising services. 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions?

No. Domestic legislation and case law stipulate that where there Malaysian sales tax is generally imposed on all goods manufactured is conflict between the provisions of a treaty and the provisions in in or imported into Malaysia, unless specifically exempted. domestic tax legislation, the treaty provision will take precedence Exemptions may be granted by way of a statutory order to exempt and prevail over domestic law. (i) any goods or class of goods from sales tax, or (ii) any persons or

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class of persons from the payment of sales tax. For example, most raw food items and medicine are currently exempted from sales tax. 3.2 Would there be any withholding tax on royalties paid Persons exempted from the payment of sales tax include the Federal by a local company to a non-resident? and State Governments. Separately, any person may also apply to the Minister of Finance for a specific exemption from sales tax. Yes, withholding tax is applicable on royalties paid by a Malaysian company to a non-resident at the domestic rate of 10%, subject to Malaysian service tax is only imposed on specific services identified reduction under an applicable double tax treaty. as taxable services. Further, certain services provided between companies in the same group of companies are not treated as taxable The term “royalty” is broadly defined in domestic tax legislation and services, subject to the fulfilment of certain conditions. includes any sums paid in consideration for, or derived from the use of, or the right to use in respect of any copyrights, software, designs

Malaysia or models or other like property or rights. 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? 3.3 Would there be any withholding tax on interest paid No. There is no input tax credit mechanism under the sales tax and by a local company to a non-resident? service tax regime. Yes, withholding tax is applicable on interest paid by a Malaysian Sales tax and service tax is therefore generally not recoverable, save company to non-residents at the domestic rate of 15%, subject to for sales tax drawback mechanisms which allow a person to claim a reduction under an applicable double tax treaty. drawback for sales tax paid on taxable goods which are subsequently exported out of Malaysia or for goods which are imported to be used There are certain circumstances in which interest income derived by in the manufacturing process. non-residents is exempt from withholding tax. For example, interest paid or credited to a non-resident in respect of securities issued by the Malaysian Government is exempted from withholding tax. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? No. Group registration is not permitted under the sales tax and service tax regime. Initial proposals to introduce thin capitalisation rules in Malaysia have been scrapped, and it is now proposed that Earning Stripping Rules (“ESR”) will be introduced. Under the proposed ESR, 2.6 Are there any other transaction taxes payable by an entity’s deduction for interest expenses will be limited to a companies? percentage of its earnings before interest, taxes, depreciation and amortisation based on a fixed ratio rule. Real property transactions may potentially be subject to real property gains tax (“RPGT”). Malaysia imposes RPGT on chargeable gains It is expected that the final form of the ESR legislation will be made realised from the disposal of real properties or shares in real property available in November 2018, and will take effect from 1 January companies (“RPC”). An RPC is a controlled company which owns 2019 onwards. land with a defined value of not less than 75% of its total tangible assets. Capital gains on the disposal of shares in RPCs will be 3.5 If so, is there a “safe harbour” by reference to which subject to tax in the same way as capital gains on the disposal of land. tax relief is assured? The applicable RPGT rates are set out in questions 8.1 and 8.2 below. This is not applicable to Malaysia as there are no thin capitalisation rules in Malaysia. 2.7 Are there any other indirect taxes of which we should be aware? 3.6 Would any such rules extend to debt advanced by a Import and excise duties may be imposed on the movement of goods third party but guaranteed by a parent company? into or out of Malaysia. Import duties are levied on a wide variety of goods imported This will depend on the final form of the ESR legislation which is into Malaysia, whereas export duties are levied on a very limited expected to be made available in November 2018. category of products (e.g., crude petroleum, palm oil). Excise duties are imposed on certain goods which are imported into Malaysia 3.7 Are there any other restrictions on tax relief for or manufactured in Malaysia (for, e.g., cars, alcoholic beverages, interest payments by a local company to a non- cigarettes and certain articles such as casino accessories and resident? billiards). Generally, Malaysian companies will be entitled to take a deduction on interest payments made to a non-resident with respect to 3 Cross-border Payments borrowing employed in the production of gross income or laid out on assets used or held for the production of gross income. However, the Malaysian company will not be entitled to take a tax deduction 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? on the interest payments if the withholding tax (where applicable) chargeable on the interest payments has not been paid. No, dividends distributed by a Malaysian resident company to a non-resident shareholder are not subject to Malaysian withholding tax.

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qualifying conditions set out in the domestic tax legislation. The 3.8 Is there any withholding tax on property rental tax grouping rules only apply if the transferor and transferee payments made to non-residents? companies are related companies (as defined), resident in Malaysia and incorporated in Malaysia for the relevant year of assessment. No, there is no such tax.

4.5 Do tax losses survive a change of ownership? 3.9 Does your jurisdiction have transfer pricing rules? Generally, tax losses can be carried forward indefinitely. However, Yes. The domestic tax legislation contains specific transfer pricing from the year of assessment 2006 onwards, the accumulated tax provisions which govern transactions between associated companies losses of a company will not be allowed to be carried forward if Malaysia and require such transactions to be conducted on an arm’s length there has been a substantial change in the shareholders of the basis. The Director-General of Inland Revenue may make company, i.e., a change of more than 50% of the shareholders of the adjustments or disregard certain transactions as necessary if he has company. However, the Ministry of Finance subsequently issued an reason to believe that any property or services provided between exemption from the “substantial shareholder” requirements, which associated persons have not been supplied at an arm’s length price. allowed tax losses to be carried forward even if there has been a There are also specific rules which came into effect on 1 January substantial change in shareholders, except for dormant companies. 2009, which require the preparation of contemporaneous transfer The exemption will continue to be in force until otherwise revoked. pricing documentation for controlled transactions between associated persons. To complement these rules, the Malaysian Inland 4.6 Is tax imposed at a different rate upon distributed, as Revenue Board (“IRB”) also issued transfer pricing guidelines to opposed to retained, profits? provide taxpayers with further guidance on the (i) administrative requirements in preparing transfer pricing documentation, and No. Malaysian income tax is imposed on profits, regardless of (ii) application of transfer pricing methodologies to related party whether they are retained or distributed. transactions.

4.7 Are companies subject to any significant taxes not 4 Tax on Business Operations: General covered elsewhere in this chapter – e.g. tax on the occupation of property?

4.1 What is the headline rate of tax on corporate profits? Other taxes which may be imposed include quit rent and assessment tax relating to real property. Assessment tax is payable on a half- The income tax rate for resident and non-resident companies in yearly basis based on the value of the property. Quit rent is payable Malaysia is 24% from the year of assessment 2016 onwards. For the to the local state government on an annual basis with respect to years of assessment 2017 and 2018, companies incorporated under alienated land in Malaysia. the Companies Act 2016 will be eligible for a reduction between 1% and 4% on the standard tax rate for a portion of their income, if there is an increase of 5% or more in the company’s chargeable income 5 Capital Gains compared to the immediately preceding year of assessment.

5.1 Is there a special set of rules for taxing capital gains 4.2 Is the tax base accounting profit subject to and losses? adjustments, or something else? Malaysia does not impose tax on capital gains, except for RPGT The chargeable income that is subject to tax comprises of the gross with respect to gains arising from the disposal or real property income, less permitted deductions. or shares in RPCs. Please refer to section 8 below regarding the imposition of RPGT. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 5.2 Is there a participation exemption for capital gains?

A company is permitted to take deductions for expenses incurred This is not applicable in Malaysia. wholly and exclusively incurred in the production of income. Other adjustments which would be made in arriving at the chargeable income subject to tax include: 5.3 Is there any special relief for reinvestment? (i) capital allowances; This is not applicable in Malaysia. (ii) reinvestment allowances; (iii) approved donations; and (iv) losses carried forward from prior years. 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local assets/shares? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas Generally, no. However, RPGT may be imposed on gains arising subsidiaries? from the sale of shares in an RPC, i.e., a company whereby 75% or more of its total tangible assets consist of real property. Where Yes. A Malaysian company may transfer up to 70% of its current RPGT is applicable, the purchaser of the RPC shares is required to year losses to one or more related companies, subject to certain

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withhold 3% of the cash consideration payable to the seller, and remit the sum to the Malaysian Inland Revenue Board within 60 6.5 Would any withholding tax or other similar tax be days from the date of acquisition. imposed as the result of a remittance of profits by the branch?

6 Local Branch or Subsidiary? No. Malaysian withholding tax would not be imposed on the remittance of profits by the local branch in Malaysia to the non- resident company. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 7 Overseas Profits Malaysia Malaysia does not impose taxes on the formation of a subsidiary incorporated in Malaysia. The execution of some statutory documents relating to the incorporation process may be subject to stamp duty, 7.1 Does your jurisdiction tax profits earned in overseas branches? such as the memorandum of association of the company. There are also some administrative charges imposed by the Companies Commission of Malaysia for the incorporation of a company in Generally, only Malaysian-sourced income (i.e., income derived Malaysia. from or accrued in Malaysia) will be subject to Malaysian income tax. Profits earned in overseas branches are only taxed in Malaysia to the extent that the profits are derived from or accrued in Malaysia. 6.2 Is there a difference between the taxation of a local The income received in Malaysia from outside Malaysia is exempted subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? from Malaysian income tax, save for the income of a resident person carrying on the business of banking, insurance, sea transport or air transport. In Malaysia, a local branch of a non-resident company and a local subsidiary would be subject to corporate tax at the same rate of 24% (for years of assessment 2016 onwards) with respect to Malaysian- 7.2 Is tax imposed on the receipt of dividends by a local sourced income. company from a non-resident company? However, there are some distinctions in the tax treatment of a branch and a subsidiary. For example, a local subsidiary may potentially No, dividends distributed by a non-resident company to a local avail itself of tax incentives under the Promotion of Investments Malaysian company would generally be regarded as foreign-sourced Act 1986 and Income Tax Act 1967, but a local branch of a non- income, which is not taxable in Malaysia. resident company generally would not qualify for such benefits. Further, a local branch of a non-resident company is generally 7.3 Does your jurisdiction have “controlled foreign regarded as a non-resident for Malaysia tax purposes since company” rules and, if so, when do these apply? management and control are exercised outside Malaysia, and accordingly certain payments (e.g., interest, royalties, service fees) No, Malaysia does not have any such rules. paid by a Malaysian payor to the local branch would be subject to Malaysian withholding tax. 8 Taxation of Commercial Real Estate Malaysia does not impose branch profits tax on the branch remittances by the local branch in Malaysia to its non-resident head office. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction?

6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Yes. RPGT is chargeable on gains derived by non-residents from the disposal of real property in Malaysia. Real property gains tax is The branch of the non-resident company will be taxed on income imposed at the rate of 30% for disposals made by a company within accrued in or derived from Malaysia. The calculation of the three years from the date of acquisition, 20% for disposals made in chargeable income which will be subject to income tax is similar to the fourth year from the date of acquisition, 15% for disposals made the calculation applied for local subsidiaries. in the fifth year from the date of acquisition and at the rate of 5% for disposals made in the sixth year onwards, from the date of acquisition.

6.4 Would a branch benefit from double tax relief in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? The branch of a foreign company generally would not be treated as a Malaysian tax resident since management and control are Yes. Real property gains tax is also chargeable on gains derived exercised outside Malaysia, and accordingly would not be able to from the disposal of RPCs. A company is regarded as a real property benefit from the relief afforded under Malaysia’s tax treaties with company if it is a controlled company and 75% or more of the value a third country. of its total tangible assets comprises of real property or shares in

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other RPCs. Real property gains tax is imposed at the rate of 30% for disposals made by a company within three years from the date of 9.4 Does your jurisdiction encourage “co-operative acquisition, 20% for disposals made in the fourth year from the date compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? of acquisition, 15% for disposals made in the fifth year from the date of acquisition and at the rate of 5% for disposals made in the sixth year onwards from the date of acquisition. Yes, the Malaysian tax authority encourages voluntary disclosures by taxpayers. Under the tax audit framework, reduced penalty rates will be offered in instances where a taxpayer makes a voluntary 8.3 Does your jurisdiction have a special tax regime disclosure of instances of non-compliance with the income tax for Real Estate Investment Trusts (REITs) or their legislation. equivalent? Malaysia

Yes, there is special tax treatment for REITs under the Malaysian 10 BEPS and Tax Competition Income Tax Act 1967. If a REIT distributes 90% or more of its total income in a year of 10.1 Has your jurisdiction introduced any legislation assessment to its unit holders, the total income of the REIT for that in response to the OECD’s project targeting Base year of assessment will be exempted from corporate income tax. Erosion and Profit Shifting (BEPS)? Further, the rental income earned by a REIT from the letting of property will be treated as business income of the REIT, and the Yes. Malaysia has introduced legislation for the implementation of amount of deductible expenses that can be claimed by a REIT in a the country-by-country reporting requirements recommended under year of assessment is restricted to the gross income from the letting BEPS Action 13. The three-tiered approach comprising the filing of properties in that year of assessment. of the master file, local file and country-by-country report has been incorporated into the Malaysian tax legislation. 9 Anti-avoidance and Compliance Malaysia is also considering proposals to introduce new legislation to adopt the BEPS Action 4 recommendations relating to the limitation of an entity’s deduction for interest expenses to a percentage of its 9.1 Does your jurisdiction have a general anti-avoidance income before interest, taxes, depreciation and amortisation. The or anti-abuse rule? new legislation is expected to be published in November 2018 and come into force on 1 January 2019. Yes, Malaysia has a general anti-avoidance rule in Section 140 of the Malaysian Income Tax Act 1967. The anti-avoidance rule applies to 10.2 Does your jurisdiction intend to adopt any legislation any transaction which has the direct or indirect effect of: (i) altering to tackle BEPS which goes beyond what is the incidence of tax which would otherwise have been payable; (ii) recommended in the OECD’s BEPS reports? relieving any person from any liability which would have arisen to pay tax or to make a tax return; (iii) evading or avoiding any There is no proposed legislation at this current time to tackle BEPS duty or liability imposed under the Income Tax Act 1967; or (iv) which goes beyond the recommendations in the BEPS reports. hindering or preventing the operation of the Income Tax Act 1967 in any respect. If the Director General of Inland Revenue has reason to believe that any of the above-mentioned transactions have occurred, 10.3 Does your jurisdiction support public Country-by- he may disregard or vary the transaction and make such adjustments Country Reporting (CBCR)? as he deems fit with a view to counteracting the whole or any part of the effect of the transaction. Yes, Malaysia signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports in January 2016. 9.2 Is there a requirement to make special disclosure of avoidance schemes? The CBCR rules came into force in Malaysia on 1 January 2017. The rules apply to a multinational corporation group which has: (i) cross-border transactions between its constituent entities; (ii) a total No. Malaysian tax law currently does not impose any requirements consolidated group revenue of at least MYR 3 billion in the preceding to make disclosures of avoidance schemes. financial year; (iii) its ultimate holding company incorporated and resident in Malaysia; and (iv) its constituent entities incorporated in 9.3 Does your jurisdiction have rules which target not Malaysia or outside Malaysia and resident in Malaysia. only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax avoidance? 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? No, there are no specific rules targeting persons who promote, enable or facilitate tax avoidance. However, in tax evasion cases, No, Malaysia’s regime does not include a preferential any person who assists in or advises on the preparation of tax returns regime such as a patent box. However, there are certain incentives where the return results in an understatement of tax liability may be in Malaysia which are available for research and development guilty of an offence unless he satisfies the court that the assistance activities. or advice was given with reasonable care.

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11 Taxing the Digital Economy 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? The Ministry of Finance is currently studying potential mechanisms for the imposition of a digital tax in Malaysia. However, there are no formal proposals or recommendations which have been made Malaysia introduced two amendments to the domestic tax legislation with respect to the form of the proposed “digital tax”, including in January 2017 which were aimed at expanding the tax base to whether such proposal would be introduced as a direct tax or an capture digital transactions.

Malaysia indirect tax. The Malaysian government has not made any formal Firstly, the definition of “royalties” under Malaysian tax legislation statements on its view regarding the European Commission’s was expanded to include payments “for the use of, or the right interim proposal for a digital service tax. to use… in respect of software”. Following this amendment, it is potentially arguable that any payments made which include a software element may be regarded as royalties which are chargeable to Malaysian withholding tax at the rate of 10%, subject to any Yvonne Beh reduction or relief afforded under an applicable double tax treaty. Wong & Partners Level 21, The Gardens South Tower Secondly, the scope of service fees paid to non-residents which Mid Valley City, Lingkaran Syed Putra are subject to Malaysian withholding tax was also amended. Prior 59200 Kuala Lumpur to the amendment, service fees paid by a Malaysian payor to a Malaysia non-resident for services performed offshore were not subject to Tel: +603 2298 7808 Malaysian withholding tax. With effect from 17 January 2017, Email: [email protected] an amendment was introduced to subject service fees paid to URL: www.wongpartners.com non-residents for offshore services to withholding tax. A broad interpretation of service fees is adopted by the Malaysian Inland Yvonne is a partner with 14 years of experience, and leads the Indirect Revenue Board and the Malaysian courts, and payments for digital Tax sub-practice of the Tax, Trade and Wealth Management Practice Group in Wong & Partners. Her practice includes advising international content and electronically-supplied services could potentially fall and local clients on tax issues spanning across M&A, indirect taxes within the ambit of service fees. However, following significant (sales and service tax and GST), transfer taxes, tax controversies, pushback by the business community, the effect of the amendment transfer pricing, stamp duties, real property gains tax, foreign direct was subsequently suspended by virtue of an exemption order which investment and cross-border tax planning issues. came into force on 6 September 2017. From 6 September 2017 Some of her industry accolades include being listed as a Star Lawyer onwards, payments for offshore services provided by non-residents by Acritas 2018. She is listed in the Indirect Tax Leaders Guide were exempted from withholding tax. (2017–2018) and Women in Tax Leaders Guide (2016–2017), as well as Asian Legal Business’s 40 Under 40 Lawyers to Watch in 2016. Yvonne was the recipient of the Best in Tax award by Euromoney Asia Women in Business Law Awards, both in 2015 and 2017.

Wong & Partners is a Malaysian law firm dedicated to providing solution-oriented legal services to its clients. As a member firm of Baker McKenzie International, we bring a unique combination of local knowledge and global experience to every matter. Since its establishment in 1998, Wong & Partners has grown steadily and now consists of 19 partners and more than 50 associates. The Firm’s lawyers are able to deliver comprehensive and integrated advice to clients, and are trusted by respected domestic and multinational corporations for their needs in Malaysia and throughout Asia. The Firm’s lawyers are committed to helping clients apply industry-specific, innovative and practical solutions.

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Malta Ramona Azzopardi

WH Partners Sonia Brahmi

resident in Malta for tax purposes regardless of where management 1 Tax Treaties and Residence and control is exercised in Malta.

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

Malta has a voluminous tax treaty network, with most European 2.1 Are there any documentary taxes in your jurisdiction? countries and also with third countries enabling tax-efficient structures and relief from double taxation on cross-border transactions. To The Duty on Documents and Transfers Act (Chapter 364 of the date, Malta has 71 signed and ratified double taxation treaties. Laws of Malta) provides for the imposition of a tax commonly referred to as stamp duty on certain legal documents and transfers. 1.2 Do they generally follow the OECD Model Convention Under the said Act, the duty is chargeable on documents and transfers or another model? or transmissions concerning immovable property, marketable securities, interests in partnerships, transfers causa mortis, Notwithstanding the fact that Malta is not an OECD member contracts of exchange and policies of insurance. country, almost all the double tax treaties which were concluded by Malta adopt the OECD Model Convention as their basis. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? 1.3 Do treaties have to be incorporated into domestic law before they take effect? VAT was initially introduced into the Maltese legal system in 1994. Since then numerous amendments have been made to the Maltese Article 76(1) of the Income Tax Act (Chapter 123 of the Laws VAT Act (Chapter 406 of the Laws of Malta). The standard rate of of Malta) grants the automatic ratification of double taxation VAT in Malta is 18%. However, in terms of the Eighth Schedule agreements upon their conclusion. Double tax treaties have primacy to the VAT Act, the reduced rates of 0%, 5% or 7% apply to certain of over domestic law as instruments of international law. transactions. The VAT Act and its subsidiary legislations are based on the EU VAT Directives.

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? Generally, Malta double taxation agreements do not incorporate anti-treaty shopping rules or limitation of benefits articles. However, The VAT Act distinguishes between different types of exemptions by agreements like the one entered with the USA includes a limitation reference to the rights granted to the person providing the transaction of benefits clause designed to avoid treaty-shopping. and the availability to claim input tax incurred in connection with the said transaction.

1.5 Are treaties overridden by any rules of domestic In fact, the VAT Act lists a number of goods and services which law (whether existing when the treaty takes effect or are considered to be either exempt with credit supplies or exempt introduced subsequently)? without credit supplies. Suppliers providing exempt with credit supplies do not charge VAT on those particular transactions, In Malta, double tax treaties override any provisions to the contrary however, the supplier is still entitled to recover input VAT incurred under Maltese domestic tax legislation on expenses and overheads that are directly connected with the provision of such supplies. On the other hand, suppliers providing exempt without credit supplies, albeit not charging VAT on those 1.6 What is the test in domestic law for determining the particular transactions, are not entitled to recover the input VAT residence of a company? incurred on expenses and overheads that are directly connected with such supplies. All companies incorporated in Malta are deemed to be domiciled and

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2.4 Is it always fully recoverable by all businesses? If not, 3 Cross-border Payments what are the relevant restrictions?

3.1 Is any withholding tax imposed on dividends paid by Generally speaking, a business may recover VAT payable or paid in a locally resident company to a non-resident? the course of its economic activity. Every business registered for VAT purposes in terms of Article 10 of the VAT Act is entitled to In Malta, no tax is withheld on dividends paid by Maltese Companies recover input VAT that is attributable to: to non-Maltese shareholders. (a) taxable supplies;

Malta (b) exempt with credit supplies; and 3.2 Would there be any withholding tax on royalties paid (c) supplies which take place outside Malta which would, if by a local company to a non-resident? made in Malta, be treated as taxable supplies or as exempt with credit supplies, or supplies taxed outside Malta which are made in Malta and would have been treated as exempt No withholding tax applies on royalties paid by Maltese Companies without credit supplies. to non-residents. A business registered in terms of Article 10 which furnishes a tax return for a tax period has the right to deduct the input tax for that 3.3 Would there be any withholding tax on interest paid period from the output tax for that period. In addition, the right to by a local company to a non-resident? claim input VAT must be supported by a tax invoice. However, businesses registered under Article 11 or Article 12 of the No withholding tax applies on interest paid by Maltese Companies VAT Act for VAT purposes are precluded from recovering input tax. to non-residents.

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.4 Would relief for interest so paid be restricted by is it “establishment only” VAT grouping, such as that reference to “thin capitalisation” rules? applied by Sweden in the Skandia case? There are no thin capitalisation rules in Malta. With effect from 1st June 2018, VAT grouping was implemented in Malta and such regime allows separate legal persons, connected 3.5 If so, is there a “safe harbour” by reference to which together by a specific criteria, to be grouped together as a relief is assured? taxable person for VAT purposes. The Value Added Tax (Regulation as a Single Taxable Person) This is not applicable. Regulations provide that if a legal person has establishments outside Malta, such establishments may be part of the group except where 3.6 Would any such rules extend to debt advanced by a they are part of another VAT group outside of Malta. To this effect, third party but guaranteed by a parent company? the Maltese legislation seems to deviate slightly from the Skandia case. This is not applicable.

2.6 Are there any other transaction taxes payable by 3.7 Are there any other restrictions on tax relief for companies? interest payments by a local company to a non- resident? No, there are not. There are currently no restrictions on tax relief for interest payments 2.7 Are there any other indirect taxes of which we should in Malta. be aware? 3.8 Is there any withholding tax on property rental Malta imposes an import duty on imports from non-EU countries. payments made to non-residents? The import duty varies according to the type of product imported. An excise duty is paid on certain specific goods (e.g. alcoholic No withholding tax applies on property rental payments made to beverages and tobacco products) imported or produced in Malta and non-residents. sold in Malta.

In addition, a fuel bunkering tax per metric ton is charged on the 3.9 Does your jurisdiction have transfer pricing rules? bunkering of certain fuel oils used for ships and their machinery and supplies free from customs and other duties. To date, there are no transfer pricing rules in force in Malta. Moreover, an eco-tax contribution is charged on every tourist of However, this might change in the near future as a result of the over 18 years of age arriving in Malta and it is capped at €5 per visit. local implementation of BEPS actions.

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4 Tax on Business Operations: General 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits?

4.1 What is the headline rate of tax on corporate profits? No. Chargeable income is subject to income tax at a standard rate of 35%, irrespective of whether it is distributed or not. However, Companies which are incorporated in Malta are subject to a standard the shareholders – when receiving a dividend – may benefit from corporate tax rate of 35% on worldwide income and capital gains. the relief for economic double taxation through the application of Foreign companies which are incorporated outside Malta but the full imputation and refund system. The shareholder may claim a which are managed and controlled in Malta and/or which carry out refund of all or part of the Malta tax paid on the distributed profits. business activities in Malta, are subject to pay tax in Malta on the Malta income and capital gains that arise in Malta and on foreign income which is received in Malta. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Maltese Companies are not subject to any other significant direct taxes. In order to calculate the accounting profit, Maltese Companies follow the International Financial Reporting Standard (IFRS) accounting principles or the General Accounting Principles for 5 Capital Gains Small and Medium Enterprises (GAPSME). The GAPSME are the Maltese General Accepted accounting principles based on IFRSs. 5.1 Is there a special set of rules for taxing capital gains The Accounting Profit Before Tax figure does not necessarily equal and losses? the Income Chargeable to Tax as the Income Tax Act provides that certain types of expenses/losses must be added back and certain Maltese tax law does not provide for blanket tax on all capital income/gains are deducted from the tax computation. gains. Chargeable capital gains are brought to charge as part of the taxpayer’s chargeable income. 4.3 If the tax base is accounting profit subject to Gains which are chargeable to tax in Malta, are those which are adjustments, what are the main adjustments? derived from the transfer of ownership, usufruct, assignment or cessation over any rights on immovable property, securities, Given that expenses must be wholly and exclusively incurred in business, goodwill, business permits, and from the transfer of the production of the company’s income; the items of expense as beneficial interest in a trust. provisions and unrealised losses or gains are to be added back to Maltese tax law contains specific rules on the computation of the accounting profit/loss before tax to compute the income that is capital gains on immovable property and the transfer of securities chargeable to tax. including shares in a company and interest in a partnership. The rules also contain formulae for the increase of inflation on the value 4.4 Are there any tax grouping rules? Do these allow of immovable property. for relief in your jurisdiction for losses of overseas Foreign sources capital gains which are remitted to Malta are not subsidiaries? charged to tax, unless they are owned by persons who are both ordinary resident and domiciled in Malta. Additionally, the transfer Groups of companies may benefit from group relief in Malta where of assets between companies of the same group is exempt from a member of one company surrenders tax losses to another member capital gains tax. within the group. The losses surrendered by the company can be set off against the tax profits or chargeable income of the other company making the claim. The group relief is available if the companies are 5.2 Is there a participation exemption for capital gains? members of the same group throughout the year preceding the year of assessment for which the relief is claimed. Capital gains which are derived by a Malta company from the In order to be eligible for tax grouping relief, the companies must transfer of a participating holding, where the taxpayer has not be resident in Malta and none of them may be resident in any other shown such gain as part of his chargeable income, may benefit from country for tax purposes. Additionally, one of the companies must a participation exemption. be more than a 50% subsidiary of the other or both companies must Should the Malta company decide not to opt for the participation be more than 50% of a third company which is resident in Malta. exemption it will be subject to tax on the capital gains arising from Hence, the tax grouping relief is not available in the case of overseas the participating holding. The shareholder will then be entitled subsidiaries. to claim a 100% refund of the company income tax upon the distribution of profits. 4.5 Do tax losses survive a change of ownership? 5.3 Is there any special relief for reinvestment? Tax losses may be carried forward indefinitely, even if there is a change in shareholder, as long as the trading activities of the Where an asset which is used for a period of at least three years is company are not altered and the change in the ownership is not transferred and replaced within one year by another asset which is deemed to be a tax avoidance scheme. used solely for a similar purpose in the business, any capital gains

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realised on the transfer of are not subject to tax. However, the cost of acquisition of the new asset is reduced by the said gain. If the asset 6.5 Would any withholding tax or other similar tax be is disposed of without replacement, the overall gain must consider imposed as the result of a remittance of profits by the branch? the transfer price and the cost of acquisition, reduced as aforesaid. Where the asset is transferred from one company to another company Malta does not impose any outbound withholding taxes on and such companies are deemed to be a group of companies or remittance of profits by the branch. controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders, it is deemed that no loss or gain has arisen from the transfer. 7 Overseas Profits Malta

5.4 Does your jurisdiction impose withholding tax on the 7.1 Does your jurisdiction tax profits earned in overseas proceeds of selling a direct or indirect interest in local branches? assets/shares?

A company incorporated in Malta is deemed to be both resident and No, Malta does not impose withholding tax on the proceeds of domiciled in Malta and thus is taxed in Malta on a worldwide basis, selling a direct or indirect interest in local assets or shares. The subject to double taxation relief. However, any income or gains acquisition or disposal of marketable securities is subject only to derived by a local company attributable to a branch outside of Malta duty on documents, however, exemptions are available for transfers may be exempt from in view of the participation of the marketable securities made in a company if such company exemption. obtains a duty exemption. The exemption is only granted if the business interest of the company is located outside Malta and the ultimate beneficial owner/s are non-Maltese resident individuals. 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company?

6 Local Branch or Subsidiary? Dividends received by a Malta company from a non-resident company that qualifies as a “participating holding” may either (i) avail of the participation exemption, or (ii) pay tax on such dividend 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? at the 35% tax rate, and then the shareholders will be entitled to a 100% tax refund of the Malta tax paid. There are no taxes levied in Malta upon the formation of a This is subject to certain anti-abuse provisions and the non-resident subsidiary. company (the subsidiary) must either: (i) be resident or incorporated in the EU; (ii) be subject to any foreign tax of at least 15%; or (iii) have more than 50% of its income derived from passive interest or 6.2 Is there a difference between the taxation of a local royalties. If none of these conditions are satisfied, then both of the subsidiary and a local branch of a non-resident following two conditions must be satisfied: company (for example, a branch profits tax)? (1) the equity holding of the Maltese company in the non-resident company is not a portfolio investment; and A local subsidiary is deemed to be both resident and domiciled in Malta and thus taxed on a worldwide basis in Malta. A branch of (2) the non-resident subsidiary or its passive interest or royalties a foreign company is subject to 35% tax in Malta on the profits have been subject to a minimum 5% foreign tax. “attributable” to the Malta branch in terms of general rules of international taxation. The Malta branch would be covered by the 7.3 Does your jurisdiction have “controlled foreign local tax accounting system and can avail of the refundable tax company” rules and, if so, when do these apply? credit system available to companies registered in Malta. To date Malta does not currently have “controlled foreign company” rules and relies on general anti-abuse provisions. However, these 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? CFC rules should be implemented in line with the implementation of the EU Anti-Tax Avoidance Directive in 2019. The branch would be subject to taxation in Malta on income and certain capital gains arising in Malta. For the purpose of 8 Taxation of Commercial Real Estate ascertaining the total income, all expenses wholly and exclusively incurred in the production of the income shall be deducted. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.4 Would a branch benefit from double tax relief in its jurisdiction? The transfer of immovable property situated in Malta attracts duty on documents and tax on property transfers. Maltese branches of foreign companies that receive foreign income such as dividends, interests or royalties that have been subject to source country withholding taxes can claim that 8.2 Does your jurisdiction impose tax on the transfer of withholding tax as a credit against their tax liability. an indirect interest in commercial real estate in your jurisdiction?

Capital gains that arise upon the transfer of real estate securities are subject to the tax and duty.

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8.3 Does your jurisdiction have a special tax regime 10.2 Does your jurisdiction intend to adopt any legislation for Real Estate Investment Trusts (REITs) or their to tackle BEPS which goes beyond what is equivalent? recommended in the OECD’s BEPS reports?

REITs are not subject to tax provided that they allocate all or To date, the Maltese Tax Authorities have not communicated on the almost all of their profits to their investors. next steps to be taken in order to tackle the actions of the OECD’s BEPS reports. Malta has been reviewed by the OECD under Action 14 and it was considered that Malta meets almost all the elements 9 Anti-avoidance and Compliance of the Action 14 Minimum Standard to ensure the effectiveness and Malta efficiency of the mutual agreement procedure. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? Yes, the Income Tax Act caters for two anti-avoidance or anti-abuse rules: CBCR has been implemented in Malta by virtue of Legal Notice (a) Artificial or fictitious schemes which reduce the amount of 400 of 2016 entitled the Cooperation with Other Jurisdictions on tax payable may be disregarded and the persons concerned Tax Matters (Amendment) Regulations 2016. would be assessable accordingly. (b) Where a scheme solely or mainly aimed at obtaining an 10.4 Does your jurisdiction maintain any preferential tax advantage which has the effect of avoiding, reducing or regimes such as a patent box? postponing liability to tax a person, the person who has obtained (or is in the position to obtain such an advantage), may be assessed to tax by the Commissioner of revenue on No, it does not. such tax advantage. 11 Taxing the Digital Economy 9.2 Is there a requirement to make special disclosure of avoidance schemes? 11.1 Has your jurisdiction taken any unilateral action to tax To date, there is no such a requirement. However, in the view if the digital activities or to expand the tax base to capture digital presence? implementation of the Directive on administrative cooperation in the field of taxation (DAC 6) – by 1st January 2019 – certain persons including intermediaries will be required to disclose any potential As a Member State of the European Union, Malta’s legislation aims aggressive tax planning arrangements. to be compliant with EU legislation, harmonised with other Member States’ regimes. In Malta, incomes generated through the supply of online products would be subject to the general principles of income 9.3 Does your jurisdiction have rules which target not tax and hence taxed at progressive rates in the case of individual only taxpayers engaging in tax avoidance but also suppliers and at the standard corporate tax rate of 35% in the case of anyone who promotes, enables or facilitates the tax a company. To date, no unilateral action has been taken to tackle the avoidance? taxation of digital activities.

Following the implementation of DAC6 in Malta, certain persons who promote, enable or facilitate tax avoidance and who meet the 11.2 Does your jurisdiction support the European criteria of DAC6 (subject to local specificities) will be required to Commission’s interim proposal for a digital services disclose potential aggressive tax planning arrangements. tax?

Malta’s government has not been in favour of the interim proposal 9.4 Does your jurisdiction encourage “co-operative for a digital services tax. During the EU Digital Summit on 29th compliance” and, if so, does this provide procedural September 2017, Prime Minister Joseph Muscat expressed his benefits only or result in a reduction of tax? opposition to the proposal to tax the digital turnover of large companies. Malta’s tax policy favours solutions that will address Malta has no specific co-operative compliance schemes providing longer-term or permanent problems, rather than expedient quick- tax benefits. There are no current tax amnesty programmes. fixes that do not address the root problems caused by the largest corporations providing digital services. 10 BEPS and Tax Competition

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

Malta has implemented the Country-by-Country Reporting requirement in the Cooperation with Other Jurisdictions on Tax Matters Regulations (Legal Notice of 2016), as per Action 13 of the BEPS report.

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Ramona Azzopardi Sonia Brahmi WH Partners WH Partners Level 5, Quantum House Level 5, Quantum House 75 Abate Rigord Street 75 Abate Rigord Street Ta’ Xbiex XBX1120 Ta’ Xbiex XBX1120 Malta Malta

Tel: +356 2092 5100 Tel: +356 2092 5100 Email: [email protected] Email: [email protected] URL: www.whpartners.eu URL: www.whpartners.eu Malta

Ramona Azzopardi is recognised as one of the leading taxation Sonia Brahmi is a Senior Associate at WH Partners where she lawyers in Malta. She heads the Tax and Private Client Department primarily practises tax law. She specialises in tax transparency, and regularly advises corporate clients in the gaming and gambling, advising financial institutions on the implementation of the FATCA- financial services, and digital services industries, on their cross-border IGA regulations, and international groups on their Country-by-Country tax implications. She also assists HNWI families in estate and tax Reporting obligations. She also assists clients with the implementation planning. Ramona holds a Doctor of Laws Degree and Masters in of the Common Reporting Standard, providing staff training, advising Financial Services from the University of Malta. Ramona is a regular on due diligence and reporting rules, and providing health-check speaker at tax conferences and often contributes articles to prominent services. publications. She is also a Council Member at the Malta Institute of In addition, Sonia provides corporate tax advice, focusing on Taxation. the implementation of tax-efficient structures for cross-border transactions.

WH Partners is a leading Malta-based business law firm with a focus on taxation, gaming and gambling, financial and investment services, Fintech, and blockchain and cryptocurrencies. Both the firms and the lawyers are highly ranked by the foremost legal directories, including World Tax, Chambers & Partners, The Legal 500 and IFLR 1000.

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Mexico Ana Paula Pardo Lelo de Larrea

SMPS Legal Alexis Michel

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Entities should be deemed as Mexican residents for tax purposes, if they established the main administration of its business or the headquarters of its effective management within Mexican territory. Mexico currently has over 58 income Double Tax Treaties in force. In this regard, a legal entity could be considered as a Mexican tax Mexico has also entered Exchange of Information Agreements with resident when the parties entitled to decide its business strategies, certain countries where an income Double Tax Treaty has not been policies, distribution of profits or dividends or other core subjects agreed. are located within national territory.

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

Mexico generally adheres to the OECD Model, even to the extent 2.1 Are there any documentary taxes in your jurisdiction? that in some cases the content of local status is given by the OECD guidelines. There are no documentary or stamp taxes imposed in Mexico.

1.3 Do treaties have to be incorporated into domestic law before they take effect? 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? In order for Double Tax Treaties to take effect and have the force of a federal law under the Mexican Constitution, they are negotiated and Mexico has a Value Added Tax (VAT), which is imposed on the signed by the President and then sent to the Senate for ratification following activities: and, if approved, must be published in the Mexican Official Gazette. a) Alienation of goods. b) Rendering of independent services.

1.4 Do they generally incorporate anti-treaty shopping c) Granting of temporary use or enjoyment of goods. rules (or “limitation on benefits” articles)? d) Importation of goods and services. The general VAT rate is 16%. In some cases, the tax rate can be 0% Most Double Tax Treaties incorporate anti-treaty shopping rules and other activities are tax-exempt. and limitations on benefits provision.

Additionally, it should be noted that the Mexico tax system includes 2.3 Is VAT (or any similar tax) charged on all transactions general anti-avoidance rules and has been actively participating in or are there any relevant exclusions? the G20 for the BEPS Action Plan. In accordance with the Mexican VAT Law, there are some exempt 1.5 Are treaties overridden by any rules of domestic activities for such tax such as: law (whether existing when the treaty takes effect or a) Exempt transfers. introduced subsequently)? i. Land. ii. Residential real property constructions. Pursuant to Mexican law, a treaty may only be overridden if it is contradictory with a provision found in the Constitution. In terms of iii. Books, newspapers, magazines and copyright. hierarchy, the Supreme Court of Justice has stated that international iv. Used personal property. treaties are positioned above federal and local laws, but immediately v. Lotteries, raffles, drawing, etc. below the Constitution. vi. Currency and troy ounces. vii. Partnership interest, negotiable instruments.

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viii. Non-participating real estate trust certificates. Likewise, in certain states, payroll taxes are imposed and paid by ix. Gold ingots. employers, and the rates rank from 1% to 3% on the payroll value. x. Between foreign residents or to toll manufacturers or enterprises of the automotive industry. 2.7 Are there any other indirect taxes of which we should b) Exempt services. be aware? i. Consideration for mortgage loan. ii. Commissions for management of funds from the retirement In Mexico, there is also the special tax on products and services that savings system. is a federal tax applicable to certain alienations and/or import of iii. Free services. goods such as alcoholic and some non-alcoholic beverages, tobacco,

Mexico gasoline and diesel. This also applies to certain services. iv. Education. In addition, there are also customs duties on the import and export of v. Land passenger transportation. goods in Mexico. Agreements in force grant tax benefits vi. International maritime transportation of goods. and represent the possibility of reducing or receiving an exemption vii. Agribusiness, housing loan, financial guaranty and life from tariffs. insurance. viii. Interest. ix. Financial derivative transactions. 3 Cross-border Payments x. From associations, unions to their members. xi. Public events. 3.1 Is any withholding tax imposed on dividends paid by xii. Professional medical services. a locally resident company to a non-resident? xiii. Medical and hospital services by the government agencies. Yes. There is a 10% withholding tax on dividends paid by a xiv. Authors. Mexican entity out of the after-tax earnings and profits account to c) Exempt use or enjoyment of goods. a non-resident shareholder/partner. This tax can be reduced, and in i. Real property intended or used for residence. some cases eliminated, by an applicable Double Tax Treaty. ii. Farms.

iii. Tangible property the use of enjoyment of which is granted 3.2 Would there be any withholding tax on royalties paid by residents abroad without a permanent base in Mexico. by a local company to a non-resident? iv. Books, newspapers and magazines. d) Exempt imports. Yes. There is a withholding tax on royalties paid by a Mexican i. Not finalised, temporary or in transit goods. entity to a non-resident recipient; different withholding tax rates ii. Baggage and household goods. apply to different type of royalties. iii. Goods donated to the Federal Government. a) 5% rate applies in the case of royalties paid for temporary use or enjoyment of railroads; iv. Works of art intended for permanent public exhibition. b) 35% rate applies to royalties for the use of patents, inventions, v. Works of art with a cultural value. trademarks, trade names and commercial names; and vi. Goods containing at least 80% of gold. c) 25% rate applies to technical assistance and any other type of vii. Vehicles in some specific cases. royalty. Finally, a 0% rate applies to certain acts or activities, sale of patented Under most Double Tax Treaties executed by Mexico, the medicine and products destined as food. withholding tax rate is reduced to 10% or 15%.

2.4 Is it always fully recoverable by all businesses? If not, 3.3 Would there be any withholding tax on interest paid what are the relevant restrictions? by a local company to a non-resident?

To recover VAT, individuals or corporations must be registered as Yes. There is a withholding tax on interest paid by Mexican entities taxpayers for income tax and VAT purposes. In the event a taxpayer to a non-resident lender. The withholding tax rate on interests is is exempt for part of the transactions carried out, the VAT Law different for each case depending on the type of credit or the nature establishes an apportionment method to consider only the taxable of the parties, the rate goes from 4.9% to 35% withholding tax. portion of such transactions. Finally, under some Double Tax Treaties, different withholding tax rates may apply, but are normally reduced taxes. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that 3.4 Would relief for interest so paid be restricted by applied by Sweden in the Skandia case? reference to “thin capitalisation” rules?

No, it is not applicable in Mexico. The Law provides that debts with foreign related parties must not exceed the 3-to-1 ratio with respect to the debtor’s capital. 2.6 Are there any other transaction taxes payable by Otherwise, interest associated to the excess will not be deductible. companies? Nonetheless, entities engaged in specific industries such as the financial system or the country’s strategic sectors could be allowed Even though it is not a federal tax, the States of the Federation have to have a higher debt-to-net equity ratio, and the thin capitalisation a tax on the acquisition of real estate and the applicable tax rates are between 3% and 5% of the value of the real estate.

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rules do not apply, similarly to taxpayers which might have a special ruling on transfer pricing. 4 Tax on Business Operations: General

3.5 If so, is there a “safe harbour” by reference to which 4.1 What is the headline rate of tax on corporate profits? tax relief is assured? The Income Tax Law provides a flat rate of 30% over all taxable Transfer pricing safe harbour rules apply to the maquila operations. income of Mexican corporate entities. The maquila tax regime has two main benefits: a) Exemption from having a permanent establishment in 4.2 Is the tax base accounting profit subject to Mexico. adjustments, or something else? Mexico b) Reduced income tax liability (the safe harbour). Corporate Mexican entities shall accrue all of their income earned in cash, in kind, in services, in credit or in any other form obtained 3.6 Would any such rules extend to debt advanced by a during the fiscal year, including income from their establishments third party but guaranteed by a parent company? abroad.

Interest derived from back-to-back loans shall, for tax purposes, be The tax profit shall be determined by subtracting the authorised treated as dividends, and as such, a non-deductible expense. deductions and the employee’s profit-sharing paid in the fiscal year. Back-to-back loans are transactions where one person provides The tax profit for the fiscal year shall be reduced, as applicable, by cash, goods or services to another person, who, in turn, provides the loss carry-forward from previous years. directly or indirectly, cash, goods or services to the former person or to a related party thereof. 4.3 If the tax base is accounting profit subject to Back-to-back loans are also transactions in which one person extends adjustments, what are the main adjustments? financing and the credit is guaranteed by cash, cash deposits, shares or debt instruments of any kind from a related party or from the Mexican entities may offset the income tax which has been same borrower, to the extent that the credit is guaranteed in this effectively paid abroad against the tax payable in Mexico under the same manner. Income Tax Law (see question 4.7).

3.7 Are there any other restrictions on tax relief for 4.4 Are there any tax grouping rules? Do these allow interest payments by a local company to a non- for relief in your jurisdiction for losses of overseas resident? subsidiaries?

Interest subject to a preferential tax regime could be subject to a Under the Income Tax Law, corporate members of an affiliated group 40% withholding rate on said income, if some requirements are not may elect the tax grouping rules (special regime) which allows the met. This does not apply to interest paid to foreign banks or to tax results obtained by entities to be combined in a group providing foreign residents derived from financial instruments. the benefit of a tax deferral (a portion of the tax) up to three years taking into account only the profits and losses of entities in the group. For an entity to obtain the authorisation to operate under the optional 3.8 Is there any withholding tax on property rental payments made to non-residents? regime for groups of companies, certain requirements must be met, for example: In accordance with the Mexican Income Tax Law, there is a a) It must be a Mexican resident company. withholding tax on property rental payments made to non-residents b) More than 80% of the shares with voting rights of the at a 25% rate of the income obtained (gross income), no deduction companies that will be integrated must be directly or indirectly applied. The USA Double Tax Treaty with Mexico provides a held. reduced rate if some requirements are met. c) The written consent of the legal representative of each of the companies that will be integrated must be obtained. d) A request to operate under the optional regime for groups of 3.9 Does your jurisdiction have transfer pricing rules? companies (accompanying thereto, supporting information and documentation such as the companies’ shareholders The Mexican transfer pricing rules have been adapted to the OECD and their participation therein) must be filed before the tax guidelines on the subject. Accordingly, transactions between related authorities. parties must be at fair market values and are required to comply with It should be noted that several restrictions apply both to the the arm’s length principle. integrating company and to the integrated companies. For instance, The extent of relationship between parties required to apply the entities that form part of the financial system, foreign residents, or transfer pricing rules to transactions is direct or indirect participation legal entities with non-profit purposes may not be subject to this tax in management, supervision, control, or capital/ownership. The regime. parent entity of a permanent establishment and all other permanent establishments of that entity are also considered related parties. 4.5 Do tax losses survive a change of ownership? The interpretation of the transfer pricing rules is based on Transfer Pricing Guidelines for Multinational Enterprises and Tax As a general rule, the right to amortise losses corresponds exclusively Administrations which were approved by the OECD. It should be to the taxpayer that incurred such loss and may not be transferred mentioned that the “Best Method Rule” shall apply within the terms even as a consequence of a merger. of the Income Tax Law.

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

6.1 What taxes (e.g. capital duty) would be imposed upon There is no additional corporate tax on a distribution event. If the the formation of a subsidiary? amount to be distributed is from the “CUFIN”, the account is composed of profits that have already been subject to and pay corporate income In Mexico, there are no taxes to the incorporation of any kind of entity. tax. However, there is a second level of tax imposed, at the shareholder/ partner level, when earnings are distributed by the mentioned entity. Profits obtained by non-residents or individuals resident in Mexico 6.2 Is there a difference between the taxation of a local Mexico will be taxed an additional 10% rate when such profits are distributed. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

4.7 Are companies subject to any significant taxes not In accordance with Mexican Income Tax Law, a subsidiary resident covered elsewhere in this chapter – e.g. tax on the in Mexico would be subject to tax on its worldwide income as any occupation of property? other corporation. On the other hand, the branches of a non-resident are generally subject to Mexican tax on their income attributable In Mexico, the main federal taxes for entities are income tax, VAT to it (the so-called “permanent establishment”); special rules for and special tax on products and services (the excise tax). However, deduction apply. there are some state taxes mainly regarding real estate, including ownership or acquisition, and payroll taxes, among others. In addition, foreign tax residents could also be subject to income taxation in Mexico regarding Mexican-sourced income that cannot be attributed to a permanent establishment. 5 Capital Gains 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 5.1 Is there a special set of rules for taxing capital gains and losses? Permanent establishments in Mexico are taxed on all income In Mexico, entities may deduct capital losses but only to the extent attributable thereto. For such purposes, income obtained as a of capital gains, whenever the amount of deductions is higher than consequence of a business activity, the rendering of a service and/ gross income. Excess capital losses may be carried forward 10 or the sale of goods within national territory would be deemed as years to offset capital gains from such years. attributable income. Additionally, income obtained by the central office or by another permanent establishment set up abroad for the realisation of which the Mexican permanent establishment incurred 5.2 Is there a participation exemption for capital gains? in expenses or share costs could also be deemed as attributable income. There is no participation exemption in Mexico for capital gains of Permanent establishments in Mexico could be allowed to deduct the Mexican entities. expenses incurred by them for the performance of its taxable activity insofar as the applicable conditions for deductibility are met. 5.3 Is there any special relief for reinvestment? 6.4 Would a branch benefit from double tax relief in its Currently, there is no special relief for profit reinvestment in jurisdiction? Mexico. All payments received by a permanent establishment are considered 5.4 Does your jurisdiction impose withholding tax on the as being done to a Mexican entity, thus a Double Tax Treaty does proceeds of selling a direct or indirect interest in local not apply. assets/shares?

6.5 Would any withholding tax or other similar tax be In general, Income Tax Law provides that gains from the disposition imposed as the result of a remittance of profits by the of capital assets are sourced in Mexico when the issuer is resident branch? in Mexico for tax purposes, or when regardless of the tax residency of the issuer, the value of the shares proceeds directly or indirectly In the case that the profits remitted by the permanent establishment from real property located in the country. are distributed from the Net Tax Profit Account or from the Capital In principle, the transfer of shares by a foreign resident is subject Remittances Account, the remittance of such profits will be tax-free to a 25% withholding tax on the gross amount without deductions. at the corporate level. However, the transferor may elect to apply a 35% tax on the net gain Notwithstanding the foregoing, and regardless of the obligation if some requirements are met. to accrue taxable income and pay the corresponding tax (amount registered on the Net Tax Profit Account), profits distributed or reimbursed (in cash or in kind) by it to its parent company or main office would receive a similar tax treatment as that applicable to dividend payments in favour of foreign residents and the 10% withholding tax applies.

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obligation of the FIBRA to make advance payments for the income 7 Overseas Profits tax purposes. Certain requirements must be met to be subject of this special regime of taxation. 7.1 Does your jurisdiction tax profits earned in overseas branches? 9 Anti-avoidance and Compliance Mexican Income Tax Law provides that Mexican tax residents will be taxed on their worldwide income including income from their 9.1 Does your jurisdiction have a general anti-avoidance establishments abroad. or anti-abuse rule? Mexico 7.2 Is tax imposed on the receipt of dividends by a local The Mexican tax system considers transfer-pricing, thin capitalisation, company from a non-resident company? CFC, back-to-back and tax re-characterisations as general anti- avoidance rules. Yes, dividends received by a local company from a non-resident company will be subject to taxation. The law allows a foreign 9.2 Is there a requirement to make special disclosure of tax credit for taxes paid abroad with respect to such dividends, if avoidance schemes? requirements are met. In Mexican tax law, there is no legal requirement to make special 7.3 Does your jurisdiction have “controlled foreign disclosure of avoidance schemes. In some cases, the taxpayers are company” rules and, if so, when do these apply? required to file a notice to inform the tax authorities if they have an offshore investment that might be subject to controlled foreign Concerning “controlled foreign company” (CFC) rules, the Income corporation regulations. Tax Law establishes that Mexican tax residents and residents with Likewise, whenever the tax audit report is prepared by an a permanent establishment in Mexico could be deemed to receive independent certified public accountant they are required to disclose income from jurisdictions considered as preferential tax regimens any transaction that might be in violation of the Mexican tax law. whenever: (i) income deriving therefrom is not subject to taxation; or (ii) the income tax to which said income is subject to in the 9.3 Does your jurisdiction have rules which target not relevant jurisdiction is less than 75% of the income tax that would only taxpayers engaging in tax avoidance but also have been levied in Mexico for such operation. anyone who promotes, enables or facilitates the tax avoidance? 8 Taxation of Commercial Real Estate Under the Mexican Fiscal Code, it is a violation if any individual gives advice or provides consultancy or other services in order for a 8.1 Are non-residents taxed on the disposal of taxpayer to totally or partially omit the payment of any contribution commercial real estate in your jurisdiction? in violation of the tax provisions.

Yes. The Mexican Income Tax Law provides that the disposition of 9.4 Does your jurisdiction encourage “co-operative Mexican real estate by non-residents is subject to Mexican income compliance” and, if so, does this provide procedural taxation at a tax rate of 25% on the total revenue obtained, with no benefits only or result in a reduction of tax? deductions allowed. However, under the US/Mexican Double Tax Treaty, the rate could be 30% on the profit if certain conditions are In Mexico, there is no co-operative compliance programme as met. such. Regardless of the foregoing, it is worth nothing that those being audited are entitled to seek remedy before the Mexican tax 8.2 Does your jurisdiction impose tax on the transfer of ombudsman (PRODECON). an indirect interest in commercial real estate in your This alternative allows taxpayers to negotiate with the tax jurisdiction? authorities, solutions to avoid escalating into litigation; under this procedure, fines could be reduced or even repealed. Yes. In Mexico, the transfer of an indirect interest in real estate located in Mexico is also the subject of taxation. An indirect interest refers to the alienation of property through the disposition of shares 10 BEPS and Tax Competition or interests in any entity if more than 50% of the value of the shares or interests proceeds from real property. 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base 8.3 Does your jurisdiction have a special tax regime Erosion and Profit Shifting (BEPS)? for Real Estate Investment Trusts (REITs) or their equivalent? The BEPS Action Plan has had a major impact on the design and implementation of tax laws in Mexico. Furthermore, said document Yes. Mexico provides a special tax regime regulation to real has made Mexican tax authorities aware of the everchanging nature estate investment trusts (FIBRA) dedicated to the acquisition and of cross-border structures and transactions conducted by taxpayers. development of real estate for lease or in the acquisition of the right As a consequence thereof, provisions normally reserved to to receive income from the lease of the property or to grant financing international instruments have gradually been incorporated to local for such purposes. This tax regime gives benefits to taxpayers that statutes and regulations. contribute the property to the trust of tax deferrals and eliminates the

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In addition, it should be noted that more stringent requirements However, some incentives are granted for national cinematographic concerning the deductibility of certain income/expense items have and theatrical production, as well as for innovation (CONACYT). been incorporated into Mexican laws in view of recent BEPS Also there are some incentives on the FIBRA (real estate investment advances. For instance, for taxpayers to be able to claim treaty trust) and on investments in risk capital and on the Maquila industry. benefits, tax authorities could request a sworn affidavit from the foreign party stating the existence of a double taxation and identifying the statutes or provisions under foreign law in terms of 11 Taxing the Digital Economy which said double taxation exists. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture Mexico 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is digital presence? recommended in the OECD’s BEPS reports? To this date there has not been any substantial tax law reform to tax Since the tax reform of 2014, the local set of laws have been digital activities or to expand the tax base to capture digital presence. amended to abide by the standards set forth in the BEPS Action Likewise, there is no mechanism to collect tax on digital services. Plan, before the OECD’s recommendations. However, following the OECD trends, there is a proposal to include In this regard, more stringent conditions and requirements have been a special tax (on the Excise Tax Law) on the sale of publicity online established relating to hybrid mismatches (Action 2), CFC rules and digital intermediary activities that facilitate the sale of goods (Action 3), treaty abuse (Action 8), transfer pricing rules (Action 8, and services. Also, it is highly probable that in the near future there 9 and 10), and reporting obligations (Action 13). will be changes following the International VAT/GST Guidelines.

10.3 Does your jurisdiction support public Country-by- 11.2 Does your jurisdiction support the European Country Reporting (CBCR)? Commission’s interim proposal for a digital services tax?

The Country-by-Country Reporting filing obligations regarding Mexico, as an OECD Member and a part of the BEPS Actions, transactions with related parties abroad have been included in the follows the approach of the OECD on its work, that will be provided Income Tax Law. in 2019, towards a consensus-based solution by 2020. Taxpayers could now be required to file (no later than on December 31 of the following tax year to which the filing obligation corresponds) the following informative returns: (a) master file, Acknowledgment information concerning the structure and activities of multinational The authors would like to thank Mariam Bojalil Lerch, Associate, corporate groups; (b) local file, describing the structure and activities for her invaluable assistance in the preparation of this chapter. conducted with related parties at a local level; and (c) country-by- country reporting, with respect to the activities, distribution of Tel: +52 55 5282 9063 / Email: [email protected] income and taxes paid in each jurisdiction.

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

No. In Mexico there is no special tax regime concerning intellectual property.

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Ana Paula Pardo Lelo de Larrea Alexis Michel SMPS Legal SMPS Legal Andrés Bello N. 10 Andrés Bello N. 10 oficina 402, Col. Polanco, 11560 oficina 402, Col. Polanco, 11560 México, D.F México, D.F

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

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

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Netherlands Paulus Merks

Houthoff Wieger Kop

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Based on Dutch tax law, the residency of a company is determined based on all relevant facts and circumstances, whereby the place of effective management is one of the main factors. The place The Netherlands has concluded 98 bilateral income tax treaties. of effective management is the place where the management In addition, the Netherlands is re-negotiating some of its existing of the company is actually established. Furthermore, under the bilateral income tax treaties and negotiating various new bilateral incorporation fiction of the Dutch Corporation Income Tax Act, income tax treaties with jurisdictions in Africa, Asia and Latin companies incorporated under Dutch law are always considered America. Dutch tax residents and therefore fully liable for Dutch corporate income tax. However, the residency of a company under Dutch tax 1.2 Do they generally follow the OECD Model Convention law can be overridden by a bilateral tax treaty for the purpose of that or another model? bilateral tax treaty.

The Dutch bilateral income tax treaties typically follow the OECD Model Convention. 2 Transaction Taxes

1.3 Do treaties have to be incorporated into domestic law 2.1 Are there any documentary taxes in your jurisdiction? before they take effect? The Netherlands does not levy any stamp taxes or capital duties. According to Dutch law, treaties have to be approved by both chambers of parliament. Furthermore an announcement of the ratification of the treaties should be made in the Dutch Treaty Series 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? (Tractatenblad van het Koninkrijk der Nederlanden) before the treaties enter into force. Value Added Tax (VAT) applies to the following transactions: ■ The supply of goods or services made in the Netherlands by a 1.4 Do they generally incorporate anti-treaty shopping taxable person. rules (or “limitation on benefits” articles)? ■ The intra-Community acquisition of goods from another EU Member State by a taxable person or by a nontaxable legal The Dutch government has agreed to adopt a new (2019) tax policy person in excess of the annual threshold. agenda proposed by the Dutch State Secretary for Finance Menno ■ Reverse-charge services received by a taxable person Snel. The agenda includes the two following priorities to both: (1) and nontaxable legal entities in the Netherlands and the promote a tax climate in the Netherlands that remains competitive importation of goods from outside the EU, regardless of the for real economic activities; and (2) tackle tax avoidance and status of the importer. evasion. The latter also includes the tackling of tax avoidance and The standard Dutch VAT rate is 21%. The low rate of 6% applies tax evasion in tax treaties. to many common products or services including food, medicines, books, etc. However, the Dutch government announced that the low 1.5 Are treaties overridden by any rules of domestic VAT rate will be increased from 6% to 9% as from 1 January 2019. law (whether existing when the treaty takes effect or Furthermore a 0% rate applies to certain international transactions. introduced subsequently)?

2.3 Is VAT (or any similar tax) charged on all transactions The Dutch constitutional law contains a treaty priority principle. or are there any relevant exclusions? This principle states that a treaty overrides the rules of Dutch domestic law. Some goods and services are exempt from VAT. In case an

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exemption applies, no VAT is levied and VAT is also non-deductible intragroup royalty payments to jurisdictions with a statutory profit by the purchaser. Exempt goods and services include, but are not tax rate of less than 7% or to jurisdictions that are EU blacklisted. limited to education, healthcare, fundraising activities, childcare, financial services and insurance services. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? The Netherlands currently does not impose any withholding tax on interest payments. However, the Dutch government recently A taxable person may recover input tax, which is VAT charged on proposed to introduce (as of 1 January 2021) a withholding tax on goods and services supplied to it for business purposes. Input tax intragroup interest payments to jurisdictions with a statutory profit is generally recovered by being deducted from output tax, which is tax rate of less than 7% or to jurisdictions that are EU blacklisted. Netherlands VAT charged on supplies made.

3.4 Would relief for interest so paid be restricted by 2.5 Does your jurisdiction permit VAT grouping and, if so, reference to “thin capitalisation” rules? is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? In line with ATAD1 the Netherlands plans to introduce an earnings stripping rule as of 1 January 2019. In connection with the The Dutch VAT Act includes a provision allowing Dutch VAT- implementation of the earnings stripping rule the interest deduction entrepreneurs to form a VAT fiscal unity. This VAT fiscal unity acts limitation rules for participation debt (art. 13l CITA), as well as for as a fiction to treat multiple VAT-entrepreneurs as a single taxpayer. acquisition holding debt (art. 15ad CITA), will be abolished as of 1 A VAT group exists by virtue of Dutch law if there is financial, January 2019. organisational and economic interdependence between the VAT- entrepreneurs of the VAT fiscal unity. The VAT group is limited to 3.5 If so, is there a “safe harbour” by reference to which Dutch persons and bodies or Dutch permanent establishments. tax relief is assured?

2.6 Are there any other transaction taxes payable by Under the proposed earnings stripping rules, the deduction of net companies? interest expenses is, for Dutch corporate taxpayers, limited to the highest of: The acquisition of real estate located in the Netherlands is generally (i) 30% of the earnings before interest, taxes, depreciation and subject to real estate transfer tax. This tax has a standard rate of 6% amortisation (EBITDA); and whereas a reduced rate of 2% applies to residential properties. (ii) a threshold of €1 million. The net interest expenses are defined as the balance of a corporate 2.7 Are there any other indirect taxes of which we should taxpayer’s interest expense (including certain related costs and be aware? foreign exchange losses on the one hand) and interest income (including foreign exchange gains) on the other. EBITDA is Excise duties are levied on several products (alcohol, tobacco and calculated on the basis of tax accounts and excludes tax-exempt mineral oil products). This is a consumption tax. Furthermore, income. import duties are levied on various products imported into the The Dutch proposal does not provide for a group escape rule Netherlands from outside the EU. or grandfathering rules for existing loans. However, the Dutch government has announced a separate proposal of law introducing 3 Cross-border Payments a grandfathering rule for certain existing public infrastructure projects. No exception is made for banks and insurance companies. The 3.1 Is any withholding tax imposed on dividends paid by Dutch government intends to introduce a thin capitalisation rule that a locally resident company to a non-resident? will apply to banks and insurance companies as of 1 January 2020.

Dutch dividend withholding tax is currently typically imposed on dividends paid by a locally resident company to a non-resident. 3.6 Would any such rules extend to debt advanced by a However, the Dutch government recently proposed to abolish third party but guaranteed by a parent company? the dividend withholding tax as of 1 January 2020, without a transitional regime. At the same point in time it has been proposed These rules apply regardless of whether the debt is incurred from a that a withholding tax on certain intragroup dividend payments group company or a third party. to: jurisdictions with a statutory profit tax rate of less than 7%; or jurisdictions that are EU blacklisted, is introduced. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? The Netherlands has various interest deduction limitation rules The Netherlands currently does not impose any withholding tax including but not limited to a restriction on the deduction of on royalty payments. However, the Dutch government recently payments on certain hybrid loans (art. 10(1)d CITA) and limitations proposed to introduce (as of 1 January 2021) a withholding tax on on interest payments on loans related to circular transactions and acquisitions (art. 10a CITA). In connection with the implementation of the aforementioned earnings stripping rule, the interest deduction

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limitation rules for participation debt (art. 13l CITA) as well as for also either be a Dutch resident company that forms part of the fiscal acquisition holding debt (art. 15ad CITA) will be abolished on 1 unity itself or a company resident in an EU/EEA country. January 2019.

4.5 Do tax losses survive a change of ownership? 3.8 Is there any withholding tax on property rental payments made to non-residents? The Netherlands has specific rules to combat the trade in so-called “loss companies”. If 30% or more of the ultimate interests in No, there is not. a Dutch company change among ultimate shareholders or are transferred to new shareholders, in principle, the losses of the 3.9 Does your jurisdiction have transfer pricing rules? company may not be offset against its future profits. Many

Netherlands exceptions to this rule exist. The company has the burden of proof with respect to the applicability of the exemptions. Dutch tax law includes the arm’s-length principle (codified in the Dutch Corporate Income Tax Act) and contains specific transfer- pricing documentation requirements. Taxpayers can use the Dutch 4.6 Is tax imposed at a different rate upon distributed, as transfer-pricing decrees for guidance. These decrees provide the opposed to retained, profits? Dutch interpretation of the OECD transfer-pricing guidelines. No, it is not. 4 Tax on Business Operations: General 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the 4.1 What is the headline rate of tax on corporate profits? occupation of property?

The proposed standard corporate income tax rate for 2019 is 24.3% No, they are not. (19% on the first €200,000). A reduction of these rates has been announced (23.9% and 17.5%, respectively, in 2020, and 22.25% 5 Capital Gains and 16%, respectively in 2021).

4.2 Is the tax base accounting profit subject to 5.1 Is there a special set of rules for taxing capital gains adjustments, or something else? and losses?

The Dutch tax base is not necessarily calculated on the basis of No, there are not. the annual accounting profit. In the Netherlands, commercial accounting methods typically have to be reviewed to confirm that 5.2 Is there a participation exemption for capital gains? they are acceptable under Dutch tax law. The primary feature of Dutch tax accounting is the legal concept of “sound business Yes. The Dutch participation exemption regime provides an practice” (in Dutch: goedkoopmansgebruik). exemption for capital gains and dividends received by Dutch tax resident companies from qualifying participations. The Dutch 4.3 If the tax base is accounting profit subject to participation exemption applies to all (rights to) interests of 5% or adjustments, what are the main adjustments? more in the nominal paid-up capital of the subsidiary, unless the participation is a “portfolio investment”. There are various adjustments that apply to the accounting profit in order to come to the tax base. Some of the main adjustments are: 5.3 Is there any special relief for reinvestment? ■ Participations. ■ Hybrid loans. Taxpayers can form a reinvestment reserve based on Dutch law ■ Depreciation of assets, including real estate. if certain requirements are met in order to postpone taxation of ■ Inventories. capital gains realised on the sale of business assets. However, the ■ Provisions. book value of the assets purchased from the reinvestment reserve is corrected for an amount of the reinvestment reserve in order to ensure that the profits realised on the original sale of the business 4.4 Are there any tax grouping rules? Do these allow assets will be taxed in the future. The reinvestment reserve has a for relief in your jurisdiction for losses of overseas three-year reinvestment period and requires that a new business subsidiaries? asset, purchased from the reinvestment reserve, is similar to the sold business asset. Under the Dutch grouping rules, a group of companies can be treated as one taxpayer for Dutch tax purposes (a so-called fiscal unity). To elect a fiscal unity, Dutch taxpayers must be connected 5.4 Does your jurisdiction impose withholding tax on the to each other through at least 95% of the entire legal and economic proceeds of selling a direct or indirect interest in local assets/shares? ownership of shares. A connection can be established through a common (indirect) parent company that is either a Dutch resident company that forms part of the fiscal unity itself, or a common No, it does not. However, the introduction of a withholding tax in (indirect) parent that is resident in an EU/EEA country. In the case 2020 in cases of (indirect) capital gains in certain abusive situations, of indirect ownership, the intermediate owner of the shares must has been proposed.

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6 Local Branch or Subsidiary? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply?

6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? In line with ATAD1 the Netherlands plans to introduce, on 1 January 2019, a CFC regime that effects controlled companies in jurisdictions with a statutory profit tax rate of less than 7% or in The Netherlands does not levy duties on the incorporation of jurisdictions that are EU blacklisted. Control is defined as a direct a subsidiary. A (small) annual registration fee is required by the or indirect interest of more than 50% in nominal capital, voting Dutch chamber of commerce. rights or entitlement to profits. Exceptions to the CFC rules apply to some financial institutions, to companies that perform genuine

6.2 Is there a difference between the taxation of a local economic activities and to companies that mainly earn non-tainted Netherlands subsidiary and a local branch of a non-resident income. company (for example, a branch profits tax)?

Local subsidiaries fall under the Dutch dividend withholding tax 8 Taxation of Commercial Real Estate rules. Local branches are not liable to Dutch dividend withholding tax. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Income from Dutch real estate, including capital gains as a result of the sale of real estate, is considered a Dutch business of the non- Taxable profits of a local branch can be determined on the basis of resident. Therefore, the income is subject to Dutch (corporate) a two-step approach. First, a functional analysis is performed for income tax. However, there may be ways to avoid the Dutch tax on both the local branch and its head office. Next, the taxable profits the disposal of commercial real estate in the Netherlands altogether. are attributed to the branch and its head office based on the arm’s length principle. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 6.4 Would a branch benefit from double tax relief in its jurisdiction? jurisdiction? This is generally not the case. However, real estate transfer tax may Although a Dutch branch is typically not regarded as a resident for be due in specific cases if a so-called “real estate entity” is being Dutch tax treaty purposes, the branch can generally apply for double transferred. tax relief under Dutch domestic rules, specific double tax treaties, and pursuant to EU case law. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 6.5 Would any withholding tax or other similar tax be equivalent? imposed as the result of a remittance of profits by the branch? Dutch Financial Investment Institutions (in Dutch: Fiscale beleggingsinstellingen) can invest directly or indirectly in Dutch Profits realised by permanent establishments of Dutch tax residents real estate against a 0% corporate income tax rate. However, are exempt under the object exemption (objectvrijstelling) in the this will no longer be allowed as of 1 January 2020 in light of the Netherlands. Profits distributed to a foreign entity by its Dutch abolishment of Dutch dividend withholding tax. permanent establishment are not subject to withholding tax. 9 Anti-avoidance and Compliance 7 Overseas Profits

9.1 Does your jurisdiction have a general anti-avoidance 7.1 Does your jurisdiction tax profits earned in overseas or anti-abuse rule? branches? Yes, the Netherlands has a general anti-abuse doctrine called fraus Profits earned in overseas branches are generally excluded from legis. This is unwritten doctrine to prevent the abuse of law. the tax base of Dutch companies based on the object exemption (objectvrijstelling). 9.2 Is there a requirement to make special disclosure of avoidance schemes? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? Yes, specific tax advice will have to be disclosed based onthe EU Mandatory Disclosure Directive. The Dutch government will Income realised by Dutch entities on foreign entities is subject to submit a legislative proposal to implement this Directive in the corporate income tax unless the participation exemption applies course of 2019. (see question 5.2).

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■ Transparency framework which applies to rulings: as of 1 9.3 Does your jurisdiction have rules which target not January 2017 the Dutch “Law on Exchange of Information only taxpayers engaging in tax avoidance but also about Rulings” has been entered into force. anyone who promotes, enables or facilitates the tax ■ Nexus approach: the Dutch innovation box regime has been avoidance? adjusted to comply with the nexus approach (adjustments have entered into force as of 1 January 2017). This will be covered in the legislation based on the Mandatory ■ Treaty abuse: this will be implemented in the Multilateral Disclosure Directive as mentioned at question 9.2. Furthermore, Instrument (MLI). advisors of illegal tax structures may be prosecuted as co- ■ Transfer Pricing: the Dutch Transfer Pricing Decree conspirators. (Verrekenprijzenbesluit) was updated on 22 April 2018 and includes various changes as a result of BEPS.

Netherlands 9.4 Does your jurisdiction encourage “co-operative ■ Country-by-country reporting: CBCR was implemented as compliance” and, if so, does this provide procedural of 1 January 2017. benefits only or result in a reduction of tax?

10.2 Does your jurisdiction intend to adopt any legislation Yes, the Netherlands encourages co-operative compliance by to tackle BEPS which goes beyond what is conducting Advance Tax Rulings (ATRs) and Advanced Pricing recommended in the OECD’s BEPS reports? Agreements (APAs) with taxpayers. ATRs are agreements concluded with the Dutch tax authorities confirming the Dutch tax No, it does not. consequences of transactions or situations involving taxpayers. Rulings are based on Dutch tax laws that apply at the time of the request. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? For certainty in advance regarding general transfer-pricing matters, an APA can be concluded with the tax authorities. APAs provide Yes, the Netherlands has implemented CBCR in national law. taxpayers with upfront certainty regarding the arm’s-length nature of transfer prices. All Dutch APAs are based on OECD transfer- pricing principles and require the taxpayer to file transfer-pricing 10.4 Does your jurisdiction maintain any preferential tax documentation with the tax authorities. APAs can be entered into regimes such as a patent box? on a unilateral, bilateral or multilateral basis (that is, with several tax administrations). APAs may cover all or part of transactions The Netherlands has an innovation box regime to encourage with related parties, including transactions involving permanent innovations. Qualifying innovation profits are effectively taxed establishments. against 7% (2018 rate) instead of the standard Dutch corporate Furthermore, it is possible for taxpayers to have a formal ongoing income tax rate. compliance relationship with the tax authorities under a horizontal monitoring agreement (horizontaal toezicht). These procedures do 11 Taxing the Digital Economy not result in a reduction of tax but do allow Dutch tax residents to have certainty in advance with respect to their tax treatment. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 10 BEPS and Tax Competition digital presence?

10.1 Has your jurisdiction introduced any legislation The Netherlands has not undertaken any specific unilateral actions in response to the OECD’s project targeting Base to tax digital activities and has no intention to do so. Erosion and Profit Shifting (BEPS)? 11.2 Does your jurisdiction support the European The Netherlands already introduced various laws as a result of the Commission’s interim proposal for a digital services BEPS project: tax? ■ Hybrid mismatches: legislation regarding hybrid mismatches was already partially implemented with respect to the No, it does not. The Dutch government expressed (strong) application of the participation exemption. Further laws are reservations regarding the new plans of the European Commission expected to be implemented as of 1 January 2020. for such a tax. ■ CFC: new legislation to be implemented by 1 January 2019. ■ GAAR: a general anti-abuse regulation will be implemented by 1 January 2019.

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Paulus Merks Wieger Kop Houthoff Houthoff Gustav Mahlerplein 50 Gustav Mahlerplein 50 1082 MA 1082 MA Amsterdam Amsterdam Netherlands Netherlands

Tel: +31 20 605 6172 Tel: +31 20 605 6560 Email: [email protected] Email: [email protected] URL: www.houthoff.com URL: www.houthoff.com

International tax partner and an expert in both Dutch domestic Wieger specialises in tax law with a focus on M&A and tax proceedings, and international tax law, Paulus advises on M&A transactions, including in the area of criminal law. He advises clients on Dutch and Netherlands restructurings, reorganisations, public offerings and transfer pricing. international tax matters regarding transactions, compliance and He also litigates disputes with the tax authorities, as well as advising civil liabilities, for tax and criminal tax law. Wieger is a member of on general tax law matters. Merks regularly advises US, French, the Netherlands Bar Association and the Dutch Association of Tax Japanese and other non-Dutch companies on how best to structure Advisers. their worldwide operations and acquisitions. Paulus has previously worked as a tax lawyer in New York, Paris, Chicago and San Jose (California).

Houthoff is an independent top-tier Netherlands-based firm with 300 lawyers, civil-law notaries and tax advisers, all offering exceptional legal advice and support to an extensive national and international client base. Clients choose us to help them tackle their most complex and critical problems, the kind where genuine strategic advice is essential and not just knowledge of the law. Why? They say it is the reassuring depth of our practice group’s legal knowledge combined with the breadth of our sector knowledge and experience that gives them confidence that we will give them the very best team to work with. They also praise our proven track record of resolving disputes and capitalising on opportunities. They also talk about our pragmatic approach to problem-solving, our passion for innovation and our truly entrepreneurial spirit. Together with our worldwide network, consisting of offices in Amsterdam, Rotterdam, Brussels, London and New York, representatives in Houston, Singapore and Tokyo, an exclusive Lex Mundi membership and our own International Friends Network, these qualities make Houthoff a reliable partner at the most critical moments.

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Nigeria

Blackwood & Stone LP Kelechi Ugbeva

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

1.1 How many income tax treaties are currently in force in your jurisdiction? Under Nigerian law, the test for determining the residence of a company is the place of incorporation. A company is resident in Nigeria if it is incorporated under the relevant Nigerian law. There are currently 14 tax treaties in force in Nigeria. These treaties are between Nigeria and the following countries: Belgium; Canada; China; the Czech Republic; France; Italy; the Netherlands; Pakistan; 2 Transaction Taxes the Philippines; Romania; Slovakia; South Africa; Spain; and the United Kingdom. 2.1 Are there any documentary taxes in your jurisdiction?

1.2 Do they generally follow the OECD Model Convention or another model? Yes, stamp duty is payable on instruments listed in the Stamp Duties Act. Yes, they generally follow the OECD Model Convention and the UN Model Convention. 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates?

1.3 Do treaties have to be incorporated into domestic law before they take effect? Yes, VAT is charged at a flat rate of 5%.

Yes, treaties must be incorporated into Nigerian domestic law, 2.3 Is VAT (or any similar tax) charged on all transactions through the National Assembly, before they take effect. or are there any relevant exclusions?

1.4 Do they generally incorporate anti-treaty shopping According to the VAT Act, VAT is charged on the supply of taxable rules (or “limitation on benefits” articles)? goods and services. There are certain exemptions which include: all medical and pharmaceutical products; basic food items; books and No, Nigeria does not have provisions for anti-treaty shopping rules educational materials; baby products; fertiliser, locally produced (or “limitation on benefits” articles). agricultural and veterinary medicine, farming machinery and farming transportation equipment; all exports; plant and machinery imported for use in the Export Processing Zone; plant, machinery 1.5 Are treaties overridden by any rules of domestic and equipment purchased for utilisation of gas in downstream law (whether existing when the treaty takes effect or petroleum operations; troughs, ploughs and agricultural equipment introduced subsequently)? and implements purchased for agricultural purposes; proceeds from the disposal of short-term Federal Government of Nigeria securities The Nigerian Constitution is the supreme law of the land and and bonds; proceeds from the disposal of short-term state, local it overrides every other law, regulation or treaty. No other rules government and corporate bonds (including supra-national bonds); of domestic law can override a treaty that has been ratified by medical services; services rendered by Community Banks, the the National Assembly, and this position is supported by judicial People’s Bank and mortgage institutions; plays and performances authority in a number of cases. Furthermore, section 45(1) of the conducted by educational institutions as part of learning; and all Companies Income Tax Act stipulates that where there is a conflict, export services. double taxation treaties shall override the provisions of the Act However, there is currently a VAT Act Amendment Bill before the itself. National Assembly, which when ratified will have the following implications:

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1. Expand the exempted items to include rent/lease on residential properties, public transport services, life insurance 3.3 Would there be any withholding tax on interest paid policies, education and training conducted by public or non- by a local company to a non-resident? profit educational institutions, and intangible properties. 2. Streamline the exemption of export services to only non-oil WHT is generally applicable on interest paid by a local company to exports. a non-resident, however, the law grants tax exemptions for interest 3. Replace the exemption of services rendered by Community payable in relation to foreign and agricultural loans invested in banks and People’s banks with services rendered by unit Nigeria under certain circumstances, as provided for under the Third Microfinance banks. Schedule (pursuant to section 11) of the Companies Income Tax Act. Nigeria 2.4 Is it always fully recoverable by all businesses? If not, 3.4 Would relief for interest so paid be restricted by what are the relevant restrictions? reference to “thin capitalisation” rules?

VAT is recoverable; however, it is restricted to goods purchased There are currently no “thin capitalisation” rules in Nigeria. or imported directly for resale and goods which form the stock-in- trade used for the direct production of any new product on which the 3.5 If so, is there a “safe harbour” by reference to which output VAT is charged. tax relief is assured? VAT on fixed assets/capital items, overheads, service and general administration are not recoverable. The specific “interest-related” tax reliefs are discussed in question Furthermore, excess input VAT may be carried forward as credit 3.3 above. against future VAT payable. In addition, the Federal Inland Revenue Service (FIRS) Establishment Act provides for a cash refund on 3.6 Would any such rules extend to debt advanced by a application within 90 days of the FIRS’s decision, subject to an third party but guaranteed by a parent company? appropriate tax audit. This is not applicable in Nigeria. 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that applied by Sweden in the Skandia case? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? No, Nigeria does not permit “establishment only” VAT grouping. No, there are no other restrictions. 2.6 Are there any other transaction taxes payable by companies? 3.8 Is there any withholding tax on property rental payments made to non-residents? Yes. Capital gains tax is applicable on qualifying transactions at a rate of 10%. Yes. WHT is applicable on rental payments where the property is Also, some states in Nigeria, e.g. Lagos State, require companies situated in Nigeria and is charged at a rate of 10%. such as Hotels and Restaurants to pay Consumption and Sales Tax on their transactions at the rate of 5%, respectively. 3.9 Does your jurisdiction have transfer pricing rules?

2.7 Are there any other indirect taxes of which we should Yes. The Income Tax (Transfer Pricing) Regulations, No. 1, 2012 be aware? (TP Regulations) are applicable in Nigeria.

Yes. Customs and excise duties are imposed by the Customs and Excise Act. 4 Tax on Business Operations: General

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

The headline rate of tax on corporate profits is 30% of the total 3.1 Is any withholding tax imposed on dividends paid by profits made. a locally resident company to a non-resident?

Yes, withholding tax (WHT) at the rate of 10% is imposed on 4.2 Is the tax base accounting profit subject to dividends paid to non-resident companies. The WHT rate for adjustments, or something else? recipients of dividends from double taxation treaties countries is 7.5%. Yes, tax is assessed on profits, which are subject to adjustments.

3.2 Would there be any withholding tax on royalties paid 4.3 If the tax base is accounting profit subject to by a local company to a non-resident? adjustments, what are the main adjustments?

Yes. Please see question 3.1 above for the tax rates. The Companies Income Tax Act (CITA) allows only the deduction of expenses incurred wholly, exclusively and necessarily in the

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promotion of a business venture, and provides for capital allowances assets. Another important relief is one granted to businessmen or for qualifying capital expenditure incurred in the course of doing trade, where old business assets are sold and the proceeds are used business (as provided for under the Second Schedule to the CITA). to procure new and similar business assets.

4.4 Are there any tax grouping rules? Do these allow 5.3 Is there any special relief for reinvestment? for relief in your jurisdiction for losses of overseas subsidiaries? Yes, there is. Gains accruing to unit holders of a trust in respect of disposal of all securities are not chargeable to tax, provided that the There are no tax grouping rules in Nigeria. proceeds are reinvested. Nigeria

4.5 Do tax losses survive a change of ownership? 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local Yes, tax losses survive a change of ownership. Companies (except assets/shares? insurance companies) are allowed to carry forward tax losses indefinitely. Capital gains on disposal of stocks and shares are tax-exempt, therefore WHT is not applicable. WHT would be applicable on proceeds from the sale of assets, except where such gains meet the 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? exemption criteria provided in question 5.3 above.

No, tax is levied on the entire profits of a company for that year of 6 Local Branch or Subsidiary? assessment. However, retained earnings are generally not subject to tax.

6.1 What taxes (e.g. capital duty) would be imposed upon 4.7 Are companies subject to any significant taxes not the formation of a subsidiary? covered elsewhere in this chapter – e.g. tax on the occupation of property? Stamp duties will be imposed and are payable on the share capital of the subsidiary upon incorporation. Other taxes include: ■ Education Tax: this is payable by all Nigerian companies and levied on assessable profits at a rate of 2%. 6.2 Is there a difference between the taxation of a local ■ Petroleum Profits Tax (PPT): this is levied on the income subsidiary and a local branch of a non-resident of companies engaged in upstream petroleum operations. company (for example, a branch profits tax)? It is chargeable at a rate of: 65.75% for non-Production Sharing Contract (PSC) operations in their first five years, No, there is none. For tax purposes, a local branch is deemed to during which the company has not fully amortised all pre- be independent of its parent company. A non-resident company production capitalised expenditure; 50% for PSCs with the intending to do business in Nigeria must incorporate a Nigerian Nigerian National Petroleum Corporation (NNPC); and 85% entity. Invariably, a company cannot carry out business in Nigeria for petroleum operations carried out under joint-venture through an unincorporated branch. Companies incorporated in arrangements with the NNPC or any non-PSC over five years. Nigeria (subsidiaries) are taxable under the same regime.

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

5.1 Is there a special set of rules for taxing capital gains The branch of a non-resident company is treated for taxation and losses? purposes as a duly incorporated company in Nigeria and taxed to the extent that its income or profits accrue in, are derived from, are Capital gains and losses in Nigeria are governed by the Capital Gains brought into or are received in Nigeria. Tax Act. The Act provides that tax be imposed at a rate of 10% on all capital gains arising from a sale, exchange or other disposition of properties, known as chargeable assets, in each year of assessment, 6.4 Would a branch benefit from double tax relief in its but excluding capital gains on the disposal of government securities, jurisdiction? stocks and shares. A Nigerian branch of a non-resident company would be deemed to be resident in Nigeria and, as such, cannot claim treaty relief. 5.2 Is there a participation exemption for capital gains? However, non-resident entities (with Nigerian branches) in treaty countries may benefit from double tax relief in instances where Yes, there is. Section 32 of the Capital Gains Tax Act provides such non-resident entities derive profits attributable to a permanent for exemption on gains arising from acquisition of the shares of a establishment in Nigeria. company either taken over, absorbed or merged by another company, as a result of which the acquired company loses its identity as a limited company, provided that no cash payment is made in respect 6.5 Would any withholding tax or other similar tax be of the shares acquired. imposed as the result of a remittance of profits by the branch? Other exemptions include gains made upon a disposal of business assets where the proceeds are spent in acquiring new business Dividends repatriated are subject to withholding tax.

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7 Overseas Profits 9.2 Is there a requirement to make special disclosure of avoidance schemes?

7.1 Does your jurisdiction tax profits earned in overseas branches? Under the TP Regulations, connected taxable persons are required to disclose any transaction which affects its income or expense. Companies are required to file statutory transfer pricing forms Profits earned in branches overseas are only taxable to the extent (Declaration and Disclosure Forms) along with their annual income that such income accrued is derived from or brought into Nigeria. tax returns.

7.2 Is tax imposed on the receipt of dividends by a local Nigeria company from a non-resident company? 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax Yes, dividends received by Nigerian companies from non-resident avoidance? companies are taxable, except if brought into Nigeria through government-approved channels (any financial institution authorised Yes. Sections 95 and 96 of the Personal Income Tax Act and section by the Central Bank of Nigeria to deal in foreign currency 94 of the Companies Income Tax Act contain provisions which transactions). target anyone who promotes or facilitates tax avoidance.

7.3 Does your jurisdiction have “controlled foreign 9.4 Does your jurisdiction encourage “co-operative company” rules and, if so, when do these apply? compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? Nigeria currently does not have controlled foreign corporation (CFC) rules, but it is expected that such rules may be implemented Nigeria encourages co-operative compliance. However, this does soon. not result in a significant reduction of tax.

8 Taxation of Commercial Real Estate 10 BEPS and Tax Competition

8.1 Are non-residents taxed on the disposal of 10.1 Has your jurisdiction introduced any legislation commercial real estate in your jurisdiction? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? Yes, capital gains tax is payable upon disposal of real estate by residents and non-residents in Nigeria, except where such gains are Nigeria has not introduced any legislation in response to the OECD’s derived from the main or only private residence of the individual, BEPS Action Plan. Suffice it to say that the BEPS recommendations and provided that the real estate does not exceed one acre in size. will require ratification into Nigerian law before they can be implemented. However, please see the additional discussion on this subject in question 10.2 below 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your jurisdiction? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is No, it does not. recommended in the OECD’s BEPS reports?

The BEPS recommendations for changes to the TP Regulations 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their immediately became effective in Nigeria, as the Nigerian TP equivalent? regulations incorporated the OECD TP Guidelines. The FIRS, in this regard, has already begun to adopt some of the regulations while There is no special tax regime for REITs in Nigeria. carrying out the audits.

10.3 Does your jurisdiction support public Country-by- 9 Anti-avoidance and Compliance Country Reporting (CBCR)?

9.1 Does your jurisdiction have a general anti-avoidance The FIRS has started to request that multinational entities in Nigeria or anti-abuse rule? submit country-by-country reports, and this has been incorporated into the audit process. The FIRS also recently released the Income Yes, as provided under the TP Regulations. Note that, prior to the Tax (Country-by-Country Reporting) Regulations 2018. establishment of the TP Regulations, general anti-avoidance rules (GAAR) have been in existence in Nigeria via specific statutory 10.4 Does your jurisdiction maintain any preferential tax provisions. Specifically, section 17 of the Personal Income Tax regimes such as a patent box? Act (2004), section 22 of the Companies Income Tax Act (2004, amended 2007), section 15 of the Petroleum Profits Tax Act (2004) Subject to the approval of the National Office for Technology and the Capital Gains Tax Act (1967, last amended in 1999) all Acquisition and Promotion (NOTAP), Nigerian companies are provide for the FIRS to adjust any artificial transaction in Nigeria.

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allowed to remit royalties, management/technical service fees and payments under Technology Transfer Agreements to their non- 11.2 Does your jurisdiction support the European resident technical partners. Commission’s interim proposal for a digital services tax? Such remittances are treated as allowable deductions and are not liable to tax, provided that the FIRS is satisfied that such payments Nigeria is yet to take any stand on the European Commission’s are at arm’s length. interim proposal for digital services tax.

11 Taxing the Digital Economy

Nigeria Kelechi Ugbeva 11.1 Has your jurisdiction taken any unilateral action to tax Blackwood & Stone LP digital activities or to expand the tax base to capture 22A Rasheed Alaba Williams Street digital presence? Lekki Phase 1 Lagos Nigeria Nigeria is yet to implement the taxation of digital transactions. However, with the recent release of draft Orders and Bills, and the Tel: +234 90 3350 1613 Country-by-Country Regulation by the FIRS, it is envisaged that the Email: [email protected] commencement of taxation of digital activities is not far off. URL: www.blackwoodstone.com

Kelechi Ugbeva is a Partner at Blackwood & Stone LP. Kelechi provides specialist tax and corporate/commercial legal services to resident and non-resident entities and individuals doing business in Nigeria.

Blackwood & Stone LP is a tax law firm based in Lagos, Nigeria, dedicated to providing clients with specialised tax and corporate & commercial law services. The firm successfully represents and advises multinational companies, foreign investors, public companies, closely held businesses including those that are family-owned and owner-managed, start-ups and individuals throughout Nigeria and around the world. Our partners are experienced tax and commercial lawyers who are experts in Nigerian and international tax and business law, each having developed a successful career at a leading law firm or organisation.

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Norway Toralv Follestad

Braekhus Advokatfirm DA Charlotte Holmedal Gjelstad

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? At the outset, the answer is no. It should be noted that according to the Double Tax Treaty Act, a tax treaty can only limit the taxation Norway has currently 88 income tax treaties in force, covering 94 following Norwegian Tax Regulations. This means that the tax jurisdictions. treaty cannot be the legal basis for taxation, i.e. taxation has to be in accordance with Norwegian tax regulations irrespective of 1.2 Do they generally follow the OECD Model Convention regulation in tax treaty. or another model?

1.6 What is the test in domestic law for determining the The income tax treaties do generally follow the OECD Model residence of a company? Convention. The most important exception is the tax treaty between Norway and the USA. Currently, the test for determining company tax residency is from In addition, some of the tax treaties between Norway and some where a company is lead at the level of Board of Directors. If this developing countries are based on the United Nations Model takes place in Norway, the company is considered to be tax resident Double Taxation Convention between Developed and Developing in Norway. Countries. However, together with presentation of the State Budget for 2019 on October 8th, the Government proposed to change the test effective 1.3 Do treaties have to be incorporated into domestic law from January 1st 2019. According to the proposal, companies before they take effect? incorporated in Norway will be considered to be tax resident in Norway (unless considered tax resident in another country according At the outset, treaties in general have to be incorporated in to tax treaty). For companies incorporated in a foreign country, it Norwegian law according to the regulations on legislative decisions will be considered tax resident in Norway if the place of effective by Parliament. However, according to the Double Tax Treaty Act, management takes place in Norway. tax treaties enter into force by consent of the Parliament in plenary session. 2 Transaction Taxes

1.4 Do they generally incorporate anti-treaty shopping rules (or “limitation on benefits” articles)? 2.1 Are there any documentary taxes in your jurisdiction?

Several of the tax treaties in force contain regulations which can Yes, there are. be characterised as anti-treaty shopping or Limitation of Benefit. The type of regulation varies but, in general, it is three out of the 2.2 Do you have Value Added Tax (or a similar tax)? If so, four methods described by OECD: “The subject-to tax approach” at what rate or rates? (e.g. Nordic Tax Treaty and UK); “The exclusion approach” (e.g. USA, Canada, Argentina and Luxembourg); and “The look through A general Value Added Tax (“VAT”) was introduced in Norway in approach” (e.g. Barbados and the Netherlands Antilles). The 1970. VAT is applicable on all supplies unless explicitly exempt exclusion approach is not included in any tax treaties in force. under the Norwegian VAT legislation. The standard VAT rate It should also be noted that in 2017 Norway signed the OECD is 25%. A reduced rate of 15% applies to foodstuff and a super Multilateral Convention to Implement Tax Treaty Related Measures reduced rate of 10% applies to certain services such as hotels, taxis to Prevent Base Erosion and Profit Shifting (“MLI”), which contains and tickets to the opera/cinema. Furthermore, a zero rate applies to regulations to prevent treaty abuse, most importantly Article 7 with exports from Norway and to some specifically mentioned goods and the Principle Purpose Test, Limitation of Benefit regulations or a services supplied within the Norwegian VAT territory. combination of both. Please see more details in section 10 below.

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together with presentation of the State Budget on October 8th 2.3 Is VAT (or any similar tax) charged on all transactions 2018, the Government has notified that a proposal to introduce or are there any relevant exclusions? withholding tax on royalties will be presented during 2018, aiming at new regulation in 2019. VAT is generally applied unless the supplies are specifically exempt under the VAT legislation. Examples of such exemptions are services relating to the sale and lease of immovable property, 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? educational services, health care services and financial services. For the lease of immovable property an option to tax is possible. There is currently no withholding tax on interest payments.

Norway However, together with presentation of the State Budget on October 2.4 Is it always fully recoverable by all businesses? If not, 8th 2018, the Government has notified that a proposal to introduce what are the relevant restrictions? withholding tax on royalties will be presented during 2018, aiming at new regulations in 2019. VAT is generally fully deductible on expenses to be used in fully taxable business. Some exceptions apply independent of use such 3.4 Would relief for interest so paid be restricted by as VAT on catering, art, representation and passenger cars, where reference to “thin capitalisation” rules? VAT deduction is disallowed. For mixed businesses (businesses making both taxable and exempt supplies) VAT is deducted based Relief is currently restricted by the Norwegian Tax Act §13-1, on a pro rata key according to which transactions between related parties must be in accordance with arm’s length pricing. This regulation is also applied 2.5 Does your jurisdiction permit VAT grouping and, if so, to “thin capitalisation”. Relief may also be restricted by the General is it “establishment only” VAT grouping, such as that Anti Avoidance Regulation (doctrine developed by case law). applied by Sweden in the Skandia case?

3.5 If so, is there a “safe harbour” by reference to which VAT grouping is allowed between companies and establishments tax relief is assured? in Norway on certain conditions. Norway has one of the most favourable VAT grouping rules in Europe The principle of the Please see the answer to question 3.4. Skandia case, that a branch part of a foreign VAT group is a separate taxable person, does so far not apply in Norway. 3.6 Would any such rules extend to debt advanced by a third party but guaranteed by a parent company? 2.6 Are there any other transaction taxes payable by companies? Please see the answer to question 3.7. Transfer of title to real estate is subject to a 2.5% transfer tax, calculated on the gross value of the property. When transferring ownership to a 3.7 Are there any other restrictions on tax relief for company holding title to real estate, no transfer tax is levied. interest payments by a local company to a non- resident?

2.7 Are there any other indirect taxes of which we should Regulations providing limitation on the deductibility of interest costs be aware? are currently in place, irrespective of interest costs being paid to a resident or non-resident. According to these regulations, deduction Special duties apply on certain goods and services in Norway such for interest costs paid to a related party (direct or indirect ownership as sugar, tobacco, candy, alcohol, NOx and electric power. of at least 50%) shall not exceed 25% of “taxable EBITDA”. This limitation is only applied if net interest costs exceed NOK 5,000,000 3 Cross-border Payments (approx. EUR 500,000) per annum. Effective from January 1st 2019, this regulation will be expanded for group companies to also include external interest cost (i.e. 3.1 Is any withholding tax imposed on dividends paid by interest costs paid to non-related parties), but there are important a locally resident company to a non-resident? exemptions. First of all, it will only apply to group companies with interest costs exceeding NOK 25,000,000 (approx. EUR 2,500,000) 25% withholding tax is, at the outset, imposed on dividends paid by per annum. Second, if the equity according to accounts at company a company tax resident in Norway according to the Norwegian tax level is not lower than the equity level in the consolidated accounts law. However, companies tax resident in an EU/EEA country will be at a global level, deduction of interest costs is not limited. Third, exempt, provided the company is in fact established and conducting deduction of interest costs is not limited if the company claiming real economic activity in such country. This test was developed in deduction for interest costs is part of a Norwegian group and the order to comply with the “wholly artificial arrangements” test by equity ratio for the Norwegian group as a whole is not lower than ECJ in the Cadbury Schweppes ruling (C-196/04). Reduced-rate or the equity ratio of the group globally. Although the mentioned no withholding tax may follow from tax treaty. equity ratio test is passed for a group company, deduction will be limited if the company has interest costs paid to a related individual 3.2 Would there be any withholding tax on royalties paid and thereby having total interest costs exceeding 25% of taxable by a local company to a non-resident? EBITDA.

There is currently no withholding tax on royalties. However,

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company must be “final” (ref. the Marks & Spencer ruling of ECJ, 3.8 Is there any withholding tax on property rental case C-446/03) and it must not be a “wholly artificial arrangement”. payments made to non-residents?

No, there is not. 4.5 Do tax losses survive a change of ownership?

Losses do, at the outset, survive change of ownership. However, 3.9 Does your jurisdiction have transfer pricing rules? losses will not survive change of ownership or other kinds of transactions if the exploitation of the loss is the principle purpose Transactions between related parties must be in accordance with the of the transaction, ref. Norwegian Tax Act §14-90. These are arm’s length principle. The OECD Transfer Pricing Guidelines for anti-avoidance regulations which are stricter that the General Anti Norway Multinational Enterprises and Tax Administrations are incorporated Avoidance Regulations developed by case law. in Norwegian tax law. In addition, an entity being involved in group-controlled transactions 4.6 Is tax imposed at a different rate upon distributed, as exceeding NOK 10,000,000 (approx. EUR 1,000,000) or internal opposed to retained, profits? balances exceeding NOK 25,000,000 (approx. EUR 2,500,000) must report this. If subject to the reporting obligation as mentioned, Please see the answers to questions 3.1 and 4.1 above. transactions must in addition be documented in accordance with specific reporting obligations, as the tax authorities may require such documentation with a 45-day notice. However, entities which 4.7 Are companies subject to any significant taxes not are part of a group with less than 250 total employees that either has covered elsewhere in this chapter – e.g. tax on the a turnover exceeding NOK 400,000,000 (approx. EUR 40,000,000) occupation of property? or gross balance (equity + debt) exceeding NOK 350,000,000 (approx. EUR 35,000,000). Companies may be subject to tax on occupation of property. This is levied by local communes, and the number of communes imposing such tax has increased in the last few years. The maximum rate is 4 Tax on Business Operations: General currently 0.7%, but will be reduced to 0.5% effective from January 1st 2019. This is calculated on the gross value of the property and the property is valuated according to specific regulations aiming at 4.1 What is the headline rate of tax on corporate profits? setting the “objective” value of the property, irrespective of actual use of the property. Headline tax rate in general is currently 23%, but will be reduced to 22% effective from January 1st 2019. Headline tax rate on income subject to the Norwegian Petroleum 5 Capital Gains Tax Act is 78%. Taxation of income from hydro-power is currently subject to a tax 5.1 Is there a special set of rules for taxing capital gains of 35.7%, which will be increased to 37% effective from January 1st and losses? 2019 according to specific regulations, in addition to the base rate of 23%. Taxation of capital gains and losses are subject to a special set of rules in the Norwegian Tax Act. Capital gains/losses are, at the outset, taxable when realised and the tax base will be the difference 4.2 Is the tax base accounting profit subject to adjustments, or something else? between cost price (less eventual depreciation) and sales price/ market value. Accounting profit is subject to adjustments. Most importantly, Norway has exit tax regulations, according to which capital gains are taxable if taken out of Norwegian tax jurisdiction or if Norwegian tax residency ceases to exist. 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? 5.2 Is there a participation exemption for capital gains? The tax law has its own regulations on when income/capital gains and costs/capital losses are taxable. The most important adjustments Norway has participation exemption regulations, according to which relate to depreciation, capital gains/losses (taxable when realised) capital gains and losses on shareholding, ownership in partnership and manufacturing contracts (income taxable when completed). and similar are tax free, provided the shareholding is in a Norwegian company or a company tax resident and conducting real economic activity in an EU/EEA Member State. 3% of dividend income is 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas taxable at the general rate. subsidiaries? For shareholding in companies tax resident outside the EU/EEA, capital gains and losses will be tax free and only 3% of dividends Norway has tax grouping rules, according to which group will be taxed, provided shareholding has exceeded 10% of total contributions are deductible for the paying company and taxable share capital for at least two years. for the receiving company, irrespective of whether the receiving However, shareholding in a low tax jurisdiction will not be subject company has a profit or loss. These regulations, at the outset, to participation exemption in any case. In addition, dividends allow deduction for group contributions paid to a group company are not covered by the participation exemption regulations if the taxable in another EU/EEA State. However, eventual loss in such distribution is deductible in the jurisdiction of the distributing entity.

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

There is relief for reinvestment capital gain from assets which 7.1 Does your jurisdiction tax profits earned in overseas have been realised involuntarily (e.g. as a result of an accident branches? or expropriation), provided certain conditions are met. Most importantly, the proceeds must be reinvested in a similar asset. Norwegian tax law is based on the global tax income. The only exception is if the method for avoiding double taxation in an 5.4 Does your jurisdiction impose withholding tax on the applicable tax treaty is the exemption method. proceeds of selling a direct or indirect interest in local Norway assets/shares? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? No, it does not. Unless covered by participation exemption regulations, receipt of 6 Local Branch or Subsidiary? dividends will be taxable for local company.

7.3 Does your jurisdiction have “controlled foreign 6.1 What taxes (e.g. capital duty) would be imposed upon company” rules and, if so, when do these apply? the formation of a subsidiary?

Norway has CFC regulations, which are applicable on Norwegian No tax will be levied upon the mere formation of a subsidiary. The entities holding at least 50% ownership in a company tax resident in income of the subsidiary will be taxed in accordance with the tax a low-tax jurisdiction both at the beginning and end of a tax year. If regulations as described. the ownership share is more than 60% at the end of the tax year, CFS regulations will apply in any case. Countries with a general tax rate 6.2 Is there a difference between the taxation of a local of less than ⅔ of the tax rate for a similar company in Norway, are subsidiary and a local branch of a non-resident classified as low-tax jurisdictions. company (for example, a branch profits tax)?

There is, at the outset, no difference between taxation of a local 8 Taxation of Commercial Real Estate subsidiary and local branch of a non-resident company. However, a branch may be exempted from taxation based on tax treaties 8.1 Are non-residents taxed on the disposal of (permanent establishment) whereas a subsidiary will be taxable commercial real estate in your jurisdiction? from day one of having taxable income. Yes, they are. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your Taxable profit will be determined by applying the regular tax jurisdiction? regulations applicable according to the Norwegian Tax Act, i.e. no special regulations in Norwegian internal tax law. No, it does not. Most of the Norwegian tax treaties provide that it is only the profit attributable to a permanent establishment of the branch in Norway which can be taxed in Norway. In attributing the profit to the branch, 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their the starting point will be the profits it might be expected to make if equivalent? it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, i.e. the arm’s No, it does not. length principle. It will further be in accordance with the OECD Model Tax Treaty and relevant OECD Guidelines. 9 Anti-avoidance and Compliance 6.4 Would a branch benefit from double tax relief in its jurisdiction? 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? A branch will not benefit from any double tax relief other than provided for in a tax treaty. Norway has General Anti Avoidance Regulations, which are developed by case law. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the branch? 9.2 Is there a requirement to make special disclosure of avoidance schemes?

There is no withholding tax on remittance of profit from branch. No, there is currently no such requirement but it is being considered by the Government.

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9.3 Does your jurisdiction have rules which target not 10.3 Does your jurisdiction support public Country-by- only taxpayers engaging in tax avoidance but also Country Reporting (CBCR)? anyone who promotes, enables or facilitates the tax avoidance? Norway has introduced CBCR regulations effective from the financial year 2016. Anyone who is aiding and abetting illegal tax avoidance may be subject to claim for damages and/or criminal proceedings. 10.4 Does your jurisdiction maintain any preferential tax regimes such as a patent box? 9.4 Does your jurisdiction encourage “co-operative Norway compliance” and, if so, does this provide procedural Norway has a special tax regime available for shipping; a tonnage benefits only or result in a reduction of tax? tax system. This is considered to be competitive with similar systems available in Europe. Norwegian tax regulations have no rules on “co-operative compliance”. 11 Taxing the Digital Economy 10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture 10.1 Has your jurisdiction introduced any legislation digital presence? in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? The Norwegian Government is taking an active role in the OECD Task Force on the Digital Economy and is also following The Norwegian Government is working actively on implementing the development in the EU closely. The notified legislation of BEPS in Norwegian tax legislation. Reference is made to our answer withholding tax on royalty (see our answer to question 3.2 above), to question 1.4 above, regarding the Norwegian position on MLI is partly considered to be a part of this work. Development should (BEPS Action 15). Legislation in order to incorporate the following be monitored closely. Norway introduced VAT on the supply of BEPS Actions is, or will be, incorporated in Norwegian tax law: electronic services by foreign established businesses to Norwegian Action 2 (Hybrid Investments), Action 4 (Interest Deductions), private individuals in 2011. The rules are modelled on the OECD Action 6 (Treaty Abuse), Action 7 (Permanent Establishment), Guidelines. Actions 8–10 (Change in the OECD Transfer Pricing Guidelines), Action 13 (Country by Country Reporting), and Action 14 (Dispute Resolution). 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is Please see our answer to question 11.1. recommended in the OECD’s BEPS reports?

This must be analysed for each relevant legislation.

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Toralv Follestad Charlotte Holmedal Gjelstad Braekhus Advokatfirm DA Braekhus Advokatfirm DA Roald Amundsensgate 6 Roald Amundsensgate 6 0161 Oslo 0161 Oslo Norway Norway

Tel: +47 99 56 85 65 Tel: +47 48 04 00 32 Email: [email protected] Email: [email protected] URL: www.braekhus.no URL: www.braekhus.no Norway Toralv Follestad gives clients strategic tax and corporate law advice, Charlotte Holmedal Gjelstad is part of our tax team where she offers especially Norwegian clients engaged in real estate and non- legal advice to small- and medium-sized and large businesses Norwegian entities doing business in Norway. This may be related to concerning Norwegian and international VAT in addition to customs tax-optimal structuring, business transfers, mergers and acquisitions, and excise duties. She has been involved as an advisor on several etc. He is also regularly engaged in tax disputes on behalf of our larger VAT audits and planning projects for both Norwegian and clients. Our firm has a long tradition in advising non-Norwegian international clients, specifically concerning Norwegian VAT-liability on entities doing business in Norway, e.g. in the oil service industry and cross-border projects. various construction projects both onshore and offshore, and Toralv plays an important part of the team, giving the required advice. His work experience includes the Norwegian tax administration and the Ministry of Foreign Affairs.

Braekhus Advokatfirm DA has a long tradition in advising clients on cross-border and international business activities. We advise clients on strategic tax and VAT issues and can also provide required tax and VAT compliance services for non-Norwegian entities doing business in Norway.

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Russia

Sameta Sofia Kriulina

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? The Constitution of the Russian Federation provides the primacy of international law. There are 83 double tax treaties which have been concluded by the Russian Federation and are currently in force. Consequently, if there is a conflict between domestic law and an international tax treaty, the tax treaty should prevail. The same rule Among them are agreements with Austria, China, Cyprus, France, is set by the Tax code. Germany, Luxembourg, Malta, the Netherlands, the UK and the USA. 1.6 What is the test in domestic law for determining the residence of a company? 1.2 Do they generally follow the OECD Model Convention or another model? There are two tests for corporate residence in Russia. The first is the incorporation test. Generally, a company which is incorporated Mostly, double tax treaties follow the OECD Model Tax in Russia is automatically a Russian resident. Secondly, a foreign Convention. However, for instance, a double tax treaty with company is recognised as a Russian tax resident if the place of its Singapore is based on the UN Model Tax Convention. effective management is in Russia. Both tests are subject to a tie- breaker provision of an applicable double tax treaty. 1.3 Do treaties have to be incorporated into domestic law before they take effect? 2 Transaction Taxes Yes, they do. A tax treaty must be incorporated into Russian law by way of ratification. 2.1 Are there any documentary taxes in your jurisdiction?

1.4 Do they generally incorporate anti-treaty shopping Yes, the Tax code contains provisions imposing state duties which rules (or “limitation on benefits” articles)? are deemed as documentary taxes.

Some treaties have “limitation on benefits” articles, for example, one 2.2 Do you have Value Added Tax (or a similar tax)? If so, with the USA. Besides, Russia signed the Multilateral Convention at what rate or rates? to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI) that provides three alternative approaches to prevent treaty Yes, VAT is imposed at three rates: abuse. Signing the MLI, Russia chose to apply the principal purpose test combined with a simplified “limitation on benefits” provision, ■ 18% (base rate – will be increased to 20% in 2019); which restricts most treaty benefits to “qualified persons”. After ■ 10% (reduced rate – mostly applied to food products); and ratification this Convention will amend 66 existing double tax ■ 0% (mostly applied to exported goods, work and services). treaties concluded by Russia.

Besides, the Russian Tax code provides that a foreign organisation 2.3 Is VAT (or any similar tax) charged on all transactions should prove that they are the beneficial owner of income in order to or are there any relevant exclusions? enjoy tax benefits under a double tax treaty. Generally, all transactions connected with the sale of goods, work, services and import of goods are VAT-taxable. However, the Tax code provides some exemptions, for instance: the sale of medical goods and some food products; medical services; services involving the carriage of passengers; the sale of shares in the charter capital;

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property leases to foreign entities (on reciprocity basis); and carrying organisation. The tax rate for dividends payable to the foreign out banking operations, etc. Also, specific types of taxpayers are company is 15%, unless otherwise provided in the double tax treaty. excluded from VAT.

3.5 If so, is there a “safe harbour” by reference to which 2.4 Is it always fully recoverable by all businesses? If not, tax relief is assured? what are the relevant restrictions? A Russian company is regarded as thinly capitalised only if the level VAT is a recoverable tax under Russian law but with restrictions for of controlled debt to net equity exceeds a ratio of 3:1 (or, a ratio of certain types of businesses applying special tax regimes. 12.5:1 in case of banks and leasing organisations). Russia

2.5 Does your jurisdiction permit VAT grouping and, if so, 3.6 Would any such rules extend to debt advanced by a is it “establishment only” VAT grouping, such as that third party but guaranteed by a parent company? applied by Sweden in the Skandia case? Yes, if a debt is advanced by a third party but guaranteed by a parent No, Russian tax law does not stipulate any VAT grouping regulation. company “thin capitalisation” rules are also applicable, taking into account the exceptions provided by the Tax code. 2.6 Are there any other transaction taxes payable by companies? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- No, the Russian tax system does not contain any other transaction resident? taxes. The restrictions on tax relief for interest payments are imposed only in cases of controlled transactions. 2.7 Are there any other indirect taxes of which we should be aware? 3.8 Is there any withholding tax on property rental Excise duties are levied on certain kinds of goods (e.g. fuel, alcohol, payments made to non-residents? and tobacco). Customs duties are generally payable on goods imported from outside Russia. Such payments are subject to withholding tax (by the tenant or agent) at 20%. However, double tax treaties allow the withholding of Russian tax only from rental payments for immovable property 3 Cross-border Payments located in Russia.

3.1 Is any withholding tax imposed on dividends paid by 3.9 Does your jurisdiction have transfer pricing rules? a locally resident company to a non-resident? Yes, transfer pricing rules are applicable to both domestic and Yes, dividend payments from residents to non-residents are taxable cross-border transactions mainly between related parties. The Tax at a 15% rate. The tax rate may be reduced to 10% or 5% according code includes five methods similar to those used in international to particular double tax treaties. transfer pricing practice. The resale-minus method has first priority for a routine distributor reselling goods to unrelated customers. In 3.2 Would there be any withholding tax on royalties paid all other cases, the CUP (comparable uncontrolled price) method by a local company to a non-resident? prevails, whereas the profit split is a method of last resort.

Royalty income is taxed at a rate of 20%. Reduced tax rates from 4 Tax on Business Operations: General 0% to 15% may be stipulated in double tax treaties.

3.3 Would there be any withholding tax on interest paid 4.1 What is the headline rate of tax on corporate profits? by a local company to a non-resident? The headline rate is 20%; 2% of which goes to the federal budget The standard tax rate for interest payments is 20%, but this can be and the other 18% to the regional budget. A subject of the Russian reduced by double tax treaties. Reduced rates vary from 0% to 15%. Federation can reduce its rate up to 13.5%. So, the minimum headline rate can be 15.5% in some regions.

3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Yes, Russia has a “thin capitalisation” regime which applies to domestic as well as cross-border transactions. Under “thin The difference between a tax base of corporate tax and an accounting capitalisation” rules there is a maximum amount of interest that may profit is that the applying methods of calculations are not the same. be recognised as an expense for corporate taxation purposes. Also, Generally, the tax base is calculated according to the special rules any positive difference between interest charged and maximum of the Tax code, while the rules of determining accounting profit interest calculated in accordance with the Tax code shall be equated are stipulated by Russian accounting legislation and standards. As for taxation purposes with dividends paid to the related foreign a general rule, the tax base is determined as the difference between

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revenues and expenses. Some of the revenues are not taxable, and some expenses are non-deductible or limited by the Tax code. That 5.2 Is there a participation exemption for capital gains? is why an accounting profit and a tax base of corporate tax usually differ. A participation exemption is available for capital gains on the sale of unlisted shares and participations in Russian companies and listed shares in high-technology Russian companies, acquired after 1 4.3 If the tax base is accounting profit subject to January 2011 and held for more than five years. adjustments, what are the main adjustments? Besides, there is a specific tax relief (tax rate of 0%) for dividends The tax base is calculated according to the special rules of the Tax earned by a Russian company from another Russian company or code, so that it is not accounting profit subject to adjustments in from a foreign company (excluding offshore companies) if the Russia Russia. recipient of dividends held a share of a minimum of 50% for at least 365 calendar days.

4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas 5.3 Is there any special relief for reinvestment? subsidiaries? No, there is not. Yes, Russian tax law stipulates a structure of a consolidated group of taxpayers which are taxed on the basis of aggregate financial 5.4 Does your jurisdiction impose withholding tax on the result. A consolidated group consists of a parent company and its proceeds of selling a direct or indirect interest in local direct and indirect subsidiaries which meet certain conditions. The assets/shares? primary responsibility for the calculation and payment of corporate tax, the payment of fines and penalties, as well as reporting to the Russia imposes withholding tax (applicable to non-resident tax authorities belongs to the responsible party of the consolidated companies) on the proceeds of selling an interest (stocks and shares) group of taxpayers. These rules do not allow relief for losses of in Russian organisations, more than 50% of the assets of which foreign subsidiaries. consist of immovable property located within the territory of Russia, as well as financial instruments derived from such shares, except for 4.5 Do tax losses survive a change of ownership? stocks recognised as listed on an organised securities market. When determining the tax base of the amount of such revenues, expenses Yes. The legal successor shall have the right to reduce the tax may lower taxable income. base by the sum of the losses incurred by the organisations put under reorganisation and prior to the moment of reorganisation. 6 Local Branch or Subsidiary? Concurrently, carry-forward losses cannot reduce the tax base by more than 50% in the current tax period. 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? A state duty of 4,000 roubles is imposed upon the formation of a There is the same tax rate (20%) for distributed and retained profits. legal entity of any kind in Russia. Since 2019, a state duty shall not be paid in case the application of the formation of a legal entity Besides, there is a specific tax relief (tax rate of 0%) for dividends and relevant documents are sent to the tax authority via the internet. earned by a Russian company from another Russian company or from a foreign company (excluding offshore companies) if the recipient of dividends held a share of a minimum of 50% for at 6.2 Is there a difference between the taxation of a local least 365 calendar days. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)?

4.7 Are companies subject to any significant taxes not There are no specific taxes or fees that would be incurred by a locally covered elsewhere in this chapter – e.g. tax on the formed subsidiary in comparison to a branch of a non-resident occupation of property? company with regard to their business in Russia. A subsidiary established under Russian law, being a separate legal entity, is to Most companies are subject to VAT, corporate property tax, land pay all Russian taxes and fees applicable to its worldwide income. tax and transport tax. Other taxes are more specific such as excise A foreign company that conducts business in Russia through its duties, mineral (subsoil) extraction tax, biological resources use fee, branch is obliged to pay Russian taxes and fees applicable to its water tax, gambling tax, etc. activity in Russia. Moreover, there are some differences in the calculation of corporate tax of a local branch of a foreign company 5 Capital Gains and a Russian subsidiary.

6.3 How would the taxable profits of a local branch be 5.1 Is there a special set of rules for taxing capital gains determined in its jurisdiction? and losses?

The taxable income of a branch is, in principle, calculated and taxed No, there are no special rules for taxing capital gains and losses. according to the same rules, as they are applicable to any other Capital gains are included in the tax base of corporate tax. Russian business taxpayer; total income minus total expenses of the

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branch taxed at a 20% base rate or other applicable rate. Besides, if a double tax treaty allows, a non-resident company’s expenses which 8 Taxation of Commercial Real Estate are incurred for the purposes of the permanent establishment, will deduct the taxable profit of the permanent establishment situated in 8.1 Are non-residents taxed on the disposal of Russia. commercial real estate in your jurisdiction? According to the Tax code in case a permanent establishment of a foreign company carries out activities of a preparatory and/ A company is taxed on the disposal of real estate situated in Russia or auxiliary nature in the interests of third parties without any at a corporate tax rate of 20%. remuneration, the tax base is 20% of the amount of the expenses of

Russia that permanent establishment. 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your 6.4 Would a branch benefit from double tax relief in its jurisdiction? jurisdiction? There is no such tax in Russia. However, according to tax treaties No, it would not. The head office, but not the branch itself, is and the Tax code, Russia imposes withholding tax on the proceeds entitled to treaty benefits because a branch is legally a part of its of selling abroad an interest (stocks and shares) in Russian head office and not a resident for tax treaty purposes. organisations, more than 50% of the assets of which consist of immovable property located in Russia, as well as financial instruments derived from such shares. 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the For a Russian resident company the transfer of indirect interest in branch? real estate located in Russia (meaning a transaction with the stocks and shares of a legal entity which owns real estate) is taxable as a No withholding tax applies to the remittance of profits by a transfer of stocks and shares. Russian branch to its head office. 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their 7 Overseas Profits equivalent?

7.1 Does your jurisdiction tax profits earned in overseas The Tax code stipulates specific rules for taxation of the profit of branches? unit investment foundation (including real estate unit investment foundation). Profits earned by foreign branches are included in the corporate tax base of Russian corporations. Taxes paid by these branches abroad 9 Anti-avoidance and Compliance are credited in an amount not more than the Russian corporate tax to be paid (if there is a double tax treaty). 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? The Russian Tax code provides for a general anti-avoidance rule Foreign dividends received by Russian companies are taxed basically with respect to all kinds of taxes. The provisions of the article 54.1 at a 13% tax rate. Besides, there is a specific tax relief (tax rate of set that if there is no misrepresentation, the taxpayer will be entitled 0%) for dividends if the recipient of dividends held a share of a to reduce its taxable base and/or tax payable provided both of the minimum of 50% for at least 365 calendar days. following conditions are fulfilled: ■ the primary purpose of the transaction is not the avoidance (or the partial avoidance) of tax and/or to obtain a tax refund; 7.3 Does your jurisdiction have “controlled foreign and company” rules and, if so, when do these apply? ■ the obligations under the transaction were performed by a party to the relevant agreement with the taxpayer, and/or its The “controlled foreign company” rules apply to foreign legitimate assignee. organisations (or foreign non-legal entity organisations) that are controlled by shareholders residing in Russia holding more than 25% of the capital or 10% of the capital in case the share of all 9.2 Is there a requirement to make special disclosure of avoidance schemes? Russian tax residents is over 50%. Then, passive income earned by these foreign corporations is treated as taxable income of the There is no special disclosure rule for avoidance schemes. During Russian shareholders (individuals or legal entities). The income of tax audits the Russian tax authorities may request information a CFC in the sum of 10 million roubles or less is not taxed. on any other suspicious transactions. Also, the tax authorities periodically publish descriptions of schemes which are considered to be tax avoidance schemes.

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9.3 Does your jurisdiction have rules which target not 10.3 Does your jurisdiction support public Country-by- only taxpayers engaging in tax avoidance but also Country Reporting (CBCR)? anyone who promotes, enables or facilitates the tax avoidance? Yes, in 2018 Russia’s Federal Tax Services issued Orders establishing the format for Country-by-Country Reports and related Tax law does not provide such rules. Nevertheless, the Criminal notifications for multinational groups, as well as instructions for code foresees criminal liability for tax evasion for individuals and completing and filing these forms electronically. representatives of legal entities.

10.4 Does your jurisdiction maintain any preferential tax Russia 9.4 Does your jurisdiction encourage “co-operative regimes such as a patent box? compliance” and, if so, does this provide procedural benefits only or result in a reduction of tax? No, there is no “patent box” regime. However, there are some special tax regimes for small enterprises, such as a simplified tax Yes, the Tax code provides the “co-operative compliance” system, a single tax on imputed income, a patent system of taxation, programme exclusively for large taxpayers – tax monitoring. Tax and a single agricultural tax. Also, there are some tax preferences monitoring is a form of tax administration, brought in to minimise for organisations which have acquired the status of participant tax disputes and claims and reduce the expenses for tax audits. in a project involving the conduct of research and development Under the tax monitoring regime the taxpayer submits the necessary activities and commercialisation of the results of those activities tax documentation electronically on demand or by allowing the tax in accordance with the Federal Law “Concerning the ‘Skolkovo’ authority direct access to the taxpayer’s IT system in exchange for a Innovation Centre”. release from office and field audits and the ability to settle disputes on certain tax issues through a “reasoned opinion” given by the tax authority. 11 Taxing the Digital Economy

10 BEPS and Tax Competition 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base Yes, since 2017 foreign IT companies that provide services by Erosion and Profit Shifting (BEPS)? means of the internet to individuals (not self-employed persons) residing in Russia will have to pay VAT. The Tax code stipulates Russia has started to follow the BEPS Action Plan. In 2015 the that 14 types of electronic services are subject to VAT, including “controlled foreign company” rules were enacted in Russia. Also, services granting rights to use computer programs on the internet Russia adopted a new format of transfer-pricing documentation (such as games and databases), services of mobile phone app stores, making taxpayers disclose the group structure and all important internet advertising services, services for maintenance of electronic details of the business which will be available to the tax authorities resources, and services relating to e-books, music, video and others. of the involved countries (the so-called master file, local file and Foreign IT companies are obliged to be registered with the Russian Country-by-Country Reporting). Russia has signed the Multilateral tax authorities for calculation and payment of VAT within 30 days Convention and notified most of its treaties to the OECD so that from the beginning of activity. (subject to the relevant treaty partner’s agreement) the modifications to Russia’s treaties required by BEPS can be made. Russia has also incorporated CRS requirements into domestic law. 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is No, it does not. Besides VAT, no other taxes on digital services are recommended in the OECD’s BEPS reports? planned to be imposed.

Such information is not available.

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Sofia Kriulina Sameta 4/3 Strastnoy Boulevard Building 3 Moscow, 125009 Russia

Tel: +7 495 937 54 85 Email: [email protected] URL: www.sameta.ru Russia Sofia specialises in tax advice on tax matters. As part of a team, she has worked on developing clients’ legal positions and defence tactics when challenging additional tax assessments, carried out tax due diligence of companies and advised on the prevention of tax risks. Sofia has been involved in the following recently completed projects: ■■ the tax audit of a large power-generating company intended to detect tax risks before field tax audit of the company; developing recommendations to eliminate tax risks and further representing the client in a tax dispute; ■■ tax advice for a major Russian leasing company during field tax audit; and ■■ legal support in respect of the tax-exempt closing-down of more than 10 foreign companies.

Sameta has been active in the Russian market since 2002. The firm offers a wide range of tax consulting and tax law services, including L&DR and specialises in corporate and labour law, М&A, corporate finance and real estate. It constantly expands professional horizons and develops innovative services in step with new market trends and a changing legislative environment. Sameta’s team consists of more than 60 professionals, including 40 lawyers and advisors with extensive experience across a range of industries. Sameta is a member of the Ally Law (previously “International Alliance of Law Firms”), with more than 60 member firms in 40 countries. Members of Ally Law combine expertise with in-depth local knowledge of commercial and legal solutions. Sameta is acknowledged by a number of international and Russian rankings: ■■ The firm’s tax practice is ranked among leaders in Russia according to World Tax 2017. ■■ The tax and corporate practices are recommended by Chambers and Partners 2017. ■■ The Legal 500 acknowledged three practices of Sameta: tax; corporate and M&A; and dispute resolution. ■■ Tax, corporate, and dispute resolution practices are also recommended by Pravo.ru rankings.

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Sri Lanka Naomal Goonewardena

Nithya Partners Savini Tissera

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many income tax treaties are currently in force in your jurisdiction? The IRA provides that where there is a conflict between the terms of a double taxation agreement and the provisions of the IRA, Sri Lanka has entered into treaties relating to the avoidance of the double taxation agreement prevails. However, it is likely that double taxation with 44 states. These include both comprehensive any subsequent legislation which is not an amendment to the IRA and limited treaties. There are 42 comprehensive treaties and there and which specifically seeks to amend the treaty would have an are limited treaties with Hong Kong, Oman and Saudi Arabia to overriding effect. cover limited areas such as shipping and air transport.

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

In terms of the IRA, a corporate entity is deemed to be resident in The United Nations Model Convention has been broadly followed, Sri Lanka when it is incorporated or formed under the laws of Sri subject to certain variations influenced by the OECD Model. Lanka or where it has its registered or principal office in Sri Lanka, or where the control and management of its affairs is exercised in 1.3 Do treaties have to be incorporated into domestic law Sri Lanka. before they take effect?

Yes. The income tax legislation (i.e. the Inland Revenue Act No. 24 2 Transaction Taxes of 2017 (“IRA”)) specifically provides that such treaties need to be approved by a resolution of Parliament and published in the Gazette 2.1 Are there any documentary taxes in your jurisdiction? in order for the same to have the force of law in Sri Lanka. Stamp duty is the documentary tax applicable in Sri Lanka and is 1.4 Do they generally incorporate anti-treaty shopping payable on a number of instruments including promissory notes, as rules (or “limitation on benefits” articles)? well as on conveyance documents such as leases, mortgages, deeds of transfer and deeds of gifts. There are no general anti-treaty shopping rules or “limitation on The rates of stamp duty vary depending on the type of instrument benefit” articles in any of the treaties. The IRA, however, provides and are generally ad valorem taxes. Stamp duty on transfers of land that where the benefit of an exemption, exclusion or reduction is is charged on the value of the land at 3% for the first Rs. 100,000 and being claimed by a resident of the other contracting state, such 4% for the remaining value. Gifts of land attract stamp duty of 3% benefit shall not be available to a body when 50% or more of the for the first Rs. 50,000 and 2% thereafter. Mortgages attract a stamp underlying ownership of that body is held by individuals who are duty of 0.1% of the secured amount and leases are charged at 1% of not residents of that other contracting state. This limitation shall the lease payments for the entire term, including premiums, up to a not apply, however, if the body which is claiming the benefit is a maximum term of 20 years. company listed on a Stock Exchange in the other contacting state. Furthermore, most of the treaties have specific provisions that limit the application of benefits provided therein to income to which a 2.2 Do you have Value Added Tax (or a similar tax)? If so, resident of the other contracting state has a beneficial entitlement. at what rate or rates?

VAT legislation has been operative in Sri Lanka since 2002 (which replaced the previous GST regime) and is payable (in general) on the supply in Sri Lanka of goods and services and on the importation

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of goods into Sri Lanka. Currently, the applicable rate is 15% and goods. Once again, no refunds are permitted, but any excesses can exports are generally zero-rated. be brought forward to future periods. There is also a special type of VAT, known as “Financial Services VAT”, which is also chargeable at the rate of 15% on persons 2.5 Does your jurisdiction permit VAT grouping and, if so, supplying financial services. Unlike conventional VAT, however, is it “establishment only” VAT grouping, such as that Financial Services VAT is not payable on the basis of turnover, but applied by Sweden in the Skandia case? on a value addition basis. Sri Lanka also has Nation Building Tax (“NBT”), which came into No, in general, Sri Lanka does not have any tax which is levied on operation in 2009. It is a tax payable by any person who imports a group basis. any article (other than personal baggage) into Sri Lanka, carries on Sri Lanka the business of manufacturing any article, carries on the business 2.6 Are there any other transaction taxes payable by of providing a service of any description or carries on the business companies? of wholesale or retail sale of any article. NBT is currently payable at a rate of 2% of the liable turnover of such person. In the case of There is a multiplicity of taxes which are levied at import point on distributors, only 25% of their liable turnover is subject to NBT, the importation of goods into Sri Lanka. This includes customs whereas for wholesale/retail business, only 50% of liable turnover duty, surcharge, ports and airports levy, cess levy, excise duty, VAT from such retail/wholesale sale is subject to NBT. and NBT.

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

Both VAT and NBT are subject to a vast number of exemptions Economic Service Charge (ESC), which is in the nature of a which are frequently modified. minimum alternative tax, is payable by businesses whose aggregate VAT, for example, is not chargeable on the supply or import of turnover exceeds Rs. 12.5 million per quarter. ESC is charged at certain basic commodities and agricultural products. Essential varying rates from 0.1% to 1.0% of liable turnover. services such as the supply of healthcare, public transport and The ESC can be set off against the income tax liability of the residential accommodation are also exempt. NBT is also not business in that year of assessment, and where such liability is less chargeable on certain basic commodities and services such as the than the ESC, it can be brought forward for the next four years. supply of water and books, and services such as medical services and transport services. There is also a Simplified VAT (“SVAT”) system whereby suppliers 3 Cross-border Payments to businesses which are zero-rated are entitled to refrain from charging VAT on transactions with such zero-rated persons, so long 3.1 Is any withholding tax imposed on dividends paid by as certain formalities are complied with. a locally resident company to a non-resident? As an incentive to small and medium enterprises, the threshold for the payment of VAT and NBT is an annual turnover of not less The IRA provides that a company resident in Sri Lanka must than Rs. 12 million, from all businesses carried on by such person. withhold 14% of the gross dividends distributed to its shareholders. The quarterly threshold for VAT and NBT liability would therefore An important exemption to this general rule is dividends declared be Rs. 3 million. However, this minimum threshold for persons out of dividends received from other Sri Lankan resident companies. involved in the business of wholesale or retail sale of articles is Rs. This withholding tax applies to all shareholders, not just non- 50 million per annum. residents.

2.4 Is it always fully recoverable by all businesses? If not, 3.2 Would there be any withholding tax on royalties paid what are the relevant restrictions? by a local company to a non-resident?

The excess of input VAT over output VAT can be claimed by persons Royalties paid to a non-resident are subject to a final withholding who are liable to VAT and as long as they are registered under the tax of 14%. VAT legislation. Accordingly, persons who are exempt from VAT on their turnover would not be entitled to reclaim any of their input VAT. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? It is important to note that it is only the VAT that has been paid on the goods or services used for the purposes of the taxable supply of In terms of the IRA, there would be a 5% withholding tax on interest such person on which output VAT is paid that can be recovered as paid by a local company to a non-resident. However, as the law input VAT. As such, input VAT is not claimable on private expenses. presently stands, unlike in the case of dividends and royalties, Input VAT can only be recovered up to a value equivalent to the the amounts so withheld would not be the final withholding tax. output VAT of such person. Any excess input VAT can be brought In terms of the IRA, interest earned by a non-resident will be forward to future periods but, again, is subject to the same restriction considered to have a payment source in Sri Lanka and, accordingly, that recoverability cannot exceed 100% of output VAT. the non-resident would be liable to income tax in Sri Lanka on such Like VAT, manufacturers (although not service providers) are entitled interest income. This income tax liability would need to be satisfied to NBT tax credits against input NBT paid by the manufacturer by submitting an income tax return and making self-assessment on any goods which were used by it in manufacturing NBT-liable payments.

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

4.1 What is the headline rate of tax on corporate profits? Interest paid by a company, other than a financial institution, is only tax deductible to the extent that such interest does not relate Generally, the highest tax bracket is 28%. However, the import and to borrowing which exceeds three times the aggregate of its share sale or the manufacture and sale of liquor and tobacco products and capital and reserves where it is a manufacturing company and four gaming is taxed at 40%. times in the case of any other company. Any deduction which is denied as a result of this limitation will be carried forward and

deducted during the immediately succeeding six years, subject to 4.2 Is the tax base accounting profit subject to Sri Lanka the same limitations set out above. adjustments, or something else? In terms of most double taxation treaties, the tax payable by the resident of the other contracting state in Sri Lanka shall not exceed The tax base for calculating corporate income tax would be the 10% of the gross amount of the interest. commercial accounts of a company, with adjustments made to comply with the provisions of the IRA.

3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? There are no “safe harbour” rules. The main differences would be that certain types of income may be exempt from tax, whereas certain types of expenses would not 3.6 Would any such rules extend to debt advanced by a be tax deductible. Furthermore, there may be certain items which third party but guaranteed by a parent company? are considered as income for tax purposes, though not shown in the commercial accounts, and certain expenses not shown in the Since the current “thin capitalisation” rules are not confined to commercial accounts, which may be tax deductible. related party debt, it would be irrelevant that the debt has been In terms of income, the adjustments made would be that there guaranteed by a parent company. are certain limited categories of income which are exempt from income tax; for example, gains arising from the sale of shares on a 3.7 Are there any other restrictions on tax relief for stock exchange in Sri Lanka. In terms of deductibles, a significant interest payments by a local company to a non- difference would be depreciation charges in the commercial accounts resident? and the tax deductible capital allowances charged to ascertain taxable income. Only certain types of assets have the benefit of There are no further restrictions. capital allowances and only at specified rates which would differ from the depreciation calculations in the commercial accounts. 3.8 Is there any withholding tax on property rental payments made to non-residents? 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas There would be a final withholding tax of 14% on rent payments subsidiaries? made to non-residents. There are no provisions for group relief in Sri Lanka. 3.9 Does your jurisdiction have transfer pricing rules? 4.5 Do tax losses survive a change of ownership? Yes, the IRA specifically provides that transactions entered into between two associated undertakings shall be ascertained having Where the underlying ownership of a company changes by more regard to the arm’s length price. than 50%, as compared with ownership at any time during the The Minister of Finance has, under the repealed Inland Revenue previous three years, the company shall not be entitled to deduct Act No. 10 of 2006, published detailed Transfer Pricing Regulations losses that were incurred by the company prior to the change. which provides for methods of ascertaining the arm’s length price, assessing comparability and specifying the necessary records to 4.6 Is tax imposed at a different rate upon distributed, as be kept. Whilst the new Inland Revenue Act No. 24 of 2017 has opposed to retained, profits? not yet published similar Regulations, it has in place a provision which ensures that documents used in relation to the repealed Act No, there is no distinction made between distributed and retained would continue to be used under the present Act of 2017. The said profits. Regulation recognises methods outlined in the OECD Guidelines. The IRA has provisions which allows the “Transfer Pricing Officer” 4.7 Are companies subject to any significant taxes not (being any officer of the Inland Revenue Department designated covered elsewhere in this chapter – e.g. tax on the by the Commissioner General as such officer) to initiate a transfer occupation of property? pricing audit for the ascertainment of arm’s-length pricing in international transactions, where the computations put forward by We have dealt with the more significant taxes in the preceding the transacting parties are unsatisfactory. sections. However, the following may also be noted:

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■ Liquor Licences: There are annual licence fees imposed on persons who are involved in the sale of liquor. 6.2 Is there a difference between the taxation of a local ■ Port and Airport Development Levy (“PAL”): This is charged subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? at 5% on the Cost, Insurance and Freight (“CIF”) value of imports, other than on specified exempt articles. There are no significant differences between the taxation of a locally ■ Betting and Gaming Levy: In addition to fixed annual levies, applicable to different types of betting and gaming activities formed subsidiary and a branch of a non-resident company. carried out in Sri Lanka, a further 5% of the gross collections A locally formed company is deemed to be resident in Sri Lanka from bookmaking/gaming business is payable on a monthly and as such is liable to pay income tax on all its profits and basis in lieu of other indirect taxes. income, wherever they arise or derive from, whether in Sri Lanka

Sri Lanka or overseas. Branches of a non-resident on the other hand would 5 Capital Gains still be considered as non-resident entities and are only liable to the extent that the income arises in or is derived from a source in Sri Lanka. 5.1 Is there a special set of rules for taxing capital gains It should be noted, however, that the standard double taxation and losses? treaty provides for the concept of a “permanent establishment” and it is only if the branch office satisfies such criteria that the profits Investment gains on the realisation of assets and liabilities is attributable to such permanent establishment will be subject to st liable to income tax after 1 April 2018. Investment gains would income tax in Sri Lanka. only arise from the realisation of capital assets held as part of an investment. The term “capital assets” are confined to land and buildings, membership interest in a company, partnership or trust, 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? a security or other financial asset and an option, right or interest in respect of the aforementioned assets. Taxable profits would be such profits to the extent that the income arises in or is derived from a source in Sri Lanka. This means that 5.2 Is there a participation exemption for capital gains? all profits and income derived from a source in Sri Lanka would be taxable. Head office expenses incurred in relation to the branch The IRA does not provide for any participation exemption for office would be tax deductible so far as such expenses do not exceed capital gains. However, there are a limited number of treaties, such 10% of the taxable profits of the branch office. as a treaty with the United States, wherein the capital gains from the The above is subject to the provisions relating to “permanent alienation of shares is subject to a participation exemption. establishments” that may be applicable when a standard double taxation treaty is in force. 5.3 Is there any special relief for reinvestment? 6.4 Would a branch benefit from double tax relief in its Yes, subject to the limitations that the replacement asset should be jurisdiction? acquired within six months before or one year after the realisation. The tax treaty would only provide for residents of a contracting state 5.4 Does your jurisdiction impose withholding tax on the to be entitled to treaty relief. Since a branch does not satisfy such proceeds of selling a direct or indirect interest in local criteria, they would not be entitled to the benefit of such tax treaty. assets/shares?

6.5 Would any withholding tax or other similar tax be There is no withholding tax. However, if such sale does not involve imposed as the result of a remittance of profits by the a share listed on a Stock Exchange in Sri Lanka, the non-resident branch? person may be liable to income tax in Sri Lanka on the basis of there being an investment gain from the realisation of an asset. In such Profit remittances of a non-resident company are charged with an instance, the non-resident person is required to file a return with income tax at the rate of 14% of such remittances. This is the the Inland Revenue Department within one month of realisation and liability of the non-resident company in Sri Lanka and the payment pay its tax prior to remitting the sales proceeds from Sri Lanka. is not made as withholding tax.

6 Local Branch or Subsidiary? 7 Overseas Profits

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

There are no taxes imposed on the formation of a subsidiary. Yes, if the company is resident in Sri Lanka, all its profits and income, wherever it arises from, will be subject to income tax in Sri Lanka. As such, the overseas branches will be subject to the same income tax laws.

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7.2 Is tax imposed on the receipt of dividends by a local 9.3 Does your jurisdiction have rules which target not company from a non-resident company? only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax If a local company holds more than a 10% shareholding in a non- avoidance? resident company, the dividends received from such non-resident company would be exempt from income tax in the hands of the local No, it does not. company. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural 7.3 Does your jurisdiction have “controlled foreign benefits only or result in a reduction of tax? company” rules and, if so, when do these apply? Sri Lanka

There are no such rules in force at the moment. However, it should No such requirement exists. be noted that in the case of a foreign company, if the control and management of its business is exercised in Sri Lanka, such company 10 BEPS and Tax Competition would be deemed to be resident in Sri Lanka for the purposes of the IRA. 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base 8 Taxation of Commercial Real Estate Erosion and Profit Shifting (BEPS)?

Sri Lanka does not have any such legislation. 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? 10.2 Does your jurisdiction intend to adopt any legislation There is no special taxation on the disposal of real estate in Sri to tackle BEPS which goes beyond what is Lanka by foreigners. The general laws under the IRA would apply. recommended in the OECD’s BEPS reports? Profits would either be an investment gain which would be taxed at the rate of 10% or it may amount to business profits which would be No, it does not. taxed at the rate of 28%. 10.3 Does your jurisdiction support public Country-by- 8.2 Does your jurisdiction impose tax on the transfer of Country Reporting (CBCR)? an indirect interest in commercial real estate in your jurisdiction? No, it does not.

Sri Lanka does not impose tax on the transfer of an indirect interest 10.4 Does your jurisdiction maintain any preferential tax in real estate located in Sri Lanka. regimes such as a patent box?

8.3 Does your jurisdiction have a special tax regime No, it does not. for Real Estate Investment Trusts (REITs) or their equivalent? 11 Taxing the Digital Economy Sri Lanka does not have a special tax regime for REITs or their equivalent. 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? 9 Anti-avoidance and Compliance No, it has not. 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule? 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services Yes, the IRA has specific anti-avoidance rules which are based on tax? the principles in the UK. Furthermore, there are specific provisions with regard to income splitting and an arm’s length standard for No, it does not. arrangements between associated persons.

9.2 Is there a requirement to make special disclosure of avoidance schemes?

No such requirement exists.

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Naomal Goonewardena Savini Tissera Nithya Partners Nithya Partners 97A, Galle Road 97A, Galle Road Colombo 3 Colombo 3 Sri Lanka Sri Lanka

Tel: +94 11 2712 625 (ext. 209) Tel: +94 11 2712 625 (ext. 216) Email: [email protected] Email: [email protected] URL: www.nithyapartners.com URL: www.nithyapartners.com

Sri Lanka Naomal Goonewardena is a founding partner of Nithya Partners. He Savini Tissera joined Nithya Partners in December 2014 after has multidisciplinary qualifications in law and finance and is a leading completing her legal studies at the University of Warwick (UK). She is attorney in financial and tax law in Sri Lanka. He advises companies attached to the corporate division of the firm and assists in commercial from various industries on all aspects and types of taxation, especially matters including advice on foreign direct investments, mergers and income tax and VAT. He also represents companies in litigious tax acquisitions and advice on regulatory matters for both local and matters. Prior to joining the Firm, he was a Senior Tax Manager at foreign clients. Further, she assists both in tax advisory and litigious Ernst & Young. He has also been a lecturer in Tax Law at the Sri tax matters. She has also been trained in transfer pricing at the Lanka Law College since 2003 and is a member of the Committee of International Bureau of Fiscal Documentation (“IBFD”), Amsterdam. Taxation of the Ceylon Chamber of Commerce. He served as a legal advisor to the Board of Review of the Inland Revenue Department from 1998 to 2002. Naomal Goonewardena is currently representing clients in the Supreme Court and the Court of Appeal with respect to income tax disputes involving the applicability of tax exemptions, deductibility of interest, deductibility of tax losses and add backs on account of specified levies. Furthermore, he is also involved in litigation with respect to exemptions under the VAT Act and the base on which financial services VAT is payable.

Nithya Partners was established in 1997 with the goal of delivering modern and client-focused services in corporate and financial law and we advise a broad range of local and foreign clients comprising several quoted and unquoted companies, multinationals, financial institutions, investment funds and statutory bodies. Our work covers areas such as foreign direct investments, mergers and acquisitions, corporate restructurings, loan syndications and securitisations. Apart from our involvement in some of the largest mergers and acquisitions and corporate restructurings in Sri Lanka in recent times, we have also played a lead role in several loan syndications, debt structuring and securitisations. The firm’s tax practice is the strongest amongst the legal firms in the country and we have consistently been ranked No. 1 for tax in Sri Lanka byThe Legal 500 and the Tax Directors Handbook. The firm has a strong reputation for corporate tax planning expertise, advising clients on complex tax disputes and tax-efficient structures, and has acted on behalf of both local and multinational clients in a number of high-profile tax cases.

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Switzerland Pascal Hinny

Lenz & Staehelin Jean-Blaise Eckert

agreement, Switzerland’s withholding tax agreements with Austria 1 Tax Treaties and Residence and with the United Kingdom were terminated on 1st January 2017. Furthermore, Switzerland has concluded various bilateral agreements 1.1 How many income tax treaties are currently in force in in the form of international treaties in order to be in line with the your jurisdiction? OECD Common Reporting System (“CRS”). On 7th June 2017, Switzerland, together with over 70 countries, Switzerland has a very extensive income tax treaty network with signed the Multilateral Convention to Implement Tax Treaty Related more than 90 income tax treaties in force. New tax treaties were Measures to Prevent Base Erosion and Profit Shifting (“MLI”) signed in 2018 with Saudi Arabia and Brazil. Moreover, Jordan which will serve to efficiently amend double taxation agreements in and Switzerland have agreed on the importance of concluding an line with the minimum standards agreed upon in the Base Erosion income tax treaty between them. Cameroon and Switzerland have and Profit Shifting (“BEPS”) project. Switzerland will implement both expressed their interest in negotiating and signing an income these minimum standards either within the framework of the tax treaty. In addition, a handful of inheritance tax treaties as well as Multilateral Convention or by means of the bilateral negotiation of tax treaties on the taxation of maritime and/or navigation companies double taxation agreements. Entry into force is not anticipated prior are in force. to January 2019. Up until 2009, Switzerland made a reservation on Article 26 of the OECD Model Tax Convention on Income and on Capital (“OECD 1.2 Do they generally follow the OECD Model Convention MC”) in its double tax treaties on income and capital and provided or another model? for exchange of information in tax matters only in cases that involved acts of fraud, subject to imprisonment according to the The majority of the Swiss income tax treaties follow the OECD MC. laws of Switzerland and the other contacting state. However, as of The income tax treaty signed with the United States of America 2009, Switzerland fully adopted the OECD standards in exchange follows the US model treaty. Switzerland has signed several treaties of information in tax matters as laid out in Article 26 of the OECD with an arbitration clause. Further, Switzerland has opted for the MC in its new income tax treaties, thus providing for an exchange mandatory and binding arbitration clause of Articles 18 to 26 of the of information upon request under certain conditions. Switzerland, MLI. today has adopted more than 50 income tax treaties that include the full implementation of Art 26 of the OECD MC as well as a handful of Tax Information Exchange Agreements (Andorra, Belize, 1.3 Do treaties have to be incorporated into domestic law Grenada, Greenland, Guernsey, Isle of Man, Jersey, San Marino before they take effect? and the Seychelles). As of January 2017, the OECD Convention on Mutual Administrative Assistance in Tax Matters (“CMAAT”) Given that Switzerland follows the monistic system, international entered into force in Switzerland increasing, therefore, the number treaties form part of federal law once they have been ratified and of countries with which an exchange of information in tax matters thus, immediately become valid sources of law. In other words, upon request can take place. they do not have to be incorporated into domestic law before taking On 1st January 2017, the agreement on automatic exchange of effect. Once into force they are an integral part of the internal law information in tax matters between Switzerland and the EU entered and supersede any contrary domestic law. into force. The said agreement implements the global automatic exchange of information standard of the OECD and further replaces 1.4 Do they generally incorporate anti-treaty shopping the taxation of saving income agreement between the EU and rules (or “limitation on benefits” articles)? Switzerland. As a result, firstly, the first exchange of financial account data between Switzerland and EU Member States will occur Not all double taxation treaties entered into by Switzerland in 2018. Secondly, Switzerland has been granted the equivalent rules incorporate explicit anti-treaty shopping rules or “limitation on to those laid down in the EU parent/subsidiary and interest/royalty benefits” articles. Naturally, the US-Swiss income tax treaty agreements that is, full withholding tax exemption of cross-border includes a limitation of benefit clause. dividends, interest and royalties between related entities if certain According to prevailing jurisprudence of the Swiss federal Supreme requirements are met. Further, with the entering into force of said Court, however, all Swiss treaties are subject to an implied anti-

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abuse provision. In 1967, Switzerland enacted unilateral rules to existing losses are eliminated and the aggregated payments by the avoid treaty-shopping with the “Abuse Decree”. This Abuse Decree shareholders or members do not exceed CHF 10 million. contains a number of tests that must be fulfilled by every Swiss- The Securities Transfer Stamp Tax is levied on the transfer of resident company in order to be eligible for treaty benefits. In certain Swiss and non-Swiss securities – mainly shares, similar 1998, facilitations were introduced for holding companies, active participating rights in corporate entities, bonds and shares in companies and publicly quoted companies. In August 2010, the investment funds, if a Swiss stockbroker (“Effektenhändler”) criteria to qualify for an active company were relaxed. is involved as a party or an intermediary to the transaction. With the entry into force of the MLI, Switzerland is expected to Stockbrokers are mainly banks and other brokers, but also companies adapt the title and preamble of the Swiss tax treaties to the minimum holding taxable securities with a book value of more than CHF 10 standard. Further, it has opted for the Principal Purpose Test (“PPT”) million (holding companies). The rates applicable on the purchase rule alone, which provides that a benefit under a tax treaty shall not price are: Switzerland be granted if obtaining that benefit was one of the principal purposes ■ 0.15% in respect of Swiss securities; and of an arrangement or transaction. Concomitantly, the Abuse Decree ■ 0.3% in respect of foreign securities. was partially repealed and became an ordinance. The Insurance Premium Tax is levied on certain insurance premiums. The taxable person is the Swiss insurance company or 1.5 Are treaties overridden by any rules of domestic the holder of a policy taken from a foreign insurance company. The law (whether existing when the treaty takes effect or standard rate is 5% of the premium. Life insurance premiums – if introduced subsequently)? taxable – are taxed at 2.5%.

Treaties supersede Swiss domestic law in the Swiss legal system, whether existing when the treaty took effect or was introduced 2.2 Do you have Value Added Tax (or a similar tax)? If so, subsequently. However, some domestic law provisions, such as the at what rate or rates? Abuse Decree, may limit the application of provisions of treaties. Switzerland introduced Value Added Tax in 1995 and as of 1st January 2018 the standard rate applicable is 7.7%, the reduced 1.6 What is the test in domestic law for determining the rate (e.g. medicine, newspapers, books and food) is 2.5% and the residence of a company? lodging services rate is 3.7%. VAT is only levied at the federal level and the system of tax is Companies are considered to be resident in Switzerland and similar to the one of VAT in the European Union. therefore, subject to unlimited tax liability if their statutory seat or effective administration is in Switzerland. The statutory seat is determined by the place in which the company is registered. The 2.3 Is VAT (or any similar tax) charged on all transactions effective place of management is determined through the Supreme or are there any relevant exclusions? Court’s case law and it is where the company has its effective and economic centre of activity. Otherwise put, where its day-to-day The Swiss VAT system largely follows the 6th VAT Directive of management is. the European Union. As of 1st January 2012, taxpayers have the possibility to request a VAT audit by the federal administration. This is especially interesting in cases of the purchase and sale of 2 Transaction Taxes enterprises. Taxable transactions 2.1 Are there any documentary taxes in your jurisdiction? The following transactions are subject to VAT: ■ supply of goods and services in Switzerland; and The transfer of Swiss-situated real estate is regularly subject to a ■ import of goods or services. cantonal or communal Real Estate Transfer Tax (see section 8 Taxable persons hereunder). A taxable person is any person, irrespective of legal form, that Furthermore, based on the Swiss Stamp Duties Act, the following carries on a business and makes supplies on Swiss territory stamp duties are levied by the Federation: through business or has its own registered office, domicile or ■ Securities Issuance Stamp Tax. permanent establishment in Switzerland. Taxable persons may file ■ Securities Transfer Stamp Tax. an application for exemption if they have a turnover below CHF ■ Insurance Premium Tax. 100,000. Moreover, all persons (including private individuals) The Securities Issuance Stamp Tax is a stamp duty levied on the receiving services from non-Swiss service providers with a total issue (primary market) of certain Swiss securities – mainly shares value exceeding CHF 10,000 annually must pay VAT (to be declared and similar participating rights in corporate entities – as well as on in the so-called “reverse charge procedure”). Furthermore, any equity contributions to such corporate entities. The taxable person person importing goods for private use for a value in excess of CHF is the company or the person issuing the securities or benefitting 300 is subject to VAT at the border. from the equity contribution. Finally, a partial VAT reform, aiming to remove competitive The rate is 1% of the capital contribution. However, the capital disadvantages between foreign and domestic companies, entered created or increased by a corporation or a limited liability company into force on 1st January 2018. The main modification consists of is exempt from the issuance stamp tax, up to the amount of CHF 1 foreign businesses (not established in Switzerland), supplying goods million. Furthermore, certain transactions, especially in the case of to Switzerland or providing end users with telecommunication and restructuring, are exempt from tax. Rescue companies created for electronic services, with a global turnover of over CHF 100,000 restructuring purposes are exempt from issuance stamp tax, as are becoming subject to VAT in Switzerland. Up until that date, foreign capital increases and additional contributions, provided previously businesses were exempt from VAT if they generated less than CHF

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100,000 of turnover per year from taxable supplies in Switzerland. As of 1st January 2019, foreign mail-order companies will have to 2.7 Are there any other indirect taxes of which we should charge VAT to their customers in Switzerland if their turnover for be aware? small, import tax-free consignments is over CHF 100,000 annually. The consumption of certain alcoholic beverages, tobacco and VAT exemptions and zero-rated transactions mineral oil, as well as emissions of carbon dioxide and heavy traffic, Article 21 of the VAT Act provides a list of certain activities to be are subject to state levies. The taxes are included in the retail price exempt from VAT. Notably: hospital and medical care; education and are not disclosed to the end-user. (school, courses, etc.); cultural activities (theatre, museum, libraries, etc.); insurance, reinsurance and social insurance transactions; granting and negotiation of credits; transactions in shares and other 3 Cross-border Payments

securities; real estate transfers; and letting and leasing of real estate Switzerland (in general), etc. Input taxes in respect of exempt transactions listed in article 21 of the VAT Act are not deductible. In order to avoid 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? competitive disadvantages, a taxable person may, however, opt for VAT in certain cases as per article 22 of the VAT Act and be able to deduct input taxes in these cases. Profit distributions made by Swiss corporations, limited liability companies and co-operatives are subject to withholding tax Article 23 of the VAT Act provides a list of “zero-rated” transactions (“WHT”). WHT is levied on interest, annuities, profit sharing and for the effective use or enjoyment of outside Switzerland (destination all other income derived from shares, social participations in limited principle). Examples of activities that are allowed zero rates are the liability companies and co-operatives, participation certificates or export of goods and services outside Switzerland, transit goods, and profit sharing certificates, issued by a person who is domiciled in supplies in the field of international air transport. The fact that no Switzerland. Distributions made by partnerships are not considered VAT is due on the respective activities does not affect the deduction as taxable dividend distributions. Profit distributions are defined of input taxes. as any benefit which may be financially quantified and which is made to the creditor or shareholder in excess of the paid-in nominal 2.4 Is it always fully recoverable by all businesses? If not, capital. They include ordinary dividend distributions, liquidation what are the relevant restrictions? proceeds, stock dividends and constructive dividends (hidden profit distributions). The VAT Act in principle grants deductibility for all VAT due or No WHT is levied on dividend payments out of so-called capital paid in respect of goods and services accumulated for the purpose contribution reserves created from earlier capital contributions of of entrepreneurial activities (“input taxes”). Where a taxpayer has shareholders. taxable and tax-exempt turnover (see question 2.3 above), he must The applicable WHT rate is 35%, whether paid to a Swiss-resident reduce the input tax recovery proportionally. For smaller businesses, or non-resident recipient. special rules apply. They may opt for a lump-sum method, whereby reduced VAT rates for the calculation of tax due take input tax into Swiss-resident recipients can normally obtain a full refund of account. dividend WHT, provided they have properly reported the gross amount of the dividend received as taxable income and claim For private goods, it is possible to proceed with a so-called fictitious the refund within a period of three years. Moreover, inter-group input tax deduction (with the exception of – starting 1st January companies under certain conditions may apply for the notification 2018 – collection pieces, for which a special procedure will apply). procedure on intra-group dividends to the parent company, so that Self-consumption of goods or services is calculated as a simple the WHT is not paid and reclaimed. correction to the input tax and is not included in the calculation of the turnover. Non-resident recipients may apply for a full or partial refund of dividend WHT pursuant to the provisions of an applicable treaty. On most inter-company cross-border dividend payments, Swiss- 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that based companies with substantial foreign shareholders may apply applied by Sweden in the Skandia case? for a reduction of the WHT at source and the Swiss company has to pay the non-refundable WHT only. However, before the due date of Under Swiss VAT legislation, the head offices and permanent dividend payment, the paying Swiss company has to file a request establishment are treated as separate taxpayers. Therefore, for the application of the notification procedure with the Federal Tax intracompany supplies of services are probably subject to Swiss Administration (“FTA”). VAT. Article 13 of the Swiss VAT Act permits group taxation The permission to pay dividend without WHT, if applicable, is (including the Swiss permanent establishment of a foreign entity). granted on the basis of form 823B or 823C. This form has to be Legal entities with their register office or permanent establishment signed by both companies and has to be stamped by the State of in Switzerland, which are closely associated with one another under residence of the parent company. The dividend payment must be the common management of a single legal entity, may apply as a notified to the Swiss federal tax administration within 30 days from single taxable person. the due date of the dividend. In case of refusal of the notification procedure, the 35% WHT due on 2.6 Are there any other transaction taxes payable by dividend distributions will be withheld by the Swiss company and companies? be paid to the FTA. The foreign (parent) company may reclaim all or part of the WHT, based on the applicable double taxation treaty. No, there are no other transaction taxes apart from real estate As per the amended Withholding Tax Act which entered into force transfer taxes (please see question 2.1 and section 8). on 15th February 2017, the following regulations were adopted (i) non-compliance with the 30 days filing requirement will not result in

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denial of the notification procedure, (ii) no interest of late payment will apply, and (iii) late filing of declaration and notification forms 3.5 If so, is there a “safe harbour” by reference to which result to a maximum administrative fine of CHF 5,000. tax relief is assured?

As per the circular letter n°6, for a company the maximum debt 3.2 Would there be any withholding tax on royalties paid allowed must not exceed the aggregate value of the following assets by a local company to a non-resident? (valued at their fair market value): ■ cash: 100%; Switzerland does not levy WHT on royalties, whether paid to a resident or non-resident person. However, to the extent that the ■ accounts receivable: 85%; royalties do not follow the “arm’s length” principle, they will be ■ inventory: 85%;

Switzerland re-qualified as hidden dividends if paid to a shareholder or a related ■ other current assets: 85%; party to the shareholder. Consequently, such royalties would not be ■ bonds in CHF: 90%; deductible for the paying company. In addition, they are subject to ■ bonds in foreign currency: 80%; the 35% Swiss WHT like any other dividend. ■ quoted shares: 60%; ■ non-quoted shares: 50%; 3.3 Would there be any withholding tax on interest paid ■ investments in subsidiaries: 70%; by a local company to a non-resident? ■ loans: 85%; Withholding Tax ■ furniture and equipment: 50%; The Swiss WHT is levied on interests from bonds issued by a Swiss ■ property, plant (commercially used): 70%; resident and on interests paid on Swiss bank deposits. However, ■ other real estate: 80%; and Switzerland does not levy any WHT on private and commercial ■ intellectual property rights: 70%. loans (including inter-company loans). Further, as per the same circular letter financial companies can have The definition of a bond according to Swiss WHT law is rather the maximum debt/equity ratio of 6:7 of the total assets (fair market extensive and includes any bonds emitted by a Swiss resident, value). offered to more than 10 non-banks under similar conditions or to more than 20 non-banks under different conditions. Further, the 3.6 Would any such rules extend to debt advanced by a definition of a bank according to the WHT law includes anyone who third party but guaranteed by a parent company? publicly offers to receive interest-bearing deposits from more than 100 clients. As a principle, the thin capitalisation rules are only applicable to In this context, please note that intra-group loan-relationships/ debt advanced by shareholders or related parties. However, if debt deposits neither qualify as bonds, nor as bank deposits for the above is advanced by a third party, but guaranteed by related parties, the calculation purpose. In other words, they do not have to be taken thin capitalisation rules could apply nevertheless. into account when calculating the 10, 20 and 100 limit, respectively unless a bond is issued by a foreign group-company, guaranteed by a Swiss group-company, and the funds are repatriated in Switzerland. 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- Tax at Source on Mortgage Secured Loans resident? Non-resident recipients of interest paid on a loan which is secured by mortgages on Swiss real estate, are subject to federal and cantonal The provisions of the Abuse Decree Circular of 1962 with regard taxes levied at source on gross income. The federal tax is 3%, while to debt-to-equity ratios, as well as maximum rates allowed for the cantonal taxes vary between 13% and 21%. remuneration in the form of interest, are generally not applicable since the Abuse Decree Circular of 1999.

3.4 Would relief for interest so paid be restricted by In addition to the thin capitalisation rules mentioned above, the reference to “thin capitalisation” rules? FTA publishes maximum rates allowing for the interest not to be considered a hidden profit distribution (deemed dividend). In Switzerland, thin capitalisation rules are embodied in the circular Otherwise, there could be provisions in the applicable double letter n°6 issued by the Federal Tax Administration on 6th June 1997. taxation treaty regarding beneficial ownership. The circular sets out safe harbour rules that require a minimum equity ratio for each asset class. 3.8 Is there any withholding tax on property rental Interest paid by a Swiss-resident payer is normally not subject to payments made to non-residents? WHT. However, to the extent that interest is paid on amounts of debt exceeding the maximum debt allowed according to the circular Switzerland does not levy any WHT on property rental payments, letter, it is re-qualified as a hidden dividend, if paid to a shareholder whether paid to a resident or non-resident person. However, to the or a related party. Consequently, such interest is not deductible for extent that the rental payments do not follow the “arm’s length” the paying company and is subject to the 35% Swiss WHT like any principle, they will be re-qualified as hidden dividends if paid to a other dividend. However, the rules set by the FTA are safe harbour shareholder or a related party. Consequently, such rental payments rules and allow for the taxpayer to prove that different “arm’s would not be deductible for the paying company, and would be length” debt-to-equity ratios and interest rates apply. subject to the 35% Swiss WHT like any other dividend.

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rules; for instance, if there is a registration of private expenses of a 3.9 Does your jurisdiction have transfer pricing rules? shareholder or a fictitious loss. Second, tax adjustments aiming at ensuring compliance with the periodicity principle; for instance, if Switzerland does not have a formal transfer pricing legislation, provisions without commercial justification are created. Third, tax however, all related party transactions with Swiss entities must adjustments aiming at preserving the system, because Switzerland respect the “arm’s length” principle as well as tax avoidance. loses its taxing rights, particularly in case of transfer abroad The Swiss authorities normally deal with transfer pricing issues (liquidation fiction). by applying these principles. Swiss tax authorities follow the It should be added that transfer pricing adjustments will be made OECD transfer pricing guideline. When the transfer price does not when group internal transactions do not meet the “arm’s length” correspond to the “arm’s length” price, a hidden profit distribution standard. is assumed and taxable income is adjusted as per article 58 of the Federal Income Tax Act. Switzerland 4.4 Are there any tax grouping rules? Do these allow Circulars and circulars letters have been issued by the FTA for relief in your jurisdiction for losses of overseas implicitly or explicitly referring to the determination of transfer subsidiaries? pricing. For example, circular letter n°4 from 19th March 2004 states that the “arm’s length” principle is also applicable when There are no tax consolidation rules with regard to corporate profit choosing the method of determination of mark-ups, and that implies tax. Thus, each company is taxed as a separate taxpayer. Mergers for financial services or management functions that “cost plus” is and other transactions of two or more companies are disregarded if not an appropriate method (or only in very exceptional cases). the only goal is to combine the tax base of the companies involved On a yearly basis, FTA publishes a Circular letter regarding the and to set off taxable profits with losses of other companies. interest rates for inter-company loans in Swiss Francs and a Circular With regard to VAT, a VAT group consisting of closely associated letter regarding the interest rates for inter-company loans in foreign legal entities, partnerships and individuals who have their domicile currencies. The interest rates vary per currency. or corporate seat in Switzerland can be treated as a single tax-liable entity. Consequently, intra-VAT group transactions are not subject 4 Tax on Business Operations: General to Swiss VAT (even if accounted by the VAT group leader).

4.5 Do tax losses survive a change of ownership? 4.1 What is the headline rate of tax on corporate profits?

In Switzerland, losses from seven financial and tax years preceding Corporate profits are taxed at the federal, cantonal and communal the current tax period may be deducted to the extent they could not level. The corporate profits tax is itself deductible from the taxable be included in the computation of taxable net profit of those years. corporate profits resulting to the statutory rates being higher than the This rule applies regardless of the shareholder; thus, tax losses do effective tax rates. survive a change of ownership. At the federal level, the statutory corporate profits tax rate is 8.5%, In case of restructuration, tax losses should survive in principle. If, corresponding to an effective tax rate of 7.83%. through the merger of a parent company and its subsidiary, losses are The cantonal tax rates vary from canton to canton. A corporation transferred to the parent company, they may be taken into account, is liable to corporate profits tax in each canton where it hasa even if the parent company has already made depreciation expenses permanent establishment or a piece of real estate. Some cantons on the participation or provided remediation services. foresee a rate, others foresee a flat rate. In addition In case of a financial reorganisation scheme, losses lying further to this initial tax rate, most of the cantons foresee cantonal and back can also be credited with rescue contributions aimed at communal tax multipliers. These multipliers vary from year to year equilibrating an adverse balance. depending on the financial needs of the local authorities. However, this rule does not apply in cases of abuse. If an For 2017, effective corporate profits tax rates are (federal, cantonal economically sound company transfers, by means of contribution in and communal tax included): kind, all of its operating assets to an over-indebted company without ■ Geneva: 24.16%. any entrepreneurial reason, the operation is considered abusive and ■ Lucerne: 12.32%. the deduction of the losses is not admitted. ■ Zug: 14.60%. ■ Zurich: 21.15%. 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? 4.2 Is the tax base accounting profit subject to adjustments, or something else? Whether profits are retained or distributed, they are subject to the same annual corporate profit tax. In the canton of Appenzell- The tax base is the annual profit as reported in the commercial Innerrhoden, however, distributed profits are taxed at a lower rate accounts. This tax base is subject to few adjustments. at the cantonal level. When the company distributes its profits (other than distributions from capital contribution reserves – see question 3.1), it must 4.3 If the tax base is accounting profit subject to adjustments, what are the main adjustments? withhold a 35% WHT, which is fully or partly refundable depending on the country of residence of the beneficiary. There are three categories of adjustments. First, tax adjustments aiming at ensuring compliance with Swiss mandatory accounting

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Favourable tax treatment is also available for qualifying participations 4.7 Are companies subject to any significant taxes not transferred to group companies abroad; the group holding or sub- covered elsewhere in this chapter – e.g. tax on the holding company must be incorporated in Switzerland. occupation of property? b. Calculation of tax relief Companies are subject annually to capital tax, which, is levied at a Companies with qualifying capital gains may reduce their corporate cantonal and communal level. It is based in the company’s net equity income tax by reference to the ratio between net earnings on such (i.e. paid-in capital, open reserves and retained profits). The amount participations and total net profit. The following formula must be subject to tax may also be increased by the debt re-characterised applied in each tax period, to determine the amount of the tax relief as equity in the application of the Swiss thin capitalisation rules available: (see question 3.4 above). The tax rate depends on the canton Tax relief = A × B / C Switzerland and community of domicile but in general varies between 0.01% Where: and 0.5%. Some cantons foresee a different tax rate for holding companies or other tax-privileged companies. For example, in A = corporate income tax; Geneva the maximum rate of tax is 0.2% and for holding companies B = net qualifying capital gain; and only 0.03%. Again, cantonal and communal multipliers will apply. C = total net profit. However, please note that these cantonal preferential tax regimes The amount of net-qualifying capital gain is determined as follows: will be soon abolished (please refer to question 10.1). The cantons may opt for crediting corporate income taxes to the capital taxes = gross qualifying capital gain – (financing costs + administrative levied in their territory. Hence, companies generating enough profit costs). will not have to pay capital tax additionally. Loss-making or only Financing costs are defined as interest on loans and other costs which low profit-making companies continue to be subject to capital tax are economically equivalent thereto. They are generally attributed (to some extent). to qualifying capital gains by reference to the ratio between the book There may be, at the cantonal level, certain other taxes payable value of the qualifying participation and total assets. depending on the canton. Thus, certain cantons may levy a tax on Administrative costs are usually fixed at 5% of gross dividend real estate situated in such cantons. In the canton of Geneva, there is income (unless actual proven administration costs are lower). a “professional tax” which is calculated as a percentage of turnover, rent paid and number of employees. 5.3 Is there any special relief for reinvestment?

5 Capital Gains According to the provisions of the Merger Law, a company can transfer certain business assets and investments to Swiss group companies without realising capital gains. Hence, hidden reserves 5.1 Is there a special set of rules for taxing capital gains available on such assets can be rolled over also for tax purposes. In and losses? addition, in some cantons, hidden reserves available on real estate can be rolled over to a new piece of real estate replacing the original In general, no special set of rules for taxing capital gains and losses piece sold (i.e. the capital gain is not taxed, but can be deferred exists. Capital gains form part of taxable profit; capital losses for tax purposes in the case of replacement of certain pieces of real are tax-deductible. Two exceptions to the general rule exist: (i) estate). Finally, in the canton of Geneva, the gain realised on real participation reduction; and (ii) replacement of certain assets, both estate is subject to the special tax, but the amount is then credited of which will be analysed hereafter. against the tax on corporate profits. Cantons that subject corporations to this special tax foresee the tax 5.2 Is there a participation exemption for capital gains? deferral on real estate by analogy to the generally applicable set of rules. Therefore, the tax deferral is available whether or not the If a corporation realises a capital gain on the sale of a qualifying capital gain is taxed according to the special tax or the corporate participation, it is entitled to a participation reduction. profit tax. a. Capital gains for which relief is available A taxation of a capital gain generated by the sale of a non-current business can be postponed if a replacement asset is acquired that can To qualify for relief on capital gains, a Swiss company must make be depreciated accordingly. The same applies for shareholdings of a profit on the sale of a participation which represents at least 10% at least 10% held for at least one year. In this context, however, the of the share capital of another company which it has held for at least participation reduction may apply alternatively. one year. Finally, capital losses are recognised immediately, whether or not Losses incurred as a result of the sale of qualifying participations the company acquires similar assets in replacement. remain tax-deductible. A capital gain is defined as the difference between the proceeds from the sale of a qualifying participation and the acquisition cost 5.4 Does your jurisdiction impose withholding tax on the of the investment. Hence, any amount of previously tax-deductible proceeds of selling a direct or indirect interest in local assets/shares? depreciation or provision on the participation is not taken into consideration to calculate the amount of gain which can benefit from Switzerland does not levy WHT on the proceeds of selling a direct the relief. In addition, revaluation gains from participations do not or indirect interest in local assets or shares. qualify.

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establishments of foreign companies and of taxable income/ 6 Local Branch or Subsidiary? capital of foreign permanent establishments of Swiss companies. Accordingly, Swiss double taxation treaties normally contain a 6.1 What taxes (e.g. capital duty) would be imposed upon corresponding reservation in favour of the indirect method. the formation of a subsidiary? Special rules apply with respect to the profit allocation of permanent establishments of banks and insurance companies. Securities issuance stamp tax is levied upon the creation or increase A branch is subject to the same profits tax and capital tax as a Swiss of the par value of participation rights (see question 2.1 above). The company, i.e. there is no special branch profits tax. There is no participation right can take the form of shares of Swiss corporations, WHT or other special tax on profit repatriations from the branch to limited liability companies (“LLCs”), co-operatives, as well as profit its head office. sharing certificates and participation certificates. A contribution Switzerland to the reserves of the company (even though the share capital is not increased) made by the shareholders, as well as the transfer of 6.4 Would a branch benefit from double tax relief in its the majority of shares of a Swiss company that is economically jurisdiction? liquidated, are also subject to the tax. The securities issuance stamp tax is levied at a flat rate of 1%. It is only levied to the extent A branch would not benefit from any tax provisions of tax treaties that the share capital of the company exceeds CHF 1 million. entered into by Switzerland, as it is not a resident of Switzerland Special rules apply when shares are newly issued in the course of pursuant to Swiss domestic law. reorganisations, mergers, spin-offs and similar transactions. Such types of transaction are normally exempt from the 1% tax. 6.5 Would any withholding tax or other similar tax be Securities issuance tax is not levied on the capital allocated to a imposed as the result of a remittance of profits by the branch. branch?

The remittance of profits by a Swiss branch to a foreign head office 6.2 Is there a difference between the taxation of a local is not subject to WHT or any other tax. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 7 Overseas Profits A resident subsidiary is taxed on its profit and equity (income allocated to foreign permanent establishments and real estate are exempted). A Swiss permanent establishment of a non-Swiss 7.1 Does your jurisdiction tax profits earned in overseas headquarters is taxed in Switzerland on the profit and equity branches? allocated to such permanent establishment, usually following the accounts of such permanent establishment. Swiss tax law generally provides for the exemption of profits The issuance of nominal capital of a resident subsidiary and any generated in non-Swiss enterprises, permanent establishments and contribution to the equity of a resident subsidiary is subject related to real estate located abroad. to issuance stamp tax at 1% (a threshold of CHF 1 million for A Swiss enterprise may compensate losses of a permanent capital increases applies), whereas equity allocated to a permanent establishment abroad with profits generated in Switzerland if the establishment is not subject to issuance stamp tax. State in which the establishment is located has not already taken A resident subsidiary whose assets, as per the last balance sheet, account of those losses for tax purposes. As soon as assumed losses consist of taxable securities in excess of CHF 10 million, qualifies can be offset in the non-Swiss branch, the Swiss corporate income as a stockbroker liable to transfer stamp tax on the transfer of tax basis is increased accordingly. The provisions of the tax treaties securities where he acts as an intermediary or party to such a remain applicable. transaction (see the answer to question 2.1). Branches do not qualify as stockbrokers merely by holding taxable shares. 7.2 Is tax imposed on the receipt of dividends by a local A WHT is imposed on dividends paid by a resident subsidiary, company from a non-resident company? whereas no such WHT applies on profit repatriations to the non- Swiss head office for branches. The taxation of dividends received will depend on the importance of the participation held. In contrast to resident subsidiaries, branches are not entitled to invoke tax treaties, since branches are not considered to be resident At the federal and cantonal levels, the participation reduction in Switzerland, pursuant to Swiss domestic law (see also the answer regime applies, so that the effective tax rate applicable to the to question 6.5). dividends received is proportionately reduced as per the ratio of the net dividend income over the total net taxable income, provided the local company holds at least 10% of the participation or 6.3 How would the taxable profits of a local branch be participation rights with a market value of at least CHF 1 million determined in its jurisdiction? (see also question 5.2 above).

A foreign entity is liable to Swiss corporate profit tax on profits and At the cantonal level only, privileged tax status as a holding equity attributable to the Swiss permanent establishment. In general, company is available in cases where the participation or the income taxable income of permanent establishments is determined on the therefrom represents at least two-thirds of the total assets or of the basis of its separate financial statements as if it were a corporate income. Such holding companies (without commercial activity in entity separate from its head office (direct method). Switzerland) do not pay profit tax at the cantonal level. The special status of holding companies will be abolished sometime in the In the past, the indirect method was preferred for both the future due to Projet fiscal 17 (see question 10.1 below). determination of taxable income/capital of domestic permanent

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real estate. Income arising from real estate is therefore attributed to 7.3 Does your jurisdiction have “controlled foreign the fund as a taxable legal person and taxed under corporate income company” rules and, if so, when do these apply? tax.

Switzerland does not have any “controlled foreign company” legislation. 9 Anti-avoidance and Compliance

8 Taxation of Commercial Real Estate 9.1 Does your jurisdiction have a general anti-avoidance or anti-abuse rule?

8.1 Are non-residents taxed on the disposal of In Switzerland, anti-avoidance rules are not contained in a specific Switzerland commercial real estate in your jurisdiction? act. Through the years the Federal Supreme Court developed a general tax avoidance theory. The application of this theory, applied The transfer of Swiss-situated real estate, commercial or otherwise, by all Swiss courts and tax authorities, has the consequence that tax is regularly subject to a cantonal or communal Real Estate Transfer authorities have the right to tax the taxpayer’s legal structure based Tax. The applicable tax rates vary from canton to canton. Normally on its economic substance if the following conditions are met: (i) the they range between 1% and 3% of the transfer value of the real taxpayer’s legal structure is unusual, inappropriate or inadequate to estate. However, some cantons do not levy this transfer tax (e.g. its economic purpose; (ii) tax considerations are deemed to be the the canton of Zurich). Both residents and non-residents are subject only motive for the transaction; and (iii) the transaction effectively to this tax. leads to significant tax savings to the extent that it would be accepted Further, the capital gain resulting from the disposal of real estate in by the tax authorities. Switzerland is subject either to a special tax on real estate capital gains or to the ordinary tax on benefits. The cantons are free to 9.2 Is there a requirement to make special disclosure of choose one or the other taxation method for cantonal and communal avoidance schemes? tax purposes. The cantons choosing the special tax on real estate capital gains generally set an increasing tax scale relating to the Tax planning is generally admitted by Swiss tax law provided that amount of the capital gain, but decreasing relating to the holding the taxpayer does not commit any abuse of law or tax avoidance period. Both residents and non-residents are subject to this tax on (please note that it is not considered a criminal offence). the disposal of real estate. In order to remove the uncertainties regarding the tax consequences At the federal level, the capital gain resulting from the disposal of of a planned transaction, as the abuse of law concept is very commercial real estate in Switzerland is only subject to the ordinary large, the taxpayer may request an advance tax ruling. The tax tax on benefits. A taxable gain at the federal level, however, administrations are willing to discuss, in advance, specific questions occurs where the real estate sold has been held by a corporate non- (law or facts) on taxation. While doing this, the tax consequences resident or where the real estate formed part of the Swiss permanent of the planned activities can be defined in a binding tax ruling – the establishment of a non-Swiss-resident individual. principle of protection of good faith applies.

8.2 Does your jurisdiction impose tax on the transfer of 9.3 Does your jurisdiction have rules which target not an indirect interest in commercial real estate in your only taxpayers engaging in tax avoidance but also jurisdiction? anyone who promotes, enables or facilitates the tax avoidance? In most cantons, a formal transfer of real estate, commercial or otherwise, is subject not only to the Real Estate Transfer Tax, but It should be noted that tax avoidance, which is described as the also to a so-called “economic change of ownership” which is the choice of an unusual, inadequate or abnormal structure or transaction case when shares in a real estate company are transferred. made for the sole purpose of saving taxes, is not a punishable An economic change of ownership does also trigger the taxation of offence under Swiss law. The taxpayer will merely be asked to pay the capital gains in the same way as the direct transfer of real estate taxes in accordance with the economic substance of the structure or (with either the special tax or the ordinary tax on benefits). transaction (including possible late interest). In most of the cantons, only the transfer of all or the majority of On the other hand, tax evasion (the non-disclosure of taxable items) shares in a real estate company triggers taxation. However, some and tax fraud (the use of forged, falsified or inaccurate documents) cantons do also tax the transfer of minority holdings (e.g. the canton are both criminal offences. Tax evasion may result in a fine for of Geneva). the taxpayer. The representative of a taxpayer who instigates, assists, commits or participates in tax evasion may also be fined, irrespective of the fine incurred by the taxpayer, and may be jointly 8.3 Does your jurisdiction have a special tax regime for Real Estate Investment Trusts (REITs) or their and severally liable for the unpaid tax. Tax fraud is punishable by equivalent? fine or imprisonment; anyone who instigates or participates as an accomplice of the taxpayer may also be punished. Switzerland does not have a special tax regime for REITs. Special rules, however, exist for Swiss real estate funds with direct 9.4 Does your jurisdiction encourage “co-operative ownership of real estate. In general, collective investment of capital compliance” and, if so, does this provide procedural is treated as transparent. Therefore, the income and capital of the benefits only or result in a reduction of tax? funds are directly attributed to investors. As to real estate funds with direct ownership of real estate, the fund is treated as non-transparent While there is no normalised programme for co-operative compliance with respect to income generated from direct ownership of Swiss in Switzerland, cooperation between taxpayers and tax authorities

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is excellent. In particular, a taxpayer may request a tax ruling to clarify the tax consequences of a planned structure or transaction. 10.2 Does your jurisdiction intend to adopt any legislation This possibility derives from the practice of the tax authorities, as to tackle BEPS which goes beyond what is recommended in the OECD’s BEPS reports? Swiss law does not refer to tax rulings (with the exception of Article 69 of the VAT Act). None of Switzerland’s foreseeable legislative reforms intend to go A tax ruling is not intended to result in a reduction of tax, but to beyond the minimum standards in the OECD’s BEPS reports. provide legal certainty regarding the application of the law. In accordance with the principle of protection of good faith, a tax ruling is binding upon the tax authorities if certain criteria are met. 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)?

10 BEPS and Tax Competition The CbC Act came into force on 1st December 2017. According to Switzerland the said Act, parent entities of multinational enterprises residing in Switzerland with more than CHF 900 million consolidated revenue 10.1 Has your jurisdiction introduced any legislation in the financial year preceding the reporting year or surrogate in response to the OECD’s project targeting Base Erosion and Profit Shifting (BEPS)? parent entities must comply with the Country-by-Country reporting obligations and provide the Federal Tax Administration with the Switzerland had elaborated the Corporate Tax Reform Act III, report. This report will not be published. The first financial year the st which aimed to strengthen the tax competitiveness of Switzerland Country-by-Country report must be filled is on or after 1 January and resolve the tax dispute with the EU, as well as align with the 2018 depending on the entities’ chosen financial year dates and it standards resulting from the new OECD principles. However, the will be exchanged with partner countries beginning 2020. Reform project was submitted to popular vote and dismissed by Swiss voters on 12th February 2017. A replacement project, called 10.4 Does your jurisdiction maintain any preferential tax Projet fiscal 17, is currently under development. regimes such as a patent box? The said project has the same purpose as the Corporate Tax Reform Act III. It includes among others, the abolition of the special tax Currently, Switzerland maintains preferential profit taxation for status companies at cantonal level as well as a few tax practices at holding companies, domiciliary companies and mixed companies. federal level (i.e. finance branch and principal company treatment) However, as mentioned in question 10.1 they will be abolished. along with transitional measures for up to five years and introduction Replacement measures could include a mandatory patent box for of higher taxation of dividends for qualifying shareholders of cantons. individuals. Concomitantly, various measures had been designed The canton of Nidwalden, as of 2011, has a “licence box rule”. The to maintain the attractiveness of the Swiss Tax System such as: a net licensing income resulting from the right to use intellectual proposed general reduction of cantonal corporate income taxes; the property (“IP”) rights is taxed separately at an overall effective 8.8% introduction of a mandatory patent box regime and optional R&D tax rate. The licence box rule only applies for companies having super deduction both at cantonal level and in the canton of Zurich; their domicile or branch in the canton of Nidwalden, and is only and the introduction of a notional interest deduction on surplus granted upon request. equity. If no referendum is called, this should come into full force in 2020 but needs to be implemented in each canton separately. 11 Taxing the Digital Economy In order to be in line with the minimum standard of the International Exchange of Country-by-Country Reports (“CbC Reports”) of Action 13 of the BEPS project, Switzerland, in January 2016, signed 11.1 Has your jurisdiction taken any unilateral action to tax the Multilateral Competent Authority Agreement on the Exchange digital activities or to expand the tax base to capture of Country-by-Country Reports (“CbC-MCAA”). The Swiss digital presence? Parliament, further, adopted the Federal Act on the International Automatic Exchange of Country-by-Country Reports (“CbC-Act”) Switzerland has not taken any unilateral action with regards to the as well as the Ordinance on International Automatic Exchange of taxation of digital economy. The State Secretary for International Country-by-Country Reports (“CbC-Ordinance”). All three came Finance has been working intensively on the taxation of the digital into force as of 1st December 2017. economy and performed an analysis on the subject. Switzerland As of January 2017, Switzerland, being in line with Action 5 of the holds the opinion that it is necessary to favour multinational BEPS project, introduced the spontaneous exchange of information approaches, which tax profits in the jurisdiction where added value in tax matters through the adoption of CMAAT as well as by is generated and which do not cause double or over taxation and revising the Swiss Federal Act on Tax Administrative Assistance that measures outside the scope of double taxation agreements are Act (“TAAA”) and the Ordinance on International Administrative to be avoided. Assistance in Tax Matters (“TAAO”). All three above entered into st force on 1 January 2017. It should be noted that certain reservations 11.2 Does your jurisdiction support the European were made limiting the taxes covered for exchange only to Federal, Commission’s interim proposal for a digital services Cantonal and Communal direct taxes, WHT and capital gain on real tax? estate taxes. Indirect taxes such as stamp duties and value added taxes are excluded. No official announcement has been issued by the authorities on the Finally, as mentioned at question 1.1, Switzerland signed the MLI subject. on 7th June 2017.

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Pascal Hinny Jean-Blaise Eckert Lenz & Staehelin Lenz & Staehelin Brandschenkestrasse 24 Route de Chêne 30 8027 Zurich 1211 Genève 6 Switzerland Switzerland

Tel: +41 58 450 80 00 Tel: +41 58 450 70 00 Email: [email protected] Email: [email protected] URL: www.lenzstaehelin.com URL: www.lenzstaehelin.com

Prof. Pascal Hinny is a specialist in the field of national and Jean-Blaise Eckert is a partner at Lenz & Staehelin and co-head of the Switzerland international tax planning for multinational groups of companies tax group. His practice areas include tax, private clients, contract law (including M&A, restructurings, recapitalisation, financing, relocation and commercial. and private equity). He advises regularly on international and domestic He speaks French, English and German. Jean-Blaise studied law at transactions, including public tender offers and private equity buy-outs. the University of Neuchâtel and was admitted to the Bar of Neuchâtel Pascal studied law at the University of St. Gallen, where he also in 1989 and to the Bar of Geneva in 1991. He studied business gained his Ph.D. degree on his thesis: “Tax treatment of trademarks administration at Berkeley, Haas Business School, where he acquired in a multinational group of companies”. He is a lawyer and certified an MBA in 1991. He received his diploma as a Certified Tax Expert in tax expert. He holds an LL.M. degree from the London School of 1994 and is a Certified Specialist in Inheritance Law. Economics. Jean-Blaise is considered as a leading lawyer in Switzerland. He Since 2002, Pascal he has been a full professor of tax law at the advises a number of multinational groups of companies as well University of Fribourg. He chairs the Swiss Association of Tax Law as HNWIs. He sits on the board of a number of public and private Professors and is the Swiss delegate to the International Fiscal companies. Jean-Blaise is a frequent speaker at professional Association (“IFA”) Permanent Scientific Committee. He regularly conferences on tax matters. Jean-Blaise is Secretary General of the speaks at national and international tax conferences. International Fiscal Association (“IFA”). Pascal speaks English, French and German.

With over 200 lawyers and offices located in Geneva, Zurich and Lausanne, Lenz & Staehelin is the largest law firm in Switzerland. Ithas a long tradition of international practice and is ranked amongst the leading firms in all areas of business law. Its clients include national and foreign individuals and corporations, based either in Switzerland or abroad. Fully independent, Lenz & Staehelin has developed successful and longstanding relationships with leading foreign law firms; thus it is ideally positioned to assist clients in cross-border transactions. The firm is known for its high professional standards, in particular for its dedication to providing clients with personalised advice and for the degree of excellence required from its people. Lenz & Staehelin provides legal advice in English, French, German, Italian, Russian and Spanish.

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United Kingdom Zoe Andrews

Slaughter and May William Watson

the Dividends, Interest or Royalties article may provide that the UK 1 Tax Treaties and Residence will not give up its taxing rights if, broadly, the main purpose or one of the main purposes of the creation or assignment of the relevant 1.1 How many income tax treaties are currently in force in shares, loan or right to royalties is to take advantage of the article. your jurisdiction? The BEPS project proposed, as a minimum standard, that countries adopt a “principal purpose test” (“PPT”) that is very similar to the The United Kingdom has one of the most extensive treaty networks anti-avoidance rule already seen in the UK’s treaties, a US-style in the world, with over 130 comprehensive income tax treaties limitation on benefits test, or a combination of both. Like most other currently in force. One of the consequences of an exit from the countries, the UK favours the PPT. European Union (assuming the UK loses the benefit of the Parent- Subsidiary and Interest and Royalties Directives and repeals the 1.5 Are treaties overridden by any rules of domestic UK legislation implementing them) will be greater reliance on the law (whether existing when the treaty takes effect or UK’s treaty network to provide exemption from withholding taxes. introduced subsequently)? In some cases there will still be tax leakage, such as on dividends received in the UK from Germany and Italy and royalties paid from The UK’s General Anti-Abuse Rule (the “GAAR”, discussed in the UK to Luxembourg (see question 3.2 below). question 9.1 below) can, in principle, apply if there are abusive arrangements seeking to exploit particular provisions in a double 1.2 Do they generally follow the OECD Model Convention tax treaty, or the way in which such provisions interact with other or another model? provisions of UK tax law.

They generally follow the OECD model, with some inevitable 1.6 What is the test in domestic law for determining the variation from one treaty to the next. As part of the OECD’s BEPS residence of a company? project (see question 10.1 below), changes were proposed to the definition of “permanent establishment” (“PE”) in Article 5 of the There are two tests for corporate residence in the UK. The first Model Convention. However, the UK will not apply to its existing is the incorporation test. Generally (that is, subject to provisions treaties the changes extending the definition to “commissionaire” which disapply this test for certain companies incorporated before (and similar) arrangements. This is because of the risk that this 15 March 1988), a company which is incorporated in the UK will extension could lead to a proliferation of PEs where there is little or automatically be resident in the UK. no profit to attribute to any of them. Secondly, a company incorporated outside the UK will be resident in the UK if its central management is in the UK. This test is based 1.3 Do treaties have to be incorporated into domestic law on case law and focuses on board control rather than day-to-day before they take effect? management, though its application will always be a question of fact determined by reference to the particular circumstances of the Yes. A tax treaty must be incorporated into UK law and this is company in question. done by way of a statutory instrument. A treaty will then enter into Both tests are subject to the tie-breaker provision of an applicable force from the date determined by the treaty and will have effect in double tax treaty. If the tax treaty treats a company as resident in relation to the taxes covered from the dates determined by the treaty. another country and not as a UK resident, the company will also The UK’s diverted profits tax (discussed at question 10.1 below) be treated as non-UK resident for domestic UK tax purposes. It is was deliberately engineered as a new tax so as to fall outside the notable that the treaties which the UK has renegotiated in the past legislation which incorporates tax treaties into UK law. few years generally do not contain the standard tie-breaker based on the company’s “place of effective management” (“POEM”). As a 1.4 Do they generally incorporate anti-treaty shopping result, the tax treaty status of a company which is managed in the UK rules (or “limitation on benefits” articles)? but incorporated, for example, in the Netherlands, will be uncertain pending agreement between the two revenue authorities (“mutual In general, the UK has avoided wide limitation on benefits articles agreement procedure” (“MAP”)). The UK Government has said and prefers specific provision in particular articles. For example, it will propose similar provisions in its bilateral negotiations in the

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future and has agreed to the replacement of POEM with MAP under accordance with the nature and tax status of the supplies that the Article 4 of the Multilateral Convention to implement the BEPS person intends to make. treaty changes. Input tax on supplies wholly used to make taxable supplies is deductible in full. Input tax wholly used to make exempt or non- 2 Transaction Taxes business supplies is not deductible at all. Where a taxable person makes both taxable and exempt supplies and incurs expenditure that is not directly attributable to either (for example, general 2.1 Are there any documentary taxes in your jurisdiction? overheads), the VAT on the expenditure must be apportioned between the supplies. Stamp duty is a tax on certain documents. The main category The basis on which input tax can be recovered continues to be a of charge takes the form of an ad valorem duty, at 0.5% of the vexed topic, generating some important judicial decisions. consideration, on a transfer on sale of stock or marketable securities United Kingdom (or of an interest in a partnership which holds such stock or 2.5 Does your jurisdiction permit VAT grouping and, if so, securities). In practice, stamp duty has little relevance if the issuer is it “establishment only” VAT grouping, such as that of the stock or securities is not a company incorporated in the UK. applied by Sweden in the Skandia case? The UK’s Office of Tax Simplification (“OTS”) published a report in July 2017 on digitising and modernising the stamp duty process The UK permits VAT grouping but not “establishment only” VAT the core recommendations of which the Government responded grouping. Under the UK’s VAT grouping rules, where a foreign positively to. Some of the changes proposed in the report would be company is eligible to join a UK VAT group registration and does so, very welcome. Inevitably, though, it also suggests making the stamp the entirety of that company’s activities are then subsumed within duty charge mandatory, ending the current position under which a the UK VAT group registration, rather than solely the activities of purchaser that never needs to rely on the document in question, can, that company’s UK branch. Please also see question 4.4 below. in some circumstances, ignore the charge.

Please see question 2.6 below for details of the stamp duty land 2.6 Are there any other transaction taxes payable by tax (or the equivalents in Scotland and Wales) that applies to land companies? transactions in the UK. Stamp duty land tax (“SDLT”) 2.2 Do you have Value Added Tax (or a similar tax)? If so, SDLT is a tax on transactions involving immovable property and at what rate or rates? is payable by the purchaser. The top rate of SDLT on commercial property is 5% and applies where (and to the extent that) the The UK has had VAT since becoming a member of the European consideration exceeds £250,000. (For transactions involving Economic Community in 1973 and the UK VAT legislation gives residential property, the rate can in some cases be as much as 15%.) effect to the relevant EU Directives. There are three rates of VAT: The standard charge on the rental element of a new lease is 1% of ■ the standard rate of VAT is 20% and applies to any supply of the net present value (“NPV”) of the rent, determined in accordance goods or services which is not exempt, zero-rated or subject with a statutory formula, rising to 2% on the portion of NPV above to the reduced rate of VAT; £5 million. ■ the reduced rate of VAT is 5% (e.g. for domestic fuel); and From 15 April 2015, SDLT ceased to apply to land and buildings ■ there is a zero rate of VAT which covers, for example, books, in Scotland; in its place is a new Land and Buildings Transaction children’s wear and most foodstuffs. Tax, which has a similar scope to SDLT. This was provided for in Whilst the fundamental VAT rules within the UK may not change the first piece of tax legislation from the Scottish Parliament in 300 much upon its exit from the EU (not least because VAT has years, the Land and Buildings Transaction Tax (Scotland) Act 2013. generated over 20% of all UK tax receipts over the last seven years), From April 2018, a new Land Transaction Tax replaced SDLT in transactions in both goods and services between the UK and the Wales. other 27 EU countries are likely to be affected significantly. Stamp duty reserve tax (“SDRT”) SDRT is charged on an agreement to transfer chargeable securities 2.3 Is VAT (or any similar tax) charged on all transactions for money or money’s worth (whether or not the agreement is in or are there any relevant exclusions? writing). Subject to some exceptions, “chargeable securities” are (principally) stocks or shares issued by a company incorporated in The exclusions from VAT are as permitted or required by the the UK, and units under a UK unit trust scheme. SDRT is imposed Directive on the Common System of VAT (2006/112/EC) (as at the rate of 0.5% of the amount or value of consideration, though amended) and some examples of exempt supplies are: the rate is 1.5% if UK shares or securities are transferred (rather than ■ most supplies of land (unless the person making the supply, issued) to a depositary receipt issuer or a clearance service and the or an associate, has “opted to tax” the land); transfer is not an integral part of the raising of share capital. ■ insurance services; and UK legislation still purports to apply the 1.5% charge whenever ■ banking and other financial services. UK shares or securities are issued or transferred to a depositary or clearance service. However, the charge is not collected by Her Majesty’s Revenue and Customs (“HMRC”) because it has been 2.4 Is it always fully recoverable by all businesses? If not, what are the relevant restrictions? found to be contrary to EU law (the Capital Duties Directive). In the Autumn 2017 Budget, the Government confirmed that this practice will continue after the UK leaves the EU in 2019 notwithstanding Input tax is only recoverable by a taxable person (a person who is, the Capital Duties Directive will no longer apply. or is required to be, registered for VAT). Input tax is attributed in

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SDRT liability is imposed on the purchaser and is directly legislation implementing the Interest and Royalties Directive does enforceable. Where a transaction is completed by a duly stamped not apply, the rate of withholding tax on “yearly” interest which has instrument within six years from the date when the SDRT charge a UK source and is paid to a non-resident is generally 20%. arose, there is provision in many cases for the repayment of any There is no withholding tax, however, where interest is paid on SDRT already paid or cancellation of the SDRT charge. quoted Eurobonds; nor, since 1 January 2016, on interest paid on private placements – a form of selective, direct lending by non- 2.7 Are there any other indirect taxes of which we should bank lenders (such as insurers) to corporate borrowers. And in be aware? order to make the UK wholesale debt markets more competitive, the Government introduced, from April 2018, a new exemption for debt Customs duties are generally payable on goods imported from traded on a multilateral trading facility operated by a recognised outside the EU and, depending on the terms of the UK’s exit from stock exchange in an EEA territory. the EU, could start to apply to imports from the EU. However, the United Kingdom European Union (Withdrawal) Act 2018 will incorporate the latest 3.4 Would relief for interest so paid be restricted by EU customs code into UK law for the transitional period. reference to “thin capitalisation” rules? Excise duties are levied on particular classes of goods (e.g. alcohol and tobacco). Insurance premium tax is charged on the receipt The UK has a thin capitalisation regime which applies to domestic of a premium by an insurer under a taxable insurance contract. as well as cross-border transactions. A borrower is considered Environmental taxes include the following: landfill tax; aggregates according to its own financial circumstances when determining levy; climate change levy; and a carbon reduction charge. the amount which it would have borrowed from an independent lender. The assets and income of the borrower’s direct and indirect subsidiaries can be taken into account to the extent that 3 Cross-border Payments an unconnected lender would recognise them, but the assets and income of other group companies are disregarded. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? In most cases, no withholding tax is imposed on dividends paid by a UK resident company. Dividends deriving from the tax-exempt There are no statutory safe harbour rules. Historically, HMRC business of a UK Real Estate Investment Trust (“REIT”) are, adopted a rule of thumb that a company would not generally be however, subject to withholding tax at the rate of 20% if paid to regarded as thinly capitalised where the level of debt to equity did non-resident shareholders (or to certain categories of UK resident not exceed a ratio of 1:1 and the ratio of income (“EBIT”) to interest shareholder); this may be reduced to 15%, or in a few cases less, by was at least 3:1. HMRC’s current guidance moves away from this to an applicable double tax treaty. apply the arm’s length standard on a case-by-case basis and sets out broad principles that should be considered; and the ratio cited most often is debt to EBITDA (earnings before interest, tax, depreciation 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? and amortisation).

In the absence of a double tax treaty and provided that the UK 3.6 Would any such rules extend to debt advanced by a legislation implementing the Interest and Royalties Directive third party but guaranteed by a parent company? (2003/49/EC) does not apply, the rate of withholding tax on most royalties is 20%. There is no withholding tax on film and video Yes. A company may be thinly capitalised because of a special royalties. relationship between the borrower and the lender or because of The UK legislation implementing that Directive provides that there a guarantee given by a person connected with the borrower. A is no withholding tax on the payment of royalties (or interest) by a “guarantee” for this purpose need not be in writing and includes any UK company (or a UK PE of an EU company) to an EU company case in which the lender has a reasonable expectation that it will be which is a “25% associate”. The exemption does not apply to the paid by, or out of the assets of, another connected company. extent that any royalties (or interest) would not have been paid if the parties had been dealing at arm’s length. An EU company for 3.7 Are there any other restrictions on tax relief for these purposes is a company resident in a Member State other than interest payments by a local company to a non- the UK. resident? There must be a risk that this UK legislation will be repealed in light of Brexit. The UK has introduced an EBITDA-based cap on net interest Finance Bill 2019 is expected to include a new withholding tax in expense as recommended in the OECD report on BEPS Action respect of royalty payments made to low or no tax jurisdictions in 4; this took effect from 1 April 2017 which was, extraordinarily, connection with sales to UK customers. The rule, which will also more than six months before the relevant legislation was enacted. apply to payments for certain other rights, will apply regardless of A fixed ratio rule limits corporation tax deductions for net interest where the payer is located. expense to 30% of a group’s UK “tax EBITDA” (so excluding, for example, non-taxable dividends); there is also a group ratio rule based on the net interest to EBITDA ratio for the worldwide group. 3.3 Would there be any withholding tax on interest paid A consequence of the new 30% EBITDA cap is the repeal of the by a local company to a non-resident? UK’s previous interest restriction rule known as the worldwide debt cap, although a rule with “similar effect” has been integrated into In the absence of a double tax treaty and provided that the UK the new interest restriction rules to ensure that a group’s net UK

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interest deductions cannot exceed the global net third-party interest and deductions may then be allowable. For example, in the case of expense of the group. most plant or machinery, capital allowances on a reducing balance basis (at various rates depending on the type of asset and the level of expenditure incurred – the rules are not very generous) are 3.8 Is there any withholding tax on property rental payments made to non-residents? substituted for accounting depreciation. UK tax legislation has been amended to deal with various issues In principle, such payments are subject to withholding tax (by the arising from companies adopting International Accounting tenant or agent) at 20%, being the basic rate of income tax in the Standards for their accounts and, in certain circumstances, related UK. However, the non-resident can register as an overseas landlord adjustments are required for tax purposes. Changes will be made under the Non-resident Landlord Scheme and then account for to the UK’s tax legislation to deal with the impact of changes in income tax itself (again at 20%). Most commercial landlords that International Financial Reporting Standard 16 (leasing) in order to are non-resident opt for registration under this scheme. preserve the current tax treatment of leases. United Kingdom One notable consequence of the reductions in the rate of corporation Since autumn 2015, a revised set of rules governing the tax treatment tax in recent years (see question 4.1 below) is that a UK corporate of corporate debt and derivative contracts has been in place. The landlord may be paying less tax on UK source rent than a non- revised regime includes a broad anti-avoidance provision which resident landlord. This disparity is to be removed from 6 April may lead to an increase in the circumstances in which the taxation of 2020, however, when it is proposed that non-UK resident companies such financial instruments deviates from their accounting treatment. carrying on a UK property business will be brought within the scope of corporation tax. Accordingly, from 6 April 2020 there will 4.4 Are there any tax grouping rules? Do these allow not be any withholding tax on property rental payments because for relief in your jurisdiction for losses of overseas non-resident landlords will be completing a corporation tax self- subsidiaries? assessment return instead. Yes. The UK does not permit group companies to be taxed on the 3.9 Does your jurisdiction have transfer pricing rules? basis of consolidated accounts, but the grouping rules achieve a degree of effective consolidation for various tax purposes. A group consists, in most cases, of a parent company and its direct or indirect Yes. The UK transfer pricing rules apply to both cross-border and subsidiaries, but the exact test for whether a group exists depends on domestic transactions between associated companies. the tax in question. If HMRC do not accept that pricing is at arm’s length, they will Group relief group raise an assessment adjusting the profits or losses accordingly. It is possible to make an application for an advance transfer pricing Losses (other than capital losses) can be surrendered from one UK agreement which has the effect that pricing (or borrowing) in resident group company to another UK resident group company. accordance with its terms is accepted as arm’s length. Losses can also be surrendered by or to a UK PE of a non-UK group company. A UK PE of an overseas company can only surrender In cross-border transactions, the double taxation caused by a transfer those losses as group relief if they are not relievable (other than pricing adjustment can be mitigated by the provisions of a tax treaty. against profits within the charge to UK corporation tax) inthe Transfer pricing is also on the BEPS radar, of course, and changes to overseas country. Similarly, a UK company can surrender the the OECD Transfer Pricing Guidelines are under way. losses of an overseas PE if those losses are not relievable (other than against profits within the charge to UK corporation tax) in the 4 Tax on Business Operations: General overseas country. The UK legislation permits group relief to be given in the UK for otherwise unrelievable losses incurred by group members 4.1 What is the headline rate of tax on corporate profits? established elsewhere in the EU, even if they are not resident or trading in the UK. However, the applicable conditions are very The current Government continues to reduce the headline rate of restrictive, so in practice UK companies can rarely benefit from this tax, as part of a package of tax reforms designed to enhance UK rule. It remains to be seen whether it will be repealed after Brexit in competitiveness. From a starting point of 28% in 2010 it had fallen any event, as it was only introduced to comply with EU law. to 19% by 1 April 2017, and the Government has said it will fall to Please also see question 4.5 below as regards a legislative change 17% in 2020. Banks, however, are an exception; from 2016 they which allows the surrender of carry-forward losses. have paid an 8% surcharge on top of the headline rate of corporation Capital gains group tax. There is no consolidation of capital gains and losses, but it is possible to make an election for a gain (or loss) on a disposal made 4.2 Is the tax base accounting profit subject to by one capital gains group member to be treated as a gain (or loss) adjustments, or something else? on a disposal by another group member.

In general terms, tax follows the commercial accounts subject to Capital assets may be transferred between capital gains group adjustments. members on a no gain/no loss basis. This has the effect of postponing liability until the asset is transferred outside the group or until the company holding the asset is transferred outside the group. When 4.3 If the tax base is accounting profit subject to a company leaves a capital gains group holding an asset which it adjustments, what are the main adjustments? acquired intra-group in the previous six years, a degrouping charge may arise. However, in many cases, the degrouping charge will be Certain items of expenditure which are shown as reducing the added to the consideration received for the sale of the shares in the profits in the commercial accounts are added back for tax purposes,

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transferee company and will then be exempt under the substantial There are special regimes for the taxation of certain types of activity shareholding regime (see question 5.2 below for details of this or company, such as oil exploration (profits from which are subject regime). to a “supplementary charge”, the rate of which is currently 10%) and Stamp duty and SDLT groups UK REITs (which are not generally taxed on income or gains from investment property). Transfers between group companies are relieved from stamp duty or from SDLT where certain conditions are met. VAT group 5 Capital Gains Transactions between group members are disregarded for VAT purposes (although HMRC have powers to override this in certain 5.1 Is there a special set of rules for taxing capital gains circumstances). Broadly, two or more corporate bodies are eligible and losses? to be treated as members of a VAT group if each is established or United Kingdom has a fixed establishment in the UK and they are under common Corporation tax is chargeable on “profits”, which includes both control. The eligibility criteria for the UK’s VAT grouping rules income and capital gains. There is, however, a separate regime for are, however, the subject of a current consultation. It is proposed to computing capital gains. This contains more exemptions, but also allow non-corporate entities (such as partnerships and individuals) has the effect that capital losses can only be used against gains, not who have a business establishment in the UK and control a body against income. corporate to join a VAT group, subject to certain conditions. Please also see question 2.5 above. 5.2 Is there a participation exemption for capital gains?

4.5 Do tax losses survive a change of ownership? Yes. A substantial shareholdings exemption (“SSE”) allows trading groups to dispose of trading subsidiaries without a UK tax charge. Tax losses may survive a change of ownership but, like many The SSE is narrower and more complex than the participation other jurisdictions, the UK has rules which can deprive a company exemption found in some other countries, though some of the of carry-forward losses in certain circumstances following such a original restrictions have been removed (for disposals made on or change. The policy objective is to combat loss-buying but the rules after 1 April 2017). can easily apply where there is no tax motivation for the change in Capital gains realised on the disposal of assets by non-residents are ownership. not generally subject to corporation tax unless the assets were used Significant changes have been made to the carry-forward loss regime, for the purposes of a trade carried on through a UK PE, as noted in again with retrospective effect to 1 April 2017. On the positive side, question 6.3 below. However, from 6 April 2019 new provisions where the conditions are met the changes enable carried-forward to be included in Finance Bill 2019 will charge non-UK resident losses incurred on or after 1 April 2017 to be carried forward and companies corporation tax on their gains from disposals of interest set off against other income streams and against profits from other in UK land. companies within a group; this is more flexible than the old rules, although the new flexibility is substantially restricted where there is a change in ownership of the company with losses. The negative 5.3 Is there any special relief for reinvestment? aspect of the changes is that the amount of taxable profit that can be offset by carried-forward losses is restricted to 50%, though this There is rollover relief for the replacement of certain categories of only applies to taxable profits in excess of £5 million (calculated asset used for the purposes of a trade. Rollover is available to the on a group basis). Unlike the first measure, this applies to historic extent that the whole or part of the proceeds of disposal of such losses, not just those incurred on or after 1 April 2017. There are assets is, within one year before or three years after the disposal, different restrictions for banks. applied in the acquisition of other such assets. It is a feature of the UK’s rules that the replacement assets have to 4.6 Is tax imposed at a different rate upon distributed, as remain within the UK tax net. In 2015, a similar requirement was opposed to retained, profits? held by the CJEU to be a restriction on freedom of establishment (European Commission v Germany (C-591/13)): the Court ruled that No, it is not. the taxpayer should be able to choose between immediate payment or bearing the administrative burden of deferring the tax. With the UK preparing to exit the EU, however, it seems unlikely that the UK 4.7 Are companies subject to any significant taxes not will change its rules to permit a deferral. covered elsewhere in this chapter – e.g. tax on the occupation of property? 5.4 Does your jurisdiction impose withholding tax on the Business rates are payable by the occupier of business premises proceeds of selling a direct or indirect interest in local based on the annual rental value. The rate depends on the location assets/shares? of the business premises and the size of the business. Business rates are a deductible expense for corporation tax purposes. This occurs only in very specific circumstances; one example is on the sale of UK patent rights by a non-resident individual who An annual tax on enveloped dwellings (“ATED”) is payable by is subject to UK income tax on the proceeds of the sale (or by a companies and certain other “non-natural persons” if they own non-resident company which is subject to UK corporation tax, if the interests in dwellings with a value of more than £500,000. There buyer is an individual). are reliefs available, including where the dwelling is being or will be used for genuine commercial activities.

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Unilateral tax credit relief may be allowed for tax paid outside the 6 Local Branch or Subsidiary? UK in respect of the income or chargeable gains of a UK branch or agency of a non-UK resident person if certain conditions are 6.1 What taxes (e.g. capital duty) would be imposed upon fulfilled. Tax payable in a country where the overseas company is the formation of a subsidiary? taxable by reason of its domicile, residence or place of management is excluded from relief. There are no taxes imposed on the formation of a subsidiary. 6.5 Would any withholding tax or other similar tax be 6.2 Is there a difference between the taxation of a local imposed as the result of a remittance of profits by the subsidiary and a local branch of a non-resident branch? company (for example, a branch profits tax)? No, it would not. United Kingdom Yes: a UK resident subsidiary will pay corporation tax on its worldwide income and gains unless it makes the election described 7 Overseas Profits in question 7.1 below, whereas a UK branch is liable to corporation tax only on the items listed in question 6.3. Subject to the point immediately below, the charge to UK corporation tax imposed on a 7.1 Does your jurisdiction tax profits earned in overseas non-resident company currently applies only where the non-resident branches? company is trading in the UK through a PE; this means that a branch set up for investment purposes only, and not carrying on a trade, is As a general rule, and subject to tax treaty provisions, the UK taxes not subject to UK corporation tax, though certain types of income the profits earned in overseas branches of UK resident companies. arising in the UK − notably rent and interest − may be subject to A UK company can, however, elect for the profits (including capital income tax through withholding (at 20%). gains) of its overseas branches to be exempt from UK taxation. The The exception results from a legislative change made in 2016. A downside of such an election is that the UK company cannot then non-resident company can now be subject to corporation tax even use the losses of the overseas branch. An election is irrevocable and where it does not have a PE in the UK, if it is nonetheless trading covers all overseas branches of the company making the election. “in” the UK and the trade consists of “dealing in or developing” UK land. 7.2 Is tax imposed on the receipt of dividends by a local From 6 April 2019, non-UK resident companies will be charged company from a non-resident company? corporation tax on their gains from direct and indirect disposals of interests in UK land (where certain conditions are met (see question Foreign dividends and UK dividends (other than “property income 8.1 below)). dividends” from a UK REIT) are treated in the same way. They are generally exempt in the hands of a UK company, subject to 6.3 How would the taxable profits of a local branch be some complex anti-avoidance rules and an exclusion for dividends determined in its jurisdiction? paid by a “small” company which is not resident in the UK or a “qualifying territory”. Assuming that the local branch of a non-resident company is within the UK statutory definition of “permanent establishment” (which is 7.3 Does your jurisdiction have “controlled foreign based on, but not quite the same as, the wording of Article 5 of the company” rules and, if so, when do these apply? OECD Model Convention), it will be treated as though it were a distinct and separate entity dealing wholly independently with the It does, though the UK’s current CFC regime has a more territorial non-resident company. It will also be treated as having the equity focus than its predecessor. Under the revised rules, profits which and loan capital which it would have if it were a distinct entity, arise naturally outside the UK are not supposed to be caught. There which means that the UK’s thin capitalisation rules will apply to it. are also various exclusions and exemptions. These include a finance Subject to any treaty provisions to the contrary, the taxable profits company partial exemption (“FCPE”) which (while the main rate of of a PE through which a non-resident company is trading in the UK corporation tax is 19%) results in an effective UK corporation tax would comprise: rate of 4.75% on profits earned by a CFC from providing funding ■ trading income arising directly or indirectly through, or from, to other non-UK members of the relevant group. Indeed, in some the PE; instances such profits will not be caught by the CFC charge at all. The outcome of the European Commission’s investigation into ■ income from property and rights used by, or held by or for, the PE (but not including exempt distributions); and whether the FCPE constitutes unlawful State Aid is eagerly awaited; see also William Watson’s introductory chapter. ■ capital gains accruing on the disposal of assets situated in the UK and effectively connected with the operations of the PE. A change that took effect from 8 July 2015 adds a punitive element to the new regime: a group which has losses can no longer use them against a CFC charge. This reduces the attractiveness of the FCPE 6.4 Would a branch benefit from double tax relief in its for groups with carried-forward losses. jurisdiction? A couple of aspects of the UK’s CFC rules will be revised to ensure The UK domestic legislation does not give treaty relief against UK that the rules are fully compliant with the EU Anti-Tax Avoidance tax unless the person claiming credit is resident in the UK for the Directive (“ATAD”). accounting period in question. This means that the UK branch of a non-resident company cannot claim treaty relief.

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reasonably be regarded as a reasonable course of action (the justly 8 Taxation of Commercial Real Estate maligned “double reasonableness” test)? This is to be assessed “having regard to all the circumstances”, including consistency 8.1 Are non-residents taxed on the disposal of with policy objectives, whether there are any contrived or abnormal commercial real estate in your jurisdiction? steps and whether the arrangements exploit any shortcomings in the relevant provisions. Under current law, non-residents are not generally taxed on As predicted, the GAAR has had little impact on corporate the disposal of commercial real estate in the UK that is held as taxpayers, as they had already begun to adopt a more conservative an investment. However, from 6 April 2019, non-UK resident approach to tax planning; and the 60% penalty will doubtless prove companies will be subject to corporation tax on their gains from a strong incentive for taxpayers to settle future cases before they are direct and indirect disposals of interests in UK land (whether referred to the GAAR Panel. commercial or residential) where certain conditions are met. The ATAD includes an anti-avoidance rule which is broader United Kingdom than the UK’s GAAR but the UK has not yet shown any signs of 8.2 Does your jurisdiction impose tax on the transfer of implementing the EU GAAR. an indirect interest in commercial real estate in your jurisdiction? 9.2 Is there a requirement to make special disclosure of avoidance schemes? Not currently but from 6 April 2019 non-resident companies will become subject to a charge to corporation tax on the disposal of an The UK has disclosure rules which are designed to provide HMRC interest in a property-rich entity in certain circumstances. with information about potential tax avoidance schemes at an earlier stage than would otherwise have been the case. This enables 8.3 Does your jurisdiction have a special tax regime HMRC to investigate the schemes and introduce legislation (often for Real Estate Investment Trusts (REITs) or their a new “targeted anti-avoidance rule”) to counteract the avoidance equivalent? where appropriate. The Government sees these mandatory disclosure rules as the Yes. Since 2007, the UK’s REIT regime has enabled qualifying answer to Action 12 of the BEPS project (that taxpayers be required companies to elect to be treated as REITs. The conditions for to disclose their aggressive tax planning arrangements). qualification include UK residence, listing (on a main or secondary stock market), diversity of ownership and a requirement that three- quarters of the assets and profits of the company (or group) are 9.3 Does your jurisdiction have rules which target not attributable to its property rental business. only taxpayers engaging in tax avoidance but also anyone who promotes, enables or facilitates the tax The aim of the regime is that there should be no difference from avoidance? a tax perspective between a direct investment in real estate and an investment through a REIT. Accordingly, a REIT is exempt Yes: the Finance Act 2017 brought in new rules under which from tax on income and gains from its property rental business advisers and others who “enable” the implementation of “abusive tax but distributions of such income/gains are treated as UK property arrangements” can be penalised if those arrangements are ineffective. income in the hands of shareholders and, as noted in question 3.1 The Government has also co-opted third parties in the fight against above, are liable to 20% withholding tax (subject to exceptions). tax evasion. From 30 September 2017, the Criminal Act 2017 introduces two new corporate offences of failure to prevent 9 Anti-avoidance and Compliance the facilitation of UK or foreign tax evasion. This will hold organisations to account for the actions of their employees and other persons performing services for or on behalf of the organisation (so 9.1 Does your jurisdiction have a general anti-avoidance potentially including any contractor or sub-contractor) unless the or anti-abuse rule? organisation can show that it has reasonable procedures in place to prevent these offences being committed. Although a GAAR was enacted in the UK for the first time in The Government intends to implement the EU intermediaries 2013, it may be some time before the UK courts are asked to make disclosure rules which provide for the mandatory disclosure of sense of it. One reason for this is that, before invoking the GAAR, cross-border “potentially aggressive tax planning arrangements” by HMRC must ask an independent advisory panel (the GAAR Panel) intermediaries (EU Directive 2018/882). for its opinion as to whether the GAAR should apply (though it can use a GAAR Panel opinion in one case to counteract “equivalent arrangements” used by other taxpayers). The GAAR Panel opinions 9.4 Does your jurisdiction encourage “co-operative to date have all been in HMRC’s favour. The other reason is the compliance” and, if so, does this provide procedural massive financial deterrent to challenging HMRC’s application of benefits only or result in a reduction of tax? the GAAR. If the GAAR applies, HMRC can counteract the tax advantage by the making of “just and reasonable” adjustments. Yes. HMRC have encouraged co-operative compliance for a number Taxpayers who enter into arrangements that are counteracted by the of years; it goes hand in hand with HMRC’s risk assessment strategy GAAR are liable to a penalty of 60% of the counteracted tax unless and enables HMRC to concentrate resources on the higher risk, less they “correct” their tax position before the arrangements are referred co-operative taxpayers. It initially led to an improved relationship to the GAAR Panel. between taxpayers and HMRC and, while it may not result in lower tax liabilities, it does reduce compliance costs. More recently, The GAAR contains two tests: are there arrangements which have though, there has been a perception that HMRC has become more as their main purpose securing a tax advantage; and if so, are they likely to litigate even where the taxpayer is co-operative. arrangements the entering into or carrying out of which cannot

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DPT, discussed in question 10.1, the Government rushed through 10 BEPS and Tax Competition a corporate interest restriction (question 3.7), whereas the report on BEPS Action 4 had recommended that reasonable time be given 10.1 Has your jurisdiction introduced any legislation to entities to restructure existing financing arrangements before in response to the OECD’s project targeting Base interest restriction rules come into effect. Erosion and Profit Shifting (BEPS)?

10.3 Does your jurisdiction support public Country-by- The UK was the first country to commit formally to implementing Country Reporting (CBCR)? the country-by-country template, and regulations have been in effect since March 2016. The Government has previously spoken out in favour of public The UK, controversially, pre-empted the BEPS project and CBCR, though the OECD has subsequently expressed concern that introduced, with effect from 1 April 2015, an entirely new tax – the it would do more harm than good if only some jurisdictions require United Kingdom “diverted profits tax” (“DPT”) – which is intended to protect the public reporting, and there is a lack of consistency in what has to be UK tax base. It has two main targets: where there is a substantial reported. The Government has said it is disappointed with the lack UK operation but sales to UK customers are made by an affiliate of progress towards international agreement on public reporting outside the UK, in such a way that the UK operation is not a PE of and, while the UK legislation contains a power to switch on public the non-UK affiliate; and where the UK operation makes deductible reporting, this is unlikely to be used before a multilateral agreement payments (e.g. royalties for intellectual property (“IP”)) to a non-UK is reached. affiliate, these are taxed at less than 80% of the rate of corporation tax and the affiliate has insufficient “economic substance”. Asa 10.4 Does your jurisdiction maintain any preferential tax deterrent, the rate applicable to the “diverted” profits is 5% higher regimes such as a patent box? than the rate at which tax would otherwise have been payable.

The UK has modified its patent box regime in response to Action Until 30 June 2016, the UK had a patent box regime which allowed 5 (Countering Harmful Tax Practices) (see question 10.4 below). an arm’s length return on IP held in the UK to qualify for a reduced Anti-hybrids legislation has been in effect from 1 January 2017 (see tax rate of 10% even if all the associated research and development question 10.2 below). These rules are being revised to comply fully (“R&D”) activity was done outside the UK. In light of BEPS Action with ATAD. 5, IP which was already in the patent box on 30 June continues to Legislation to implement Action 4 (Deductibility of Interest) (see benefit from the old rules for five years. IP not already in the patent question 3.7 above) was included in Finance (No.2) Act 2017, with box on that date qualifies only to the extent it is generated by R&D retrospective effect from 1 April 2017. activities of the UK company itself, or by R&D outsourced to third parties; and acquired IP and IP generated by R&D outsourced to The UK has ratified the Multilateral Convention and notified most associates are no longer eligible for the patent box. of its treaties to the OECD so that (subject to the relevant treaty partner’s agreement) the modifications to the UK’s treaties required Where IP has been generated from a combination of “good” and by BEPS can be made. “bad” expenditure, a fraction of the patent income qualifies for the patent box and, in calculating this, there is a 30% uplift for “good” expenditure, to soften the impact of these rule changes. 10.2 Does your jurisdiction intend to adopt any legislation to tackle BEPS which goes beyond what is Depending on the deal negotiated with the EU, Brexit may lead to recommended in the OECD’s BEPS reports? a further relaxation of the new rules: departure from the EU might enable the UK to treat all R&D outsourcing within the UK as Yes. The first example of a measure not required by the OECD “good” expenditure, without fear of violating EU Treaty freedoms BEPS reports is the DPT (see question 10.1 above). and State aid rules. The second example is the UK’s extension of royalty withholding tax. In particular, this will now effectively have extra-territorial 11 Taxing the Digital Economy scope in some circumstances: where the way in which sales are made in the UK creates an actual PE or, in DPT terms, an “avoided” PE, IP royalties paid out of (say) the European hub for sales activities 11.1 Has your jurisdiction taken any unilateral action to tax will be treated for the purposes of UK withholding tax as having digital activities or to expand the tax base to capture been paid out of the UK, to the extent it is “just and reasonable” digital presence? to do so. A further extension of royalty withholding tax is planned for inclusion in Finance Bill 2019. If enacted, this will require Not yet. The UK is keen to engage with the EU and the OECD on deduction of income tax at source in respect of royalty payments this issue with a view to agreeing a reform of the international tax made to low or no tax jurisdictions in connection with sales to UK rules to reflect the value of user participation. In a March 2018 customers. The rules, which will also apply to payments for certain position paper, the Government stated that in the absence of reform other rights, will apply regardless of where the payer is located. of the international rules, interim measures such as revenue-based taxes must be considered. The Government thinks there are benefits A third example is the anti-hybrids regime. The UK has implemented to implementing interim measures on a multilateral basis and intends very broad rules which, because of the absence of a motive test or a to work closely with the EU and international partners on this issue. UK tax benefit test, means that third-party, commercially motivated The position paper explained that the Government continues to transactions are potentially within scope. refine its position so we have not heard the last on this yet. There has also been a tendency for the Government to accelerate the introduction of measures; besides its pre-emptive strike with

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Commission’s proposals and intend to study them. Since then, 11.2 Does your jurisdiction support the European however, a number of other Member States (particularly Ireland and Commission’s interim proposal for a digital services the Nordic countries) have spoken out against the digital services tax? tax proposal and it is not clear that the UK continues to support it.

UK officials were party to the initial joint statement made with France, Germany, Italy and Spain that they welcomed the

Zoe Andrews William Watson

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

Tel: +44 20 7090 5017 Tel: +44 20 7090 5052 Email: [email protected] Email: [email protected] URL: slaughterandmay.com URL: www.slaughterandmay.com

Zoe Andrews is a senior professional support lawyer in the Slaughter William Watson joined Slaughter and May in 1994 and became a and May Tax Department, covering all aspects of UK corporate tax and partner in the Tax Department in 2004. His practice covers all UK international tax developments affecting the UK. Particular areas of taxes relevant to corporate and financing transactions. Particular interest in recent years have included BEPS and the development of areas of interest include real estate and the oil & gas sector; however, FATCA and other automatic exchange of information regimes. William also has extensive experience more generally of mergers & acquisitions, demergers and other corporate structuring, debt and equity financing and tax litigation. William is listed as a leading individual in the Tax section of Chambers UK, 2018 and Chambers Europe and Chambers Global, 2018. He is also listed in the International Tax Review’s Tax Controversy Leaders Guide, 2018 and in Who’s Who Legal, 2018 and is recommended for both Corporate Tax and Tax Litigation & Investigations in The Legal 500, 2018.

Slaughter and May is a leading international law firm with a worldwide corporate, commercial and financing practice. Our highly experienced Tax group deals with the tax aspects of all corporate, commercial and financial transactions. We provide pan-European tax advice via the Best Friends Tax Network*. Alongside a wide range of tax-related services, we advise on: ■■ structuring of the biggest and most complicated mergers & acquisitions and corporate finance transactions; ■■ development of innovative and tax-efficient structures for the full range of financing transactions; ■■ documentation for the implementation of transactions, to ensure that it meets tax objectives; ■■ tax aspects of private equity transactions and investment funds from initial investment to exit; and ■■ tax investigations and disputes from initial queries to litigation or settlement. “They are absolutely excellent, they are very easy to work with and they are very pragmatic in their advice.” – Chambers UK, 2018 “Additionally, market sources are quick to note the quality of deals which the firm is involved in: ‘They have multinational companies in their clientele with complex cross-border issues’.” – Chambers Global, 2018 “Stellar UK practice utilising its broad European ‘best friends’ network of firms to provide cross-border tax advice. Provides sophisticated expertise on high-profile M&A and financing transactions. Growing presence in contentious tax issues. Also offers tax consultancy advice, with particular strength in transfer pricing matters, as well as tax litigation.” – Chambers Europe, 2017 *The Best Friends Tax Network comprises BonelliErede (Italy), Bredin Prat (France), De Brauw Blackstone Westbroek (the Netherlands), Hengeler Mueller (Germany), Slaughter and May (UK) and Uría Menéndez (Spain and Portugal).

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USA Jodi J. Schwartz

Wachtell, Lipton, Rosen & Katz Swift S.O. Edgar

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

1.1 How many income tax treaties are currently in force in your jurisdiction? To take effect, treaties must be ratified by a two-thirds vote of the Senate (one house of the U.S. legislature) and must be effective in accordance with the laws of the other contracting state. Although The United States has 58 income tax treaties in force, covering 66 historically tax treaties have not been controversial, recently treaty countries (nine countries succeeded to the treaty with the U.S.S.R.). ratification in the Senate has been limited, and none of thetax The United States’ income tax treaty network covers most of the treaties or protocols amending tax treaties pending before the Senate world’s major economies, including every member of the European since 2010 has been ratified. Union other than Croatia, and every member of the G-20 other than Argentina, Brazil and Saudi Arabia. There are few treaties with nations in Africa (Egypt, Morocco, South Africa and Tunisia) 1.4 Do they generally incorporate anti-treaty shopping and South America (Trinidad and Tobago and Venezuela). Several rules (or “limitation on benefits” articles)? agreements – replacing existing treaties (Hungary and Poland), entering into a tax treaty for the first time (Chile and Vietnam), Yes. The U.S. model treaty introduced a limitation on benefits article or amending current treaties (Japan, Luxembourg, Spain and in 1981. The content of the article in actual treaties varies, but the Switzerland) – have been signed but not ratified by the U.S. Senate. negotiating position of the United States reflected in the 2016 U.S. The prospects for ratification are uncertain (see question 1.3). model treaty is to include robust limitations on benefits, including: a dedicated article; a “triangular” permanent establishment provision in the general scope article that denies treaty benefits to residents of 1.2 Do they generally follow the OECD Model Convention or another model? one state that earn income generated in the other contracting state through a permanent establishment in a third state if certain other conditions are met; limitations that apply to entities expatriated from The United States has followed its own model convention since the U.S. in order to remove incentives for corporate “inversions”; 1976, revised approximately every 10 years, most recently in and limitations on the availability of treaty benefits for income February 2016. Significant differences between the U.S. and OECD earned by a resident that benefits from a “special tax regime” (a models include the definition of residence for treaty purposes and the jurisdiction that meets certain requirements and has been identified application of the treaty to state and local income taxes. In the U.S. through diplomatic channels as problematic). model, a business organisation that is resident in both contracting states (for example, because it is incorporated in the United States Furthermore, regulations and generally applicable doctrines of tax and managed in another contracting state) is considered a resident law could apply to recharacterise transactions designed to take of neither state and thus ineligible for treaty benefits. In contrast, advantage of favourable treaty rules in accordance with what the the OECD model provides that such an entity’s place of effective U.S. Internal Revenue Service (“IRS”) or a court deems to be the management would determine its residency. The U.S. model treaty appropriate tax result (see question 9.1). also differs from the OECD standard in that the U.S. model only applies to U.S. federal income taxes and does not preempt state and 1.5 Are treaties overridden by any rules of domestic local tax laws. law (whether existing when the treaty takes effect or Despite these differences, the U.S. and OECD models have introduced subsequently)? historically influenced one another. Accordingly they have much in common, and American courts have relied on OECD Yes. Although the main source of U.S. federal tax law, the Internal commentary in interpreting U.S. tax treaties. Consistent with certain Revenue Code of 1986 (as amended, the “Code”), provides that it recommendations stemming from the OECD-G20 BEPS initiative, must be applied “with due regard to any treaty obligation of the the US model treaty includes a limitation on benefits provisions United States”, it also states that neither treaties nor domestic (which have long had a place in U.S. tax treaties) and a statement legislation have preferential status. In practice, courts, the IRS and of intent in the preamble that the treaty’s purpose is not to create practitioners generally interpret the U.S. tax laws to be consistent opportunities for tax evasion. with tax treaties; nevertheless, federal (not state or local) law may supersede previously ratified treaties. For example, notwithstanding

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treaty provisions to the contrary in place before its enactment, resident of neither. Not all U.S. treaties in force follow the U.S. a 1996 amendment to the Code provides for taxation of certain model treaty in this respect, and some provide tie-breaking rules to former citizens and long-term residents for 10 years following determine residency or allow the contracting states to reach mutual their expatriation. One potential conflict that has not been litigated agreement with respect to residence. arises in the context of “inversions”: if the requirements of the Code are met, the United States treats corporations that invert to non-U.S. jurisdictions as U.S. corporations for all purposes of the 2 Transaction Taxes Code, which could conflict with tax treaties that look to legal place of residence or place of management to determine tax residency. 2.1 Are there any documentary taxes in your jurisdiction? Additionally, tax doctrines developed by courts can recharacterise USA transactions to yield different results from what would obtain upon There are generally no U.S. federal documentary taxes. Some a literal application of the Code and a tax treaty (see question 9.1). state and local jurisdictions have documentary and transfer taxes, Last, it is uncertain whether a tax treaty could violate the U.S. especially in the real estate context. Constitution, which would control in the event of a conflict regardless of when the treaty entered into force. Although U.S. courts have generally taken a broad view of both Congress’s taxing power and 2.2 Do you have Value Added Tax (or a similar tax)? If so, at what rate or rates? the President’s treaty power, the U.S. Supreme Court has recently imposed restrictions on congressional authority and arguably has signalled a willingness to limit the treaty power as well. No. The closest existing analogue is sales and use tax, which is imposed at the state and local level on retail purchases of goods and some services, and is generally not applicable to business 1.6 What is the test in domestic law for determining the combinations and other major corporate dispositions. There are also residence of a company? federal excise taxes on the purchase of a limited set of goods and services (e.g., gasoline and airplane tickets). The test for determining what tax laws apply to a company depends on the form of the company. For U.S. federal income tax purposes, a business organisation generally is classified as a corporation, a 2.3 Is VAT (or any similar tax) charged on all transactions or are there any relevant exclusions? partnership, or an entity disregarded as separate from its owner. If the company has more than one owner, it will be treated either as a corporation or a partnership; if only one owner, a corporation or There is no VAT in the United States. a disregarded entity. Many business organisations, formed under U.S. or non-U.S. law, may elect to be classified as a corporation or 2.4 Is it always fully recoverable by all businesses? If not, a disregarded entity or a corporation or a partnership (depending on what are the relevant restrictions? the number of owners). A company treated as a corporation for U.S. federal income tax There is no VAT in the United States. Sales and use taxes are purposes will be a “domestic” corporation and hence subject to U.S. imposed on consumers and are generally not recoverable. federal income tax of its taxable income regardless of source if it is organised or created under the laws of the United States, one of 2.5 Does your jurisdiction permit VAT grouping and, if so, the 50 states or the District of Columbia. A corporation will also be is it “establishment only” VAT grouping, such as that treated as a domestic corporation if it has engaged in an inversion applied by Sweden in the Skandia case? transaction, which generally occurs when a non-U.S. corporation acquires a domestic corporation and the former shareholders of the This is not applicable in the United States. domestic corporation own 80% or more of the acquirer, calculated according to detailed rules that generally operate to increase the ownership percentage of the former shareholders of the domestic 2.6 Are there any other transaction taxes payable by companies? corporation. A corporation that is not domestic is foreign and is subject to special provisions of the Code that generally provide more limited taxation than that imposed on domestic corporations. State and local taxes vary extensively by jurisdiction, and companies that operate throughout the United States often devote With limited exceptions, partnerships are not subject to U.S. federal significant resources to state and local tax planning. The most income tax directly; rather, each partner is subject to tax with respect significant transaction taxes applicable to companies are often state to its allocable share of the income of the partnership (in a manner taxes imposed on the transfer of real property. State and local taxes that depends on the residence of the partner and the activities of the incurred in a taxpayer’s trade or business are generally deductible partnership). Where the partnership is organised for the most part for U.S. federal income tax purposes. does not matter for purposes of calculating U.S. federal income tax liability. Finally, disregarded entities are not subject to U.S. federal income 2.7 Are there any other indirect taxes of which we should be aware? tax (but may be subject to employment and/or excise taxes).

The residence of individuals and business organisations, to the Federal indirect taxes narrowly apply to the purchase of a small extent relevant for treaty purposes, is governed by the relevant range of goods and services. There is a broader assortment of treaty and may be based on place of organisation or management. specialised state and local indirect taxes, including, for example, The U.S. model treaty looks to liability for taxation by reason of insurance premium taxes, hotel occupancy taxes, and taxes on the domicile, residence, citizenship, place of management, place of sale of tobacco products beyond the federal excise tax on the same incorporation, or similar criterion to determine residency, and if a products. These taxes vary significantly by jurisdiction. company is a resident of both contracting states, it is treated as a

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be recharacterised as equity. This test generally considers a variety 3 Cross-border Payments of facts and circumstances (e.g., form of the instrument, sum certain payable on a fixed maturity date, creditor’s rights, etc.), buta 3.1 Is any withholding tax imposed on dividends paid by borrower’s capitalisation is one of the most important factors. If a locally resident company to a non-resident? an instrument is recharacterised as equity, “interest” payments on such instrument are not deductible to the borrower and are treated Yes. A 30% withholding tax applies to fixed, determinable, annual (including for withholding purposes) as distributions to the holder. or periodic income (“FDAP”) of non-U.S. persons earned from U.S. In October 2016, the IRS adopted regulations that can recast debt of sources other than income of tax-exempt persons or income that is U.S. issuers owed to or funded by related parties where the creditor is USA effectively connected with a U.S. trade or business (or, if required by not a U.S. entity, removing one of the key incentives for expatriating an applicable income tax treaty, is attributable to a U.S. permanent (or “inverting”) U.S. corporations. The rules are highly complex establishment). Dividends from a U.S. corporation paid to a non- and initially required detailed documentation in order to have U.S. shareholder are FDAP, as are certain “dividend equivalents” intercompany debt respected as such. The Treasury Department has that are economically similar to dividends but use different legal proposed revoking the documentation requirements and provided forms. Treaties may reduce or eliminate this tax. that taxpayers may rely on such proposal; the Treasury Department continues to study the issues addressed by the documentation rules and has stated that it will replace them with more streamlined rules 3.2 Would there be any withholding tax on royalties paid by a local company to a non-resident? when its study is complete.

Yes. Royalties are generally FDAP and are accordingly treated 3.5 If so, is there a “safe harbour” by reference to which similarly to dividends (see question 3.1). Under some treaties, tax relief is assured? withholding rates applicable to royalties vary depending on the industry (e.g., film or television) or type of property (e.g., patents or This is not applicable in the United States. copyrights) generating them.

3.6 Would any such rules extend to debt advanced by a 3.3 Would there be any withholding tax on interest paid third party but guaranteed by a parent company? by a local company to a non-resident? Although the interest deduction limitation described in question 3.4 Yes. Interest is also FDAP (see question 3.1). above does not specifically address the consequences of guarantees, Treaties may reduce or eliminate the withholding tax applicable to a guarantee of debt of a thinly capitalised subsidiary could implicate payments of interest, and, unlike dividends and royalties, “portfolio the economic substance doctrine (see question 9.1), with the result interest” is exempt from withholding tax. Portfolio interest is that the guarantor is treated as the borrower and payments by the interest paid on a registered (as opposed to a bearer) obligation subsidiary to the lender are treated as dividends to the guarantor or to a recipient who certifies on an applicable IRS form provided to an affiliate of the guarantor followed by an interest payment by the the payor of interest that the recipient is a non-U.S. person. The guarantor. portfolio interest exemption is not available to certain significant shareholders, with respect to contingent interest determined by 3.7 Are there any other restrictions on tax relief for reference to certain items specified in the Code and regulations interest payments by a local company to a non- (e.g., receipts, profits or dividends of the debtor or a related person), resident? banks receiving interest on ordinary-course loans, and “controlled foreign corporations” receiving interest from related persons, each Payments of interest by a U.S. corporation to a related non-U.S. as determined under specific and detailed rules enumerated in the party may give rise to the base-erosion and anti-abuse tax (see Code and regulations. question 10.1).

3.4 Would relief for interest so paid be restricted by 3.8 Is there any withholding tax on property rental reference to “thin capitalisation” rules? payments made to non-residents?

Business interest (any interest paid or accrued on indebtedness Yes. Rental income is FDAP and generally treated the same way as properly allocable to a trade or business) deductions may not other forms of FDAP discussed in questions 3.1 and 3.2. exceed the sum of business interest income (interest includible in a taxpayer’s gross income properly allocable to a trade or business) and 3.9 Does your jurisdiction have transfer pricing rules? 30% of a taxpayer’s “adjusted taxable income” (generally, earnings before interest, taxes, depreciation and amortisation for taxable years beginning before January 1, 2022, and earnings before interest and Yes. Intercompany transactions generally must reflect arm’s- taxes thereafter). Interest deductions disallowed under this rule can length terms, and there are detailed Treasury regulations specifying be carried forward indefinitely. Moreover, this rule does not affect available methodologies for meeting this standard. Additionally, holders of debt, who may still benefit from the portfolio interest taxpayers must prepare and maintain contemporaneous exemption from the U.S. withholding tax with respect to such interest documentation to support their transfer pricing practices. If an (if the requirements are otherwise met, see question 3.3). intercompany transaction does not appropriately reflect the income of the parties, the IRS has broad authority to reallocate tax items In addition, courts have long employed a multi-factor test to to achieve appropriate results. Particular scrutiny typically applies evaluate whether a purported debt instrument qualifies as such for to transfer pricing arrangements that result in deductions taken in U.S. federal income tax purposes or should, based on its substance,

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the United States and income earned offshore. Significant penalties Because non-U.S. companies are not (with some very limited may be levied on taxpayers who fail to comply with U.S. transfer exceptions) “includible corporations”, these rules do not allow for pricing rules. relief for losses of overseas subsidiaries. Some, but not all, states have similar consolidated return regimes. 4 Tax on Business Operations: General 4.5 Do tax losses survive a change of ownership?

4.1 What is the headline rate of tax on corporate profits? The availability of tax losses following an ownership change is

limited in order to prevent trafficking in such losses. Generally USA The top marginal U.S. federal corporate income tax rate is 21%. speaking, following an ownership change, the amount of losses that State and local governments tax corporate income at varying rates, may be utilised per year is limited to the value of the stock of the such that the typical top marginal rate on a corporation doing corporation with the loss as of the date of the ownership change business in all 50 states is 25.84%, according to the OECD. multiplied by the “long-term tax-exempt rate”, which is based on the market rate of interest on long-term federal bonds. As of November 4.2 Is the tax base accounting profit subject to 2018, the long-term tax-exempt rate is 2.43%. Net operating losses adjustments, or something else? (i.e., the excess of allowable deductions over taxable income) generated in a taxable year beginning after December 31, 2017 and The tax base for U.S. federal income tax purposes is taxable income, not used in a given year may be carried forward indefinitely; such rather than accounting profit subject to adjustments. Income is losses generated in prior years may be carried forward until the loss defined broadly under the Code as “income from whatever source expires (generally, 20 years after it was generated). Any losses derived”. To calculate taxable income, taxpayers apply several carried forward are added to the losses otherwise available under exclusions and deductions. For example, interest income from the general rule, and in no case may the deduction for net operating municipal bonds may be excluded from taxable income, and losses generated in a taxable year beginning after December 31, business expenses are typically deductible. Not all exclusions from 2017 exceed 80% of a taxpayer’s taxable income for the year. taxable income are relevant to determining accounting profit, and For corporations with assets that, taken together, have a basis that many deductions, notably depreciation and amortisation methods is less than their fair market value at the time of the ownership prescribed by the Code, do not reflect generally accepted accounting change (i.e., corporations with a “net unrealised built-in gain”) at principles or international financial reporting standards. Generally the time of the ownership change, this limitation is increased to the speaking, accounting principles are meant to result in financial extent they recognise (or are deemed to recognise) built-in gains statements that reflect when income is earned, while tax accounting during the five years after an ownership change. An “ownership is meant to comply with the varied purposes of the Code: generating change” for these purposes is defined under a complex statutory and revenue for the government and incentivising certain taxpayer regulatory regime, but very generally means a change of more than behaviours to support legislative policy goals. Naturally, several 50% ownership of the stock of a given corporation measured over a differences arise from these varied goals. three-year testing period.

4.3 If the tax base is accounting profit subject to 4.6 Is tax imposed at a different rate upon distributed, as adjustments, what are the main adjustments? opposed to retained, profits?

This is not applicable. Taxation of distributed, as opposed to retained, profits generally differs in who bears the tax, not necessarily the amount of tax imposed. Widely held corporations are taxed on income regardless 4.4 Are there any tax grouping rules? Do these allow of whether it is retained or distributed, but shareholders are subject for relief in your jurisdiction for losses of overseas subsidiaries? to a second level of income tax on dividends from corporations, and corporations are not entitled to deduct amounts paid as dividends (i.e., there is no integration). Partnerships, S Corporations (generally, Yes. Domestic corporations that are members of an “affiliated group” corporations with fewer than 100 domestic shareholders and a may file a consolidated U.S. federal income tax return. An affiliated single class of stock that elect S Corporation status) and entities group consists of one or more chains of “includible corporations” disregarded for U.S. federal income tax purposes are not normally (with limited exceptions, domestic business organisations treated as subject to federal income tax. Rather, taxable income of such corporations for U.S. federal income tax purposes) connected through entities is subject to tax at the owner level regardless of whether the stock ownership with a common parent corporation. The common relevant business organisation retains or distributes profit. REITs parent must itself be an includible corporation and own at least 80% and regulated investment companies are generally subject to tax of the stock (by vote and value) of the includible corporation(s) at only on retained earnings, and their shareholders are only subject the top of the chain(s), and at least 80% of the stock (by vote and to tax on distributed earnings. The applicable rate of tax depends value) of all the includible corporations in the chain(s) (other than on the identity of the taxpayer and, in the pass-through context, the the common parent) must also be owned by one or more of the other activity giving rise to the income. includible corporations. The consolidated return regulations are some of the most detailed and complex U.S. tax rules, but, generally “Personal holding companies”, i.e., corporations majority-owned speaking, affiliated corporations that file a consolidated return are by five individuals or fewer and that earn mostly passive income, taxed as one taxpayer until a corporation leaves the group, at which are subject to an additional 20% tax on their undistributed earnings. point gain or loss from prior intercompany transactions that was Corporations formed or availed of for the purpose of avoiding deferred during consolidation generally must be recognised. shareholders’ income tax are subject to a 20% tax on accumulated taxable income (as defined in the Code).

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

Companies engaged in certain activities may be subject to federal Generally, there is no U.S. withholding tax on the gross proceeds of excise taxes (on, e.g., the sale of alcohol, tobacco or firearms). sales of capital assets. However, as discussed in Section 8, under Additionally, employers are liable for a social security tax of 6.2% certain circumstances, the Foreign Investment in Real Property Tax on wages up to $128,400 per employee and a 1.45% Medicare tax Act requires withholding on the sale by a non-U.S. person of an

USA on all wages; these same amounts are also levied on employees asset (including shares of certain companies) treated as a United but collected by the employer via withholding, and employees are States real property interest. Additionally, beginning in 2019, the also responsible for an additional 0.9% Medicare tax collected by United States is scheduled to require “FATCA” withholding on the withholding on wages above $200,000 (for single taxpayers). There gross proceeds of sales by foreign financial institutions and non- is also a small unemployment tax imposed on employers. financial foreign entities that fail to comply with certain information Federal estate and gift taxes are beyond the scope of this chapter. reporting requirements. They generally do not concern publicly traded corporations, but may be relevant to closely held entities and are important to high- 6 Local Branch or Subsidiary? net-worth individual owners of business organisations. State and local taxes are beyond the scope of this chapter, too, but it should be noted that each U.S. state has its own taxing regime, and several 6.1 What taxes (e.g. capital duty) would be imposed upon municipalities do as well. The types and rates of these taxes vary the formation of a subsidiary? significantly, and some can be significant depending on the relevant industry, e.g., hotel occupancy or insurance premium taxes. None at the federal level. Some states impose registration or filing fees upon the formation of a subsidiary, but these are generally not significant. 5 Capital Gains

6.2 Is there a difference between the taxation of a local 5.1 Is there a special set of rules for taxing capital gains subsidiary and a local branch of a non-resident and losses? company (for example, a branch profits tax)?

Yes. Long-term capital gains of certain non-corporate taxpayers, There is no difference for U.S. federal income tax purposes in the including individuals, are taxed at preferential rates. The tax treatment of a “branch” – i.e., a segment of a company’s business deductibility of capital losses is subject to limitations. Capital losses that is not held in a legal form separately from the company engaged may only offset capital gains, and capital losses of corporations may in that business – and a domestic or non-U.S. business organisation only be carried back three years or forward five years. that is disregarded for U.S. tax purposes as separate from its owner by virtue of the U.S. “check the box” rules. Disregarded entities (regardless of their domicile) and branches are both ignored for U.S. 5.2 Is there a participation exemption for capital gains? federal income tax purposes. No. The sale of stock is generally subject to capital gains tax. Non- However, there is a significant difference in the taxation of a branch U.S. shareholders are generally not subject to capital gains tax on (or disregarded entity) and a regarded U.S. subsidiary of a non-U.S. the gross proceeds of the sale of property (including stock) unless corporation. A “branch profits tax” of 30% (or lower rate specified by such proceeds are effectively connected with the conduct of a U.S. an applicable income tax treaty) is imposed on foreign corporations’ trade or business (or, if required by an applicable income tax treaty, earnings and profits that are effectively connected with the conduct are attributable to a U.S. permanent establishment of the business) of a U.S. business or, if required by an applicable treaty, attributable or the property sold is a United States real property interest (see to a permanent establishment in the United States (“ECI”). This Section 8). There is, however, a limited participation exemption for tax is imposed on the “dividend equivalent amount” of a foreign dividends received from certain non-U.S. corporations (see question corporation’s ECI (generally, ECI for a taxable year reduced by any 7.3). increase (or increased by any decrease) in the foreign corporation’s U.S. assets net of U.S. liabilities) whether earned directly, through a branch, or through a disregarded subsidiary. The branch profits 5.3 Is there any special relief for reinvestment? tax is in addition to the tax imposed at the graduated corporate rates on a foreign parent’s net ECI as if the foreign corporation were a Generally, taxpayers are required to recognise gain or loss on a U.S. taxpayer. If, instead of a branch or disregarded subsidiary, the sale or other disposition for U.S. federal income tax purposes. foreign entity has a domestic corporate subsidiary, the branch profits Exceptions exist for “like kind exchanges”, by which a taxpayer can tax will not be imposed on the foreign parent (assuming it has no defer recognition of gain or loss by disposing of commercial real ECI from another source); instead, the subsidiary is taxed directly as estate not held for sale and using the proceeds of such disposition a U.S. person and dividends paid by the subsidiary to the non-U.S. within 180 days to acquire property of a like kind, and other parent will be subject to U.S. withholding tax. transactions that satisfy specific requirements of the Code where The purpose of the branch profits tax is to put on equal footing Congress has determined that deferral of gain or loss is appropriate, dividends from regarded U.S. subsidiaries and cash flow from e.g., corporate “reorganisations” or contributions by shareholders to branches and disregarded subsidiaries that generate ECI. Without controlled corporations. the branch profits tax, cash flow from branches and disregarded subsidiaries would itself be disregarded (and not subject to U.S. withholding tax), and the foreign parent would pay only one level

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of tax on its U.S. ECI, while earnings of a U.S. corporate subsidiary would be taxed once at the U.S. corporation level and once at the 7.2 Is tax imposed on the receipt of dividends by a local parent level when distributed as a dividend (see question 3.1). company from a non-resident company?

If the local and non-resident companies are treated as corporations 6.3 How would the taxable profits of a local branch be for U.S. federal income tax purposes and the local company owns determined in its jurisdiction? less than 10% (by vote or value) of the stock of the non-resident company, income of the non-resident company is generally not If a foreign corporation has a local branch that is disregarded taxed to the U.S. owner unless and until the income is distributed. for U.S. federal income tax purposes, no tax is imposed on the At that time, the distribution is includible in the U.S. owner’s USA branch; rather, the foreign corporation is subject to (a) a tax on the taxable income, though any withholding tax imposed may be able to foreign corporation’s ECI at the graduated rates applicable to U.S. be reduced by a credit for foreign taxes paid. taxpayers, and (b) the 30% branch profits tax described above in For dividends received after December 31, 2017, if the local question 6.2. ECI is net income derived from the conduct of a U.S. company owns 10% or more (by vote or value) of the stock of the trade or business (or income that a corporation elects to treat as so non-resident company, dividends on stock held for the required derived). A treaty may lower the tax rate and/or cause tax to be holding period (generally, 365 days within the two-year period imposed only on income attributable to a permanent establishment beginning one year before the stock becomes ex-dividend) from the of a foreign corporation. non-resident company are eligible for a 100% dividends-received deduction; however, if the non-resident company is a “controlled 6.4 Would a branch benefit from double tax relief in its foreign corporation”, the 10% U.S. shareholders will be subject to jurisdiction? the rules discussed below at question 7.3. To account for the fact that prior to December 31, 2017, corporations were not taxed on earnings A U.S. branch that is disregarded as separate from its owner for from non-resident corporate subsidiaries until such earnings were U.S. federal income tax purposes is neither a resident of the United repatriated, Congress imposed a one-time “transition tax” pursuant States nor subject to U.S. tax, and accordingly is not itself eligible to which 10% U.S. shareholders of controlled foreign corporations for treaty benefits. and any other foreign corporation which has one or more than one An entity organised in a jurisdiction that has a treaty with the United 10% U.S. corporate shareholder must include in income their pro States and that has a U.S. branch that results in income to the parent rata share of such corporations’ accumulated earnings and profits taxable by the United States may be entitled to treaty relief pursuant since 1987. 10% U.S. shareholders will generally be required to pay to the terms of an applicable treaty. a tax of 15.5% on accumulated earnings attributable to the foreign corporations’ cash positions and 8% on other amounts.

6.5 Would any withholding tax or other similar tax be Another important exception to the general rule of deferral arises in imposed as the result of a remittance of profits by the the context of “passive foreign investment companies” (“PFICs”). branch? A PFIC is, generally speaking, a foreign corporation that earns 75% or more of its income from passive sources or 50% or more of No. Generally, the “dividend equivalent amount” of income the assets of which, by value, generate passive income (measured earned through a branch is taxed as described in question 6.2, and annually). A U.S. owner may elect to defer his, her or its share of no additional tax is imposed on the remittance of profits by the tax on the PFIC’s earnings until distribution or until the shareholder branch to the non-U.S. corporation that holds it by withholding or sells part or all of his, her or its stake. However, such deferral comes otherwise. at a cost, as the deferred income will be treated as ordinary income rather than capital gain and interest is charged on the tax imposed on the distribution or gain from sale, as if the shareholder had 7 Overseas Profits underpaid tax. This interest regime can only be avoided by electing current taxation of the PFIC’s ordinary income and net capital gain or marking to market the value of the company’s shares each year. 7.1 Does your jurisdiction tax profits earned in overseas branches? If the non-resident company is disregarded as separate from its owner for U.S. federal income tax purposes, its income is taxed If a non-U.S. branch is either not an entity or is an entity that is currently to its owner and any dividend from it is disregarded. If disregarded as separate from its owner and the applicable owner the entity is treated as a partnership, then generally it also passes is a U.S. corporation, then yes. The U.S. federal income tax is a through its income to its owners and a distribution in itself is not a worldwide tax (with limited territorial aspects, see question 7.2) and taxable event. is imposed on income earned by U.S. taxpayers from any source, domestic or not. 7.3 Does your jurisdiction have “controlled foreign A corporation for which a check-the-box election to be disregarded company” rules and, if so, when do these apply? is not made (or that is not eligible to check the box) and that is not organised under the laws of the United States or one of its political Yes. If more than 50% of the voting power or the value of a non- subdivisions, is not subject to current U.S. federal income tax, but U.S. business organisation taxable as a corporation for U.S. federal its U.S. shareholders may be, depending on the assets and income of income tax purposes is owned (directly, indirectly or constructively) the corporation, if it is a “passive foreign investment company” (see by “United States shareholders”, the non-U.S. entity is a controlled question 7.2) or a “controlled foreign corporation” (see question foreign corporation (“CFC”) for U.S. federal income tax purposes. 7.3). United States persons who own, directly or indirectly, more than

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10% of the voting power or value of a CFC must include their pro rata share of the CFC’s “Subpart F income” and “global intangible 8.3 Does your jurisdiction have a special tax regime low-taxed income” (“GILTI”) for a given year. Subpart F income is for Real Estate Investment Trusts (REITs) or their equivalent? generally income from passive sources (dividends, interest, royalties, rents, insurance income, capital gains, etc.). GILTI is generally the excess of a United States shareholder’s pro rata share of net “tested Yes. Provided they meet the detailed qualification, income and income” (gross income of a CFC reduced by, among other things, asset tests described below, REITs are not subject to the double- U.S. source income effectively connected with the conduct of a taxation regime that characterises the U.S. federal income tax trade or business in the United States, Subpart F income, dividends applicable to corporations generally. Specifically, taxable income

USA received from related persons and deductions (including taxes) that is distributed by a REIT to its shareholders on a current basis properly allocable to such gross income) over a 10% deemed return is generally not subject to U.S. federal income tax on the REIT on the CFC’s “qualified business asset investment” (the average of level. Additionally, dividends from REITs are not deductible by a CFC’s aggregate adjusted bases of depreciable tangible property corporations that receive them. As a result of these rules, REITs used in the CFC’s trade or business that gave rise to tested income). function in some ways like partnerships or entities disregarded U.S. corporations may deduct 50% of their GILTI inclusions until as separate from their owners: they generally pass their income 2025, when the deduction is scheduled to decrease to 37.5%. through to their owners. A general summary of the most important rules for REIT qualification and operation is provided below; these are subject to exceptions, safe harbours and detailed qualifications 8 Taxation of Commercial Real Estate in complex provisions of the Code and Treasury Regulations. To qualify as a REIT, an entity must be a corporation, trust or association that (a) but for the REIT provisions, would be taxable 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? as a corporation for U.S. federal income tax purposes, (b) is beneficially owned by at least 100 persons, (c) is not more than 50% (by value) owned by five individuals or fewer, and (d) meets two Yes. Under the Foreign Investment in Real Property Tax Act “gross income” tests and six “gross asset” tests. (“FIRPTA”), a non-U.S. owner’s disposition of a United States real property interest (a “USRPI”) generally is subject to U.S. federal The gross income tests require that at least (a) 75% of a REIT’s income tax at the rates generally applicable to U.S. persons. USRPI income must come from real property, and (b) 95% of its income is broadly defined and includes real property (including commercial (towards which the 75% described in clause (a) counts) must real estate as well as mines, wells and other natural deposits) located generally be passive in nature or derive from gains on the sale of in the United States, and any interest (other than solely as a creditor) passive assets. The gross asset tests generally require that at least in a domestic corporation that was, at any point during the five- 75% of the value of a REIT’s total assets be represented by real year period ending on the disposition, a United States real property estate assets, cash and government securities, and they limit the holding corporation (“USRPHC”). A USRPHC is a corporation value of the REIT’s assets attributable to debt instruments and other with U.S. real property equal to 50% or more of the fair market securities to preclude the ability to use the REIT form for abuse. value of all its real property and other assets used or held in its trade Finally, a REIT will not be able to take advantage of the favourable or business, and U.S. corporations are presumed to be USRPHCs tax regime the Code otherwise provides unless it distributes to unless the taxpayer demonstrates otherwise. its shareholders 90% of its taxable income (subject to certain adjustments) minus certain non-cash income. FIRPTA requires withholding by the buyer of 15% of the fair market value of the USRPI disposed of. Buyers are entitled to require sellers to certify that they are either U.S. persons or not selling a 9 Anti-avoidance and Compliance USRPI. Withholding is not, however, required on the acquisition of stock of a publicly traded U.S. corporation or partnership (with exceptions for the acquisition of substantial interests in publicly 9.1 Does your jurisdiction have a general anti-avoidance traded entities). or anti-abuse rule? In addition, “qualified foreign pension funds” – generally, regulated non-U.S. retirement funds to which contributions are deductible or Although there is no overarching statutory or regulatory anti-abuse the income of which is subject to tax at a reduced rate – are exempt rule, courts have developed many generally applicable doctrines, from FIRPTA. notably the “sham transaction”, “substance over form”, “economic substance” and “step transaction” doctrines, which police transactions with forms that, if respected, would yield inappropriate 8.2 Does your jurisdiction impose tax on the transfer of tax results. Courts and the IRS also apply presumptions in an indirect interest in commercial real estate in your interpreting the tax laws that prevent (arguably) improper or abusive jurisdiction? results under the Code and regulations, such as the rule that only in the presence of a “clear declaration of intent by Congress” will two Yes. As discussed above, the disposition of a USRPI (including a tax deductions for one economic loss be sustained. share of a domestic USRPHC) is taxable, and the disposition of an Usually these doctrines apply to deny tax benefits to taxpayers interest in a pass-through entity (e.g., a partnership) will be taxable that would result from a literal application of the Code and to a non-resident to the extent the gain is attributable to a USRPI regulations to the taxpayer’s chosen form of transaction, though in held by the partnership. some circumstances a taxpayer may use these doctrines to avoid inappropriately harsh tax consequences notwithstanding the form of

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a given transaction. In each case, the form chosen by a taxpayer Phase”, when taxpayers transparently cooperate with the IRS and is presumed respected and will usually only be overlooked if the resolve issues before returns are filed (and are assured that the IRS chosen form does not reflect economic reality, and generally all facts will not challenge such returns); and the “Compliance Maintenance and circumstances are taken into account before recharacterising a Phase”, when the IRS adjusts its level of review based on its transaction. Congress has codified the economic substance doctrine, experience with the taxpayer in the CAP Phase. and a 20% penalty is imposed on transactions that do not change a Additionally, the IRS administers the Advanced Pricing Agreement taxpayer’s pre-tax economic position in a meaningful way when the (“APA”) programme, which allows the IRS and a taxpayer, and if taxpayer has no substantial purpose for the transaction other than applicable a treaty jurisdiction’s competent authority, to enter into federal income tax effects. This penalty is increased to 40% if the an agreement concerning transfer pricing methods. transaction is not adequately disclosed. USA CAP and the APA programme do not result in the reduction of a Additionally, there are civil and criminal penalties for failure to tax; rather, the purpose of CAP is to identify potential issues early comply with tax laws and a broad range of statutory and regulatory and resolve them prior to filing tax returns, decrease the length of provisions that target specific perceived abuses such as engaging audit cycles, and allow for real-time review of transactions through in transactions identified by the IRS as tax avoidance schemes, a transparent dialogue with the IRS, while the APA programme trafficking in tax losses, establishing inappropriate transfer pricing is meant to avoid complex disputes among the interested parties. schemes, abusing the interest deduction for intercompany debt, and Both programmes share the objective of saving taxpayer and IRS combining with a foreign corporation in order to redomicile a U.S. resources. corporation outside the country.

10 BEPS and Tax Competition 9.2 Is there a requirement to make special disclosure of avoidance schemes? 10.1 Has your jurisdiction introduced any legislation Yes. Certain categories of transactions have been designated as in response to the OECD’s project targeting Base “reportable transactions”. These include “listed transactions”, Erosion and Profit Shifting (BEPS)? which are specific arrangements that the IRS has identified as tax avoidance schemes (or transactions that are substantially similar to Although not necessarily responsive to the BEPS project, the United these), “transactions of interest”, which have the potential for tax States has recently enacted a Base Erosion and Anti-Abuse Tax avoidance but the IRS lacks sufficient information to determine (“BEAT”), which is, very generally, 10% of the excess of taxable whether they should be listed transactions, deals that require the income (without regard to (1) tax benefits from certain “base erosion” taxpayer to keep the tax treatment confidential, and certain other payments, and (2) a portion of net operating losses calculated based transactions. Such transactions must be reported to the IRS, and on the amount of base erosion tax benefits relative to certain other tax the failure to report listed transactions carries more severe penalties benefits) over regular tax liability (less certain credits). In 2025, the than failure to report other reportable transactions. BEAT is scheduled to increase to 12.5%, and the regular tax liability will be calculated net of all tax credits. Base erosion payments are deductible payments (including interest), purchases of deductible 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also or amortisable property and certain reinsurance payments, in each anyone who promotes, enables or facilitates the tax case, by U.S. persons to related non-U.S. persons. avoidance? Additionally, the Treasury Department and the IRS have taken some steps to implement BEPS recommendations. As discussed above Yes. The reportable transactions described in question 9.2 must at question 1.2, the most recent model income tax treaty includes be reported to the IRS by any “material advisor” with respect to limitation on benefits provisions and a statement of intent inthe such transactions. A material advisor is a person who provides any preamble that the treaty’s purpose is not to create opportunities for material assistance or advice with respect to organising, promoting, tax evasion. Also, the IRS has promulgated country-by-country selling, insuring, or carrying out any reportable transaction and regulations consistent with the BEPS recommendations. who earns $50,000 (or more) from such assistance or advice if substantially all the tax benefits from the transaction redound to 10.2 Does your jurisdiction intend to adopt any legislation individuals’ benefit, or who earns $250,000 (or more) from such to tackle BEPS which goes beyond what is assistance if the beneficiaries are not individuals. recommended in the OECD’s BEPS reports? Additionally, federal criminal law generally punishes any accomplice to a crime as a principal offender. No. It is unlikely that any laws implementing BEPS will be passed in the near future, and to the extent the IRS is empowered to make 9.4 Does your jurisdiction encourage “co-operative BEPS-compliant regulations, it is not anticipated that they will go compliance” and, if so, does this provide procedural beyond the OECD’s recommendations. benefits only or result in a reduction of tax? 10.3 Does your jurisdiction support public Country-by- Yes. Since 2005, the IRS has administered the Compliance Country Reporting (CBCR)? Assurance Process (“CAP”), which is available to publicly traded taxpayers (or privately held ones that provide quarterly audited No. Although the IRS has promulgated regulations requiring financial statements to the IRS) with at least $10,000,000 in assets. country-by-country reporting to the IRS, such reporting will be The CAP proceeds in three phases: the “Pre-CAP Phase”, when confidential, consistent with the confidential nature of most U.S. the IRS and taxpayers close ongoing examinations and the IRS taxpayer information. determines whether the taxpayer is eligible for CAP; the “CAP

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tax digital companies specifically. For tax years beginning after 10.4 Does your jurisdiction maintain any preferential tax December 31, 2017, the United States allows a deduction in respect regimes such as a patent box? of “foreign derived intangible income” (“FDII”), which is an amount that exceeds a deemed return on a domestic corporation’s tangible No. The Code does have certain preferential provisions applicable assets. The FDII regime is meant to encourage U.S. corporations to specific activities and industries (for example, a research and to keep intangible assets (and related income) in the United States. development tax credit, the REIT rules discussed above, accelerated The GILTI inclusion (see question 7.3) and BEAT (see question depreciation for certain kinds of property, etc.), but these are more 10.1) generally expand the tax base to limit strategies for shifting limited in their operation than patent boxes and are not typically income outside the country, but such strategies do not solely involve

USA described as preferential tax regimes. digital (or even intangible) activities and/or properties.

11 Taxing the Digital Economy 11.2 Does your jurisdiction support the European Commission’s interim proposal for a digital services tax? 11.1 Has your jurisdiction taken any unilateral action to tax digital activities or to expand the tax base to capture digital presence? No. The United States opposes proposals to tax digital companies specifically. No. Although the United States has taken steps to remove incentives for shifting income offshore, the government opposes proposals to

Jodi J. Schwartz Swift S.O. Edgar Wachtell, Lipton, Rosen & Katz Wachtell, Lipton, Rosen & Katz 51 West 52nd Street 51 West 52nd Street New York, NY 10019 New York, NY 10019 USA USA

Tel: +1 212 403 1212 Tel: +1 212 403 1398 Email: [email protected] Email: [email protected] URL: www.wlrk.com URL: www.wlrk.com

Jodi J. Schwartz focuses on the tax aspects of corporate transactions, Swift S.O. Edgar is an associate in Wachtell, Lipton, Rosen & Katz’s including mergers and acquisitions, joint ventures, spin-offs and tax department. financial instruments. Ms. Schwartz has been the principal tax lawyer Mr. Edgar received an A.B. cum laude with high honours in Classics on numerous domestic and cross-border transactions in a wide range from Harvard College in 2007 and a J.D. from Columbia Law School of industries. She was elected partner in 1990. in 2013, where he was a Harlan Fiske Stone Scholar and a James Ms. Schwartz is recognised as one of the world’s leading lawyers in Kent Scholar and an Essays and Reviews Editor for the Columbia Law the field of taxation, including being selected by Chambers Global Review. Guide to the World’s Leading Lawyers, Chambers USA Guide to Before joining Wachtell Lipton, Mr. Edgar clerked for the Honorable America’s Leading Lawyers for Business, International Who’s Who Cynthia M. Rufe of the United States District Court for the Eastern of Business Lawyers and as a tax expert by Euromoney Institutional District of Pennsylvania and for the Honorable Thomas L. Ambro of the Investor Expert Guides. In addition, she is a member of the Executive United States Court of Appeals for the Third Circuit. Committee and past chair of the Tax Section of the New York State Bar Association, and also is a member of the American College of Tax Counsel.

Wachtell, Lipton, Rosen & Katz is one of the most prominent business law firms in the United States. The firm’s pre-eminence in the fields of mergers and acquisitions, takeovers and takeover defence, strategic investments, corporate and securities law, and corporate governance means that it regularly handles some of the largest, most complex and demanding transactions in the United States and around the world. The firm also handles significant white-collar criminal investigations and other sensitive litigation matters, and counsels boards of directors and senior management in the most sensitive situations. It features consistently in the top rank of legal advisors. Its attorneys are also recognised thought leaders, frequently teaching, speaking and writing in their areas of expertise.

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Zambia Joseph Alexander Jalasi

Eric Silwamba, Jalasi and Linyama Legal Practitioners Mailesi Undi

1 Tax Treaties and Residence 2 Transaction Taxes

1.1 How many income tax treaties are currently in force in 2.1 Are there any documentary taxes in your jurisdiction? your jurisdiction? No, there are not. As at 11 October, 2018 Zambia had signed 24 double tax treaties.

2.2 Do you have Value Added Tax (or a similar tax)? If so, 1.2 Do they generally follow the OECD Model Convention at what rate or rates? or another model? Yes, VAT is charged at either 0% (zero-rated) or 16% (standard- They generally follow the OECD Model, however, some have rated). Please note the proposed budget changes for the fiscal year variations. 2019 indicate that Zambia will reintroduce Sales Tax in 2019. At the time of publication of this article the Sales Tax Act had not yet 1.3 Do treaties have to be incorporated into domestic law been enacted but is projected to take effect in April 2019. before they take effect? 2.3 Is VAT (or any similar tax) charged on all transactions Yes, Section 74 of the Income Tax Act gives power to the President or are there any relevant exclusions? to enter into double tax treaties. The treaties are incorporated into national law by Statutory Instruments which are a form of delegated Yes, VAT is charged at the standard rate on all supplies of goods and legislation. services that are not exempt or zero-rated. The Value Added Tax Act, Chapter 331 Volume 19 provides for a schedule of exempt or 1.4 Do they generally incorporate anti-treaty shopping zero-rated supplies and imports. rules (or “limitation on benefits” articles)? 2.4 Is it always fully recoverable by all businesses? If not, Zambia has a general anti-avoidance rule in its tax law and general what are the relevant restrictions? anti-abuse provisions are present in most tax treaties. Yes, VAT is recoverable as a claim subject to restriction set out in 1.5 Are treaties overridden by any rules of domestic the VAT (General) Rules, e.g. a claim must be made within three law (whether existing when the treaty takes effect or months of the date of invoice; the time limit and invoice on which a introduced subsequently)? claim has to be made must comply with the VAT Rules. Businesses that provide partially exempt supplies can only claim A double tax treaty once incorporated by way of Statutory input tax credit to the extent of their taxable supplies, i.e. they can Instrument becomes part and parcel of Zambian domestic law. only claim and recover VAT on their purchases partially according to approved apportionment bases. 1.6 What is the test in domestic law for determining the residence of a company? 2.5 Does your jurisdiction permit VAT grouping and, if so, is it “establishment only” VAT grouping, such as that A company is said to be resident if it is incorporated or formed applied by Sweden in the Skandia case? under the laws of Zambia or if the place of central management and control of the person’s business or affairs is in Zambia. Yes, the Value Added Tax Act states that two or more companies incorporated in Zambia are eligible to be treated as a recognised group if: (a) one of them controls the others;

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(b) one person, whether a company or an individual, controls them all; or 3.6 Would any such rules extend to debt advanced by a (c) two or more individuals carrying on a business in partnership third party but guaranteed by a parent company? control them all. Our law is silent on this.

2.6 Are there any other transaction taxes payable by companies? 3.7 Are there any other restrictions on tax relief for interest payments by a local company to a non- resident? Yes, apart from VAT, there is Withholding Tax (WHT), Property

Zambia Transfer Tax (PTT), Mineral Royalty, and Customs and Excise Duty. There are none.

2.7 Are there any other indirect taxes of which we should 3.8 Is there any withholding tax on property rental be aware? payments made to non-residents?

Customs and Excise Tax. Yes and it is charged at the rate of 10%.

3.9 Does your jurisdiction have transfer pricing rules? 3 Cross-border Payments Yes, it does. 3.1 Is any withholding tax imposed on dividends paid by a locally resident company to a non-resident? 4 Tax on Business Operations: General Yes, at the rate of 15% (proposed to be 20%, effective as of 1 January 2019. This is subject to the existence of a double tax treaty. 4.1 What is the headline rate of tax on corporate profits?

3.2 Would there be any withholding tax on royalties paid The standard rate of Corporate Tax on profits is 35%. However, by a local company to a non-resident? income from the agriculture sector and non-traditional exports (all exports except copper and cobalt) is levied at 15%, companies listed Yes, at the rate of 20%. on the Lusaka Stock Exchange are taxed at the rate of 33%, while telecommunication companies with an income exceeding K250,000 are taxed at 40%. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 4.2 Is the tax base accounting profit subject to Yes, at the rate of 15% (proposed to be 20% from 1 January 2019). adjustments, or something else?

Yes, it is. 3.4 Would relief for interest so paid be restricted by reference to “thin capitalisation” rules? 4.3 If the tax base is accounting profit subject to Yes – for mining companies there is a debt-to-equity ratio of 3:1 on adjustments, what are the main adjustments? interest deductions. ■ Deductions are limited to expenditure actually incurred A new thin capitalisation limit on interest deductions, for interest wholly and exclusively for the purposes of the business. amounts exceeding 30% of EBITDA has been proposed effective as of 1 January 2019. ■ Wear and tear allowances replace accounting depreciation. ■ Foreign exchange gains and losses are only taxable/deductible Our law also requires that the transaction is undertaken at an arm’s if revenue in nature and only when realised. length rate by reference to: ■ There are limitations on the deductions for bad and doubtful (a) the appropriate level or extent of the issuing company’s debts. overall indebtedness; ■ There is no deduction of expenditure and losses specifically (b) whether the amount issued would have been provided as a listed at Section 44 of the Income Tax Act. loan on an arm’s length basis; and (c) the rate of interest and other terms that would apply to such an arm’s length loan. 4.4 Are there any tax grouping rules? Do these allow for relief in your jurisdiction for losses of overseas subsidiaries? 3.5 If so, is there a “safe harbour” by reference to which tax relief is assured? No, there are not.

There are none.

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4.5 Do tax losses survive a change of ownership? 6.3 How would the taxable profits of a local branch be determined in its jurisdiction? Yes. However, Part IV (Sections 30) of the Income Tax Act only allows deduction of losses brought forward from the same source, The rules are the same for branches and companies. However, provided that a loss can only be carried forward for a period of five where the branch is established by an entity that is established in a years. jurisdiction with whom Zambia has a Double Taxation Agreement, then the specific rules in that Double Taxation Agreement that govern profit attribution to branches would apply. 4.6 Is tax imposed at a different rate upon distributed, as opposed to retained, profits? Zambia 6.4 Would a branch benefit from double tax relief in its No. There is, however, a 15% WHT imposed on profit distributions. jurisdiction?

Yes, it would. 4.7 Are companies subject to any significant taxes not covered elsewhere in this chapter – e.g. tax on the occupation of property? 6.5 Would any withholding tax or other similar tax be imposed as the result of a remittance of profits by the No, except for normal statutory imposts such as local authority branch? rates. Yes – there is a 15% WHT (proposed to be 20% from 1 January 2019) on remittance of branch profits. 5 Capital Gains 7 Overseas Profits 5.1 Is there a special set of rules for taxing capital gains and losses? 7.1 Does your jurisdiction tax profits earned in overseas There is no Capital Gains Tax in Zambia. However, there is PTT branches? which is charged on the realisable value of the property being transferred. Zambia principally operates a source-based system for the taxation of income. Income deemed to be from a Zambian source is generally subject to Zambian Income Tax. However, residence 5.2 Is there a participation exemption for capital gains? of a person/entity in Zambia will widen the scope of taxation to include interest and dividend income from abroad. Consequently, This is not applicable. Zambian residents will also be subject to Income Tax on interest and dividends from a source outside Zambia. 5.3 Is there any special relief for reinvestment? 7.2 Is tax imposed on the receipt of dividends by a local This is not applicable. company from a non-resident company?

5.4 Does your jurisdiction impose withholding tax on the Yes, it is. proceeds of selling a direct or indirect interest in local assets/shares? 7.3 Does your jurisdiction have “controlled foreign company” rules and, if so, when do these apply? This is not applicable. Zambia does not have a controlled foreign company regime. 6 Local Branch or Subsidiary? 8 Taxation of Commercial Real Estate 6.1 What taxes (e.g. capital duty) would be imposed upon the formation of a subsidiary? 8.1 Are non-residents taxed on the disposal of commercial real estate in your jurisdiction? There are none. Yes – the disposal is subject to Property Transfer Tax and Value 6.2 Is there a difference between the taxation of a local Added Tax. subsidiary and a local branch of a non-resident company (for example, a branch profits tax)? 8.2 Does your jurisdiction impose tax on the transfer of an indirect interest in commercial real estate in your No, the same rates apply. There is, however, a proposal to increase jurisdiction? the withholding tax rate on profit repatriation by branches from the current 15% to 20%, effective as of 1 January 2019. Yes, any transfer in interest in a lease of more than five years would be subject to Property Transfer Tax.

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8.3 Does your jurisdiction have a special tax regime 10.2 Does your jurisdiction intend to adopt any legislation for Real Estate Investment Trusts (REITs) or their to tackle BEPS which goes beyond what is equivalent? recommended in the OECD’s BEPS reports?

Yes – income from the rental of real property is subject to a turnover This information is not yet available in the Public Domain. tax at the rate of 10%.

10.3 Does your jurisdiction support public Country-by- 9 Anti-avoidance and Compliance Country Reporting (CBCR)? Zambia Yes – in practice the Zambia Revenue Authority requests for 9.1 Does your jurisdiction have a general anti-avoidance Country by Country reports when undertaking a Transfer Pricing or anti-abuse rule? Audit.

Yes, this is provided for under the provisions of Section 95 of 10.4 Does your jurisdiction maintain any preferential tax Income Tax Act. regimes such as a patent box?

9.2 Is there a requirement to make special disclosure of No, it does not. avoidance schemes?

Yes, related-party transaction disclosure is required. 11 Taxing the Digital Economy

9.3 Does your jurisdiction have rules which target not 11.1 Has your jurisdiction taken any unilateral action to tax only taxpayers engaging in tax avoidance but also digital activities or to expand the tax base to capture anyone who promotes, enables or facilitates the tax digital presence? avoidance? No, it has not. Yes, Section 95 of the Income Tax Act.

11.2 Does your jurisdiction support the European 9.4 Does your jurisdiction encourage “co-operative Commission’s interim proposal for a digital services compliance” and, if so, does this provide procedural tax? benefits only or result in a reduction of tax? No, it does not. Zambia does not have a system of private and public binding rulings or co-operative compliance arrangements.

10 BEPS and Tax Competition

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

Yes; The Income Tax (Transfer Pricing) Rules, Interest Deduction Restrictions and Section 95 of the Income Tax Act on anti-avoidance. Zambia has joined the inclusive framework.

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Joseph Alexander Jalasi Mailesi Undi Eric Silwamba, Jalasi and Linyama Eric Silwamba, Jalasi and Linyama Legal Practitioners Legal Practitioners No. 12 at William Burton Place No. 12 at William Burton Place Chilekwa Mwamba Road Chilekwa Mwamba Road Off Lubu/Saise Roads, Longacres Off Lubu/Saise Roads, Longacres Lusaka, Zambia Lusaka, Zambia

Tel: +260 211 256530 Tel: +260 211 256530 Email: [email protected] Email: [email protected] URL: www.ericsilwambaandco.com URL: www.ericsilwambaandco.com Zambia Joseph is the Head of Tax, Mining, Corporate, and the Banking and Mailesi is the firm’s Associate and specialises in Dispute Resolution, Finance Department. He has several years of experience in litigation Taxation and Corporate work. She is an upcoming tax litigation lawyer and over 18 years’ experience in tax practice. He served as the and has had several appearances before the Tax Appeals Tribunal. Registrar of the Revenue Appeals Tribunal, now renamed as the Tax She has advised several multi-national Clients on various taxation Appeals Tribunal, for seven years. He has successfully argued and matters including Transfer Pricing and Value Added Tax. settled a number of multi-million dollar tax disputes. Joseph served as Chief Policy Analyst Legal Affairs in the President’s Office under the late President Levy Mwanawasa. He also served as legal advisor to former President of Zambia, Rupiah Banda. Mr Jalasi’s expertise in tax practice in Zambia is also recognised in The Legal 500. Chambers and Partners describe Mr. Jalasi as follows: “Joseph Jalasi is noted for his work on banking and finance, and environmental litigation. He has a strong reputation and is considered by commentators to have had “considerable success in commercial litigation and constitutional law matters”.”

ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners is a Zambian Law Firm. The firm has been in existence for over 30 years as Eric Silwamba and Company. In 2013 it was rebranded to ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners following the admission to partnership of Joseph Jalasi and Lubinda Linyama. It has developed over the years to the level of being among the top law firms in Zambia. The firm has represented multinational Companies in respect of issues relating to Value Added Tax, Income Tax, Customs and Excise Tax. Their clientele varies from multinationals in the Telecom, Mining, Agriculture, Banking and Energy Sectors. In May 2017, the firm expanded its international footprint by being admitted to the Dentons NextLaw Referral Network. The International Network will enhance the firm’s service delivery with regard to serving multijurisdictional clients. The renowned Chambers and Partners (https://chambers.com) describes the firm as follows: “ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners is a Zambian Law Firm. The firm has been in existence for over thirty years as Eric Silwamba and Company. In 2013 it was rebranded to ERIC SILWAMBA, JALASI AND LINYAMA Legal Practitioners following the admission to partnership of Joseph Jalasi and Lubinda Linyama. It has over the years developed to the level of being among the top law firms in Zambia. The firm offers boutique style legal services to its clients. The firm has also published a number of international articles in areas it specialises in. The firm published articles in the International Comparative Legal Guides with respect to the Zambian mining law, energy, commercial real estate, litigation and dispute resolution. See https://www.iclg.com/firms/eric-silwamba/joseph-alexander-jalasi-jr and https://www.iclg.com/firms/eric-silwamba/ lubinda-linyama.” The World Legal 500 (https://www.legal500.com/firms/53500-eric-silwamba-jalasi-and-linyama-legal-practitioners/57583-lusaka-zambia) describes the firm as follows: “Eric Silwamba, Jalasi and Linyama Legal Practitioners is regarded by some as ‘the best in the country for dispute resolution’, with Eric Silwamba singled out as a ‘very experienced litigator’. The firm also houses robust corporate and commercial expertise and is routinely involved in banking and finance, project development and mining matters. Other key names include Joseph Jalasi, who is recommended for tax issues, and Lubinda Linyama.”

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