r u c h e l m a n OUTBOUND ACQUISITIONS: HOLDING COMPANIES OF EUROPE – A GUIDE FOR TAX PLANNING OR A ROAD MAP FOR DIFFICULTY? Insights Special Editions TABLE OF EDITORS’ NOTE CONTENTS This special edition of Insights addresses the use of holding companies in Europe. Editors’ Note The emphasis is on the tax benefits that may be obtained outside the U.S. for reve- nue generated by a holding company in a way that does not run afoul of the anti-de- Introduction ................................ 3 ferral rules of U.S. tax law. B.E.P.S. and Holding For many years, it was sufficient for tax advisers to understand the scope of benefits Companies .............................. 12 that were available to holding companies in a particular country and the steps that were required to achieve the desired goals. Often, the benefits reflected favorable State Aid, Transparency rulings, special tax regimes, and lack of congruence in the way entities or transac- Measures, and Reporting tions were viewed under the tax laws of two or more countries. All planning con- Standards in the E.U. ............... 26 tained a residual element, viz., the use of structures that allowed foreign profits to Luxembourg ............................. 42 be permanently invested outside the U.S. for financial accounting purposes and that did not result in the loss of deferral for U.S. income tax purposes. United Kingdom ....................... 56 The landscape has changed over the past three years: tax benefits derived from Switzerland .............................. 83 these arrangements have been vilified in the media, in parliamentary hearings, and by the O.E.C.D. and G-20 countries, through the B.E.P.S. Project. Countries around The Netherlands ...................... 91 the world are changing their laws in a frenzy to eliminate tax planning that was universally deemed to be acceptable in past years. As a result, the use of holding Ireland .................................... 103 companies as a tool for global planning now requires both a knowledge of local tax laws and a sensitivity to the use of planning tools that are not viewed as abusive Spain ..................................... 112 under current standards. Belgium .................................. 122 This edition of Insights examines the benefits that are obtainable in 15 European ju- risdictions. It also addresses the new reality that results from the B.E.P.S. Project of Sweden .................................. 139 the O.E.C.D. and several initiatives of the European Commission that are intended to eliminate cross-border tax planning arrangements. The authors are leading tax Denmark ................................ 147 lawyers in their respective countries and recognized experts on B.E.P.S. and the European Commission initiatives. Austria ................................... 163 We hope you enjoy this issue. France ................................... 173 - The Editors Italy ........................................ 194 Germany ................................ 212 Cyprus ................................... 222 Malta ...................................... 237 About Us This edition of Insights is based on material written by the same authors and published in different format as “Chapter 274” of the Corporate Tax Practice Series: Strategies for Corporate Acquisi- tions, Dispositions, Spin-Offs, Joint Ventures, Reorganizations & Restructurings 2016, edited by Louis S. Freeman, available at 1-800-260-4754; www.pli.edu. The copyright is held by the Practis- ing Law Institute, and the material is reproduced with its permission. Insights Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 2 INTRODUCTION When a U.S. company acquires foreign targets, the use of a holding company struc- Author ture abroad may provide certain global tax benefits. The emphasis is on “global” Stanley C. Ruchelman because standard U.S. benefits such as deferral of income while funds remain off- Ruchelman P.L.L.C. shore may not be available without further planning once a holding company derives New York, U.S.A. dividends and capital gains. In addition, the operative term is “may provide” because of steps that have been taken by the Organization for Economic Cooperation and Development (“the O.E.C.D.”), the European Commission, and the European Par- liament to impede tax planning opportunities that have been available to multina- tional groups for many years. If we assume the income of each foreign target consists of manufacturing and sales activities that take place in a single foreign country, no U.S. tax will be imposed until the profits of the target are distributed in the form of a dividend or the shares of the target are sold. This is known as “deferral” of tax. Once dividends are distributed, U.S. tax may be due whether the profits are distributed directly to the U.S. parent company or to a holding company located in another foreign jurisdiction. Without advance planning to take advantage of the entity characterization rules known as “check-the-box,” the dividends paid by the manufacturing company will be taxable in the U.S. whether paid directly to the parent or paid to a holding company located in a third country.1 In the latter case, and assuming the holding company is a controlled foreign corporation (“C.F.C.”) for U.S. income tax purposes, the dividend income in the hands of the holding company will be viewed to be an item of Foreign Personal All of the authors acknowledge Holding Company Income, which generally will be taxed to the U.S. parent company the assistance of Jennifer Lapper, or any other person that is treated as a “U.S. Shareholder” under Subpart F of the the Director of Marketing & Special 2 Events at Ruchelman P.L.L.C., Internal Revenue Code. Francesca York, a paralegal at Ruchelman P.L.L.C., Sofia Goltsberg, the Administrative 1 Section 301.7701-3(a) of the Income Tax Regulations. If an election is made Coordinator of Ruchelman for a wholly-owned subsidiary, the subsidiary is viewed to be a branch of its P.L.L.C., and Neha Rastogi, an parent corporation. Intra-company distributions of cash are not characterized extern participating in the LL.M. as Foreign Personal Holding Company Income, discussed later in the text. in Taxation program at New York 2 Law School, for converting 17 There are exceptions to the general characterization of a dividend as an item separate submissions prepared by of Foreign Personal Holding Company Income that might apply. One re- persons having a multitude of birth lates to dividends received from a related person which (i) is a corporation languages into a cohesive created or organized under the laws of the same foreign country as the re- and accurate monograph. cipient C.F.C., and (ii) has a substantial part of its assets used in its trade or business located in that foreign country. See Code §954(c)(3)(A)(i). For a temporary period of time, a look-through rule is provided in Code §954(c) (6), under which dividends received by a C.F.C. from a related C.F.C. are treat- ed as active income rather than Foreign Personal Holding Company Income to the extent that the earnings of the entity making the payment are attributable to active income. This provision is regularly adopted for two-year periods after which it must be re-enacted. The latest version was terminated at the conclu- sion of 2014. Insights Special Edition | Table of Contents | Visit www.ruchelaw.com for further information. 3 BENEFITS OF HOLDING COMPANIES Nonetheless, the use of a holding company can provide valuable tax-saving oppor- tunities when profits of the target company are distributed. Historically, the use of a holding company could reduce foreign withholding taxes claimed as foreign tax credits by the U.S. parent. This could be achieved through an income tax treaty, or in the case of operations in the E.U., through the Parent-Sub- sidiary Directive. This can result in substantial savings if the operating and tax costs of maintaining the holding company are significantly less than the withholding taxes being saved. However, as will be described below, the E.U. has taken steps to modify the Parent-Subsidiary Directive so that it does not apply when the parent is in turn owned by a company based outside the E.U. and the structure is viewed to be abusive. Although the foreign tax credit is often described as a “dollar-for-dollar reduction of U.S. tax” when foreign taxes are paid or deemed to be paid by a U.S. parent company, the reality is quite different. Only taxes that are imposed on items of “for- eign-source taxable income” may be claimed as a credit.3 This rule, known as “the foreign tax credit limitation,” is intended to prevent foreign income taxes from being claimed as a credit against U.S. tax on U.S. taxable income. “Although the The U.S., as with most countries that eliminate double taxation through a credit foreign tax credit is system, maintains that it has primary tax jurisdiction over domestic taxable income. often described as It also prevents so-called “cross crediting,” under which high taxes on operating income may be used to offset U.S. tax on lightly-taxed investment income. a ‘dollar-for-dollar reduction of U.S. tax’ For many years, the limitation was applied separately with regard to eight different when foreign taxes categories of baskets of income designed to prevent the absorption of excess for- are paid or deemed eign tax credits by low-tax foreign-source income. In substance, this eviscerated to be paid by a U.S. the benefit of the foreign tax credit when looked at on an overall basis. The problem has since eased because the number of foreign tax credit baskets has been re- parent company, duced from eight to two: passive and general. the reality is quite different.” The benefit of the foreign tax credit is reduced for dividends received from foreign corporations that, in the hands of the recipient, benefit from reduced rates of tax in the U.S.