Corporate Tax 2017 Fifth Edition

Consulting Editor: William Watson Global Legal Insights Corporate Tax

2017, Fifth Edition Consulting Editor: William Watson Published by Global Legal Group GLOBAL LEGAL INSIGHTS – CORPORATE TAX 2017, FIFTH EDITION

Consulting Editor William Watson, Slaughter and May

Editor Sam Friend

Senior Editors Suzie Levy & Rachel Williams

Group Consulting Editor Alan Falach

Publisher Rory Smith

We are extremely grateful for all contributions to this edition. Special thanks are reserved for William Watson for all of his assistance.

Published by Global Legal Group Ltd. 59 Tanner Street, London SE1 3PL, United Kingdom Tel: +44 207 367 0720 / URL: www.glgroup.co.uk

ISBN 978-1-911367-66-6 ISSN 2051-963X

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

Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY July 2017 CONTENTS

Preface William Watson, Slaughter and May

Albania Xheni Kakariqi & Erlind Kodhelaj, Deloitte Albania sh.p.k. 1 Andorra Jose María Alfin Martin-Gamero,Cases & Lacambra 14 Belgium Henk Verstraete & Lizelotte De Maeyer, Liedekerke Wolters Waelbroeck Kirkpatrick 18 Bolivia Mauricio Dalman, Guevara & Gutiérrez S.C. 29 China Claudio d’Agostino & Tina Xia, DLA Piper Shanghai Representative Office 35 Cyprus Philippos Aristotelous & Marissa Christodoulidou, Elias Neocleous & Co LLC 45 France Jean-Marc Tirard, Maryse Naudin & Ouri Belmin, Tirard, Naudin 55 Germany Dr. Gunnar Knorr & Marc Krischer, LL.M., Oppenhoff & Partner mbB 66 Ghana Eric Mensah, Sam Okudzeto & Associates 75 India Prakash Shah & Dileep C. Choksi, VoxLaw 79 Ireland John Gulliver & Niamh Keogh, Mason Hayes & Curran 91 Italy Alessandro Dagnino, LEXIA Avvocati 97 Japan Koji Fujita, Anderson Mori & Tomotsune 102 Kosovo Afrore Rudi & Ruzhdi Zenelaj, Deloitte Kosova sh.p.k. 108 Luxembourg Gaëlle Felly & Patrick Andersson, Bonn & Schmitt 115 Macedonia Dragan Dameski & Ana Pavlovska, Debarliev, Dameski and Kelesoska, Attorneys at Law 124 Netherlands Paulus Merks & Sebastian Frankenberg, DLA Piper 133 Norway Toralv Follestad, Brækhus Advokatfirm DA 139 Russia Revaz Chitaya, Sameta 143 Singapore Tan Kay Kheng & Tan Shao Tong, WongPartnership LLP 152 Spain Ernesto Lacambra & Bruno Cámara, Cases & Lacambra 159 Switzerland Susanne Schreiber & Corinna Seiler, Bär & Karrer Ltd. 167 Ukraine Natalya Ulyanova, Katerina Grabovik & Valeriya Mytyushyna, ICF Legal Service 179 United Kingdom Sandy Bhogal & Ben Fryer, Mayer Brown International LLP 187 USA Gary Mandel, Simpson Thacher & Bartlett LLP 198 Venezuela Alberto I. Benshimol B. & Humberto Romero-Muci, D’Empaire Reyna Abogados 210 PREFACE

his is the fifth edition of Global Legal Insights – Corporate Tax. Continuous change and perpetual uncertainty seem Tto have become the new normal in this area. The European Commission is becoming ever more ferocious in its application of State Aid principles to cross-border taxation and the resulting attack on tax rulings given by some EU Member States is gaining traction in the European courts. At the same time multinationals are grappling with the advent of country-by-country reporting and the OECD’s project targeting “base erosion and profit shifting” (BEPS) is making unexpectedly rapid progress; one concrete example is the “multilateral instrument” signed by over 70 countries in June and likely to be used to amend some bilateral tax treaties from 1 January 2018. Meanwhile, the world waits with bated breath to see whether President Trump will achieve a wholesale realignment of the US tax system and in the UK we don’t know much about Brexit beyond the fact that, in the prime minister’s view, it “means Brexit”.

Global Legal Insights – Corporate Tax presents the views of a group of leading tax practitioners from around the world. Authors were invited to offer their own perspective on the tax topics of interest in their own jurisdictions, explaining significant technical developments but also identifying any trends in tax policy; these include of course the developments in cross-border taxation that I refer to above and their implementation at the national level. The aim is to provide tax directors, advisers and indeed revenue authorities with an insight into the realities of corporate taxation in the chosen jurisdictions.

I hope that you will find this book a stimulating read.

William Watson Slaughter and May Albania

Xheni Kakariqi & Erlind Kodhelaj Deloitte Albania sh.p.k.

Overview of corporate tax work over last year Types of corporate tax work Albania was awarded candidate status by the EU in June 2014 and is now in the process of implementing reforms with a view to membership, under the assistance of the EU as part of the Instrument for Pre-accession Assistance (IPA II) for the period 2014–2020. In this context, Albania has undertaken and already partially implemented significant tax changes in the last one to three years, by replacing existing laws and introducing new ones aligned to EU legislation and best practice. A new Law on VAT became effective as of 1 January 2015, which has been significantly harmonised with the corresponding EU Directive 2006/112/EC and has brought significant changes to the main VAT principles and rules in Albania. A new Customs Code has been conceived and structured in line with the Union Customs Code (UCC), which was adopted as Regulation (EU) no. 952/2013 of the European Parliament and of the Council. This new Customs Code, published in 2014, has been gradually replacing the existing one until its complete replacement by 1 June 2017. With the assistance of the International Finance Corporation, an elaborated transfer pricing regulation has been drafted in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (2010), and has been published in 2014 by introducing transfer pricing documentation and reporting requirements for 2014 and onwards. The transfer pricing regulation was subsequently extended in 2015 with a detailed instruction on Advance Pricing Agreements. A new draft Law on Income Tax (covering corporate income tax, personal income tax and withholding tax) has been drafted by making reference to EU countries’ legislation and best practice and was circulated for comment amongst groups of interest during 2015 (please see below). It was first expected to become final and enter into force by 1 January 2017, but in fact has not been finalised yet and there has been no new expected date announced. During the last one to two years, the role of the fiscal administration has been restructured through a new strategy, focusing on simplifying tax procedures and compliance, increasing efficiency in tax collection and improving the overall business climate. A new law that applies as from 6 May 2017 until 31 December 2017 provides that certain unpaid tax liabilities and customs duties, as well as certain penalties and interest, may be cancelled if certain conditions are fulfilled (see below). In the context of all the significant changes, the last year showed an increase of requests towards our firm for:

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• advisory to businesses for the implementation of the relatively new law on VAT and the amended tax procedures; • advisory on the structuring of international transactions in line with transfer pricing regulations; • tax due diligences; • assistance during tax audits and tax appeals; • assessment of the possibility for businesses to benefit from fiscal amnesty; • analysis of legislative gaps and preparation of proposals to the Albanian government for amendments and solutions; and • analysis and feedback to the Albanian government on draft laws and instructions circulated for consultation with groups of interest. Significant deals and themes M&A The last one to two years have seen the following major M&A transactions or announced transactions: • As announced in March 2016, affiliates of Geo-Jade Petroleum Corporation, one of the largest independent oil and gas exploration and production companies in China, acquired in September 2016 all the issued and outstanding common shares of Bankers Petroleum Ltd. Subsequently, Bankers Petroleum’s shares were delisted from both the Toronto Stock Exchange and the AIM Exchange. • In March 2016, Shell Upstream Albania B.V., a wholly owned subsidiary of Royal Dutch Shell plc, acquired substantially all of the assets of Petromanas Albania GmbH, Petromanas’ wholly owned subsidiary, and took over Operatorship of the Productions Sharing Agreement on Blocks 2–3. • In May 2016, Novamatic Gaming Industries GmbH acquired 100% of the shares of Albanisch Österreichische Holding Gesellschaft m.b.H and consequently acquired control of Llotaria Shqiptare Shpk. • In October 2016, Tirana International Airport (TIA) announced that China Everbright Limited, an international investment and asset management company based in Hong Kong, had acquired 100% of the shares in TIA. Besides the above, several other similar transactions of a smaller scale have taken place in the last two years, involving Albanian companies, subsidiaries of foreign companies, their branches, etc. Without entering into the details of specific transactions on corporate income tax situations of Albanian companies, subsidiaries or branches involved, we would like to present here two hot topics related to M&A: the carry forward of tax losses; and the taxation of capital gains. Carry forward of tax losses As a general rule, Albanian taxpayers are entitled to carry forward tax losses resulting in a certain year and utilise them against taxable profits of the three subsequent years based on the rule “earlier losses utilised first”. In case that during a year, there is a change in direct and/or indirect ownership of subscribed capital or voting rights by more than 50% in number or value, the tax losses of that particular year and of previous years expire. This restriction is based on the view that tax losses are exclusively related to the taxpayer bearing them, therefore reference is made to the owner of the taxpayer.

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The application of this restriction becomes particularly controversial for the following two categories of M&A transactions: • A change of ownership in the shareholder structure of an ultimate parent publicly listed in a stock exchange market outside of Albania, resulting in an indirect change of ownership of more than 50% for the Albanian affiliate/branch. The Albanian legislation on corporate income tax is silent on whether and how the free trade of shares of the ultimate parent dispersed among the general public (which are not necessarily reported) should affect the carry forward of tax losses of the Albanian affiliate. • A merger or takeover between Albanian affiliates of the same owner(s), whereby the newly established or absorbing entity has the same owner(s) as before the transaction. In principle, all rights and obligations are transferred to the new entity/absorbing entity. The Albanian legislation on corporate income tax is silent on whether and how the tax losses of the merged or absorbed affiliates can be transferred to the newly established or the absorbing entity (by respecting the three-year and utilisation limitations) in circumstances where, in fact, there is no change in effective ownership. Taxation of capital gains The Albanian legislation on corporate income tax is silent as regards the taxation in Albania of capital gains deriving from sale of shares in Albanian entities. When a double tax treaty is in place between Albania and the country of residence of the shareholder (please see below), the provisions of the treaty will prevail over the Albanian legislation. As such, if the treaty provides for the exemption of such gains from tax in Albania, this provision will prevail. However, double tax treaties are not automatically applied in Albania. The General Tax Directorate (GTD) has the sole authority to approve the application of treaty provisions for all specific circumstances of taxpayers after the latter follow certain application procedures to benefit from exemptions, reduced rates and credits. In this case, it is unclear whether the obligation to follow said procedures for obtaining approval of exemption from capital gains tax in Albania lies with the non- resident shareholder, or such exemption applies automatically. In practice, in a few cases, Albanian tax authorities have charged the Albanian entities whose shares were traded with withholding tax liabilities on behalf of the non-resident shareholders. The situation is even more unclear for capital gains of shareholders resident in countries with which there is no double tax treaty in place. Transfer pricing The transfer pricing regulation introduced in 2014 requires an Albanian taxpayer engaged in controlled transactions with non-resident associated parties to ensure consistency of the controlled transactions with the ‘market principle’. ‘Associated parties’ means entities that have a direct or indirect participation in the management, control or capital of one another or by the same third party. To determine the consistency of controlled transactions with the market principle, the regulation recommends the nine-step process of comparability analysis given by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (2010) and the application of the five approved transfer pricing methods (other methods may be applied where none of these five can reasonably be applied). Thanks to the initiative of the big four consultancy firms to increase awareness on transfer pricing regulation and risks, a significant number of medium and large taxpayer members of multinational groups took the necessary measures to prepare the transfer pricing documentation for the years 2014, 2015 and 2016 up-front. According to the regulation, taxpayers are required to make such documentation available to the tax administration within 30 days following a request. The preparation and submission of the documentation

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Deloitte Albania sh.p.k. Albania on time (within 30 days after the request) does not prevent the tax administration from making a transfer pricing adjustment (if necessary), but avoids the application of penalties on the additional corporate income tax liabilities assessed (only interest for late payment applied). Furthermore, taxpayers engaging in controlled transactions exceeding in aggregate ALL 50m within a year (approximately €357,000), are required to complete and submit by the 31 March of the following year an ‘Annual Controlled Transactions Notice’. The first submissions of this kind were made by 31 March 2015. Immediately after, the tax administration commenced sending requests for submission of transfer pricing documentation and conducted a number of first transfer pricing audits assisted by external consultants from the Italian tax administration. Since then, less or no transfer pricing audits have been initiated by the tax administration. A recent amendment to the Law on Tax Procedures has specified that the transfer pricing audit is separate and independent of a general tax audit and, as such, may be undertaken on a tax period already submitted to a general tax audit and therefore already assessed once for corporate income tax purposes. Further, it is yet to be tested in practice how any transfer pricing adjustments made by a transfer pricing audit will affect the concerned transactions for other tax purposes, e.g. VAT, customs duties, withholding taxes, etc. Advance pricing agreement Starting from March 2015, any taxpayer whose cross-border controlled transactions in a period of five years are expected to exceed in total the value of €30m, is entitled to apply for an advance pricing agreement (APA). In case the threshold is not expected to be met, the request may still be accepted if the case is sufficiently complex or it is highly important in commercial and economic terms for Albania. If there are double tax treaties in place with the countries of the other associated parties, applications should be bilateral or multilateral APAs. Unilateral filings for APAs will be taken into consideration by the GTD only on special occasions (e.g. when the foreign tax administration does not agree to enter into negotiations). The administrative fees payable by the taxpayer comprise ALL 50,000 (approximately €360) upon filing of the application and ALL 1.2m (approximately €8,500) for bilateral and multilateral or ALL 300,000 (approximately €2,000) for unilateral APAs. The maximum time period covered by an APA is five years. The tax authorities may audit a taxpayer that has entered into an APA as part of their regular tax audits; however, for transactions covered by the APA, the purpose of the audit shall be limited to compliance with the provisions of the APA (which has determined in advance the transfer pricing methodology). To the best of our knowledge, there has not yet been any APAs concluded in Albania and there is only one multinational APA in the negotiation stage. Permanent establishment Under the current Law on Income Tax (in force since 1998), permanent establishment (PE) is defined as a fixed location of business where an entity carries out its business activity. Specifically, the following are considered PEs: an administration office; a branch; a factory; a workshop; a mine, an oil or gas well or a quarry; any other place of extraction of natural resources; and a construction or installation site. The said law provides for no minimum time period for any of the above to be considered a PE. If there is a double tax treaty in place, the related provisions for the determination of a PE, including any time limitations, will prevail.

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We have noted some controversy between interpretations of Albanian tax advisors on the consequences of creating a PE in Albania as a result of managerial, professional, consultancy and other types of services provided herein. One interpretation is that the non-resident person has the obligation to register the PE with the Albanian tax authorities in the form of a branch (there is no option to formally register a PE as such). The registered branch would pay tax on income attributable to it in the form of corporate income tax, by deducting costs (including those recharged by the Head Office). However, the registered branch would also trigger all other applicable taxes, e.g. VAT, social and health contributions and employment income tax (for employees), local taxes, etc., as well as other compliance obligations, e.g. preparation and audit of statutory financial statements. Another interpretation is that the non-resident person has no obligation to register the PE in the form of a branch, as long as the Albanian beneficiary of the services retains 15% withholding tax from the gross payment made to the non-resident and remits it to the Albanian tax administration. The PE in this case would not be allowed to deduct any costs in determining the amount subject to Albanian income tax. On the other hand, the PE would not typically be subject to other taxes and compliance obligations. Under this latter interpretation, the decision of whether to register the PE in Albania in the form of a branch remains at the discretion of the non-resident person and should not necessarily be driven by tax reasons. Withholding tax on services We have noted an increasing controversy between taxpayers and tax advisors on one hand, and Albanian tax authorities on the other, as regards the application of withholding tax on managerial, professional, consultancy and other types of services provided with no physical presence of personnel/equipment in Albania when no double tax treaty is in place. The general understanding of taxpayers and tax advisors is that such services should not be taxable in Albania (and therefore the Albanian beneficiary should not be charged with withholding tax liabilities) because they are provided without physical presence of the foreign personnel and equipment in Albania and therefore do not create a PE in Albania according to the definition provided by law. The interpretation of the Albanian tax administration has not been consistent on this matter. One of the positions that is often taken is that such services should be subject to withholding tax in Albania, to be retained by the Albanian beneficiary, as long as the source of payment for such services is in Albania, regardless of where they are carried out. Thin capitalisation rule There are two thin capitalisation rules in Albania, one applicable since 1998 and a new one introduced recently and applicable as of 1 January 2018. Based on the general current rule, interest expenses pertaining to the part of loans exceeding four times the net equity, are not deductible for corporate income tax purposes. Unlike in many other countries where a similar rule applies to loans by shareholders having more than a certain percentage of shares (e.g. 25%), in Albania such rule applies to all loans, except for short-term loans (payable within less than one year). This rule does not apply to banks, finance leases or insurance companies. There is particular controversy in the application of this rule on branches of foreign companies, which by default have no subscribed capital and therefore have no way of increasing net equity except for retained profits.

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Based on the second additional rule, effective as from 1 January 2018, in the case of loans from related parties, the excess of net interest over 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) will be considered as a non-deductible expense. Such excess net interest will be carried forward and deducted in subsequent years, until a transfer of more than 50% of the company’s shares or voting rights occurs. This thin capitalisation rule will not apply to banks, insurance companies, non-bank credit financial institutions and financial leasing companies. There is no instruction yet on how the carry forward and future deduction of the excess net interest will be reflected in the current limited format of the corporate income tax declaration.

Key developments affecting corporate tax law and practice Domestic – cases and legislation Administrative tax appeal and court procedures Some important amendments have been introduced during the last year to the tax appeal procedures and structures. • Voluntary pre-declaration and pre-payment of tax liabilities As of 30 November 2016, taxpayers are offered a ‘self-declaration form’, sent as an attachment to the tax audit programme notification, for the voluntary pre-declaration and pre-payment of tax liabilities for any non-declared transactions. The pre-declaration of such tax liabilities and the prepayment of them and any related interest should take place during the 30-calendar-day period between the tax audit programme notification and the tax audit commencement. The tax liabilities concerned will be subject to the respective administrative penalties as provided by the Law, to be imposed through the tax audit assessment. However, in case the taxpayer has opted to pre-declare and pre- pay the tax liabilities as described above, such penalties will be capped to 50% (in case they are higher). • New appeal structures As of 1 January 2017, the Tax Appeal Directorate has been transferred under the organigram of the Ministry of Finance (it previously was under the General Tax Directorate) and has been designated to make decisions on tax administrative appeals concerning ‘values subject to appeal’ under ALL 20,000,000. As of the same date, a new parallel structure has been established under the Ministry of Finance and has been designated to analyse and take decisions on tax administrative appeals involving ‘values subject to appeal’ over ALL 20,000,000 – ‘the Commission for Assessment of Tax Appeals’. ‘Values subject to appeal’ include tax liabilities re-assessed, tax credits reduced, tax losses reduced as well as tax reimbursement requests rejected – that are subject to appeal. The tax appeal procedures will be equally applicable for both the Tax Appeal Directorate and the Commission for Assessment of Tax Appeals, including the obligation of the concerned taxpayer to pay or create a bank guarantee for the amount of tax liabilities appealed (excluding penalties). Although the restructuring/establishment of these structures was expected to occur as of 1 January 2017, they have in fact not been functioning for several months. On 13 April 2017, the Ministry of Finance issued an instruction providing that for tax appeals presented from 1 January 2017 until the entry into force of such Instruction (i.e. until 21 April 2017), the ‘date of receipt of the appeals’ from the Tax Appeal Directorate/Commission will be “the date on which the Tax Appeal Directorate has

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initiated the exercise of its functions under the Ministry of Finance according to the legislation in force and the appeal has been handed-over to the Tax Appeal Director”. The Tax Appeal Directorate/Commission initiated its activity and held its first tax appeal hearings in early June. • Burden of proof Based on an amendment of 30 November 2016, the burden of proof to verify that a tax assessment notice is not correct will be determined based on the provisions of the Administrative Procedures Code. Previously, the burden of proof was determined as lying solely with the concerned taxpayer. Pursuant to the Code of Administrative Procedures of the Republic of Albania in relation to the administrative procedures initiated upon request of the private parties, the burden of proof lies with the private party. As regards court procedures pursuant to the law “On administrative courts and examination of administrative disputes”, the public authority has the burden of proof in relation to the legality of administrative acts issued without the request of the private party. This creates some uncertainties in case of a tax appeal petition considering that such petition is filed and the procedure initiated upon request of the private party, but mainly following a tax assessment notice initiated and issued ex officio from tax authorities. • Right of appeal by the Regional Tax Directorates Based on an amendment of 30 November 2016, the decisions of the Tax Appeal Directorate and the Commission for Assessment of Tax Appeals will be binding for the Regional Tax Directorate that issued the tax assessment, subject to appeal. The latter will no longer have the right to initiate court procedures against such decisions. Previously, in case the administrative appeal of the taxpayer was successful, the Regional Tax Directorate that issued the assessment had the right, as did the taxpayer, to appeal in court the decision of the Tax Appeal Directorate. Taking into account that, in practice, tax directorates filed a court petition against almost all decisions in favour of taxpayers, the latter faced the awkward situation where they were forced to undergo court proceedings despite the positive decision of the Tax Appeal Directorate. However, court procedures initiated prior to the entry into force of this amendment will continue their examination near the respective administrative courts. New law providing amnesty for certain tax liabilities A law approved on 30 March 2017 and that applies as from 6 May 2017 provides that certain unpaid tax liabilities and customs duties, as well as certain penalties and interest, may be cancelled if certain conditions are fulfilled. The relief depends on the type of liability and the period to which it relates. The amnesty is available to legal entities and individuals for the period from 6 May 2017 through 31 December 2017, and applies to both national and local taxes (with certain exceptions). There are two main conditions to benefit from the new law: • the taxpayer must withdraw from any ongoing administrative appeal or court proceedings related to the tax liabilities, penalties and interest that it wishes to have cancelled; and • the VAT credit balance available to the taxpayer, if any, must be automatically used to offset its unpaid tax liabilities (except for social and health contribution liabilities), for the related penalties and interest, as well as any portion of the tax liabilities not offset, to be cancelled based on the law.

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Tax liabilities, penalties and interest previously assessed by the tax administration that may be cancelled based on the new law may be divided into the categories described below: • tax liabilities, penalties and interest that relate to tax periods ending no later than 31 December 2010; • interest and penalties related to periods from 2011 to 2014, provided the taxpayer settled the principal part of the tax liability before 6 May 2017, or it will be paid in full by 31 December 2017; and • certain other tax penalties which may be cancelled regardless of the tax period to which they relate (e.g. penalties for the failure to submit or the delayed submission of tax declarations, penalties for the late submission to the tax administration of the annual financial statements and decisions relating to the use of annual profits, etc.). ‘Tax certification’ of tax declarations Taxpayers will have the possibility to engage certain authorised audit companies (amongst which is Deloitte) to certify their ‘tax declarations’ as ‘in compliance with the fiscal legislation’. The benefit of this certification, however, has been limited to improving the taxpayer’s position in the risk assessment performed by the tax administration when selecting taxpayers for tax audit (where the ‘tax certification’ will be an additional indicator to consider, amongst other existing indicators). There is still no legal guarantee that certified tax declarations will be considered to be in compliance with the tax legislation by the tax auditors. In fact, in case a tax audit reassesses the tax liabilities of a taxpayer related to a period ‘certified by an audit company as in compliance with the tax legislation’: • the taxpayer will be subject to the full amount of the additional tax liabilities (and related interest and penalties); whereas • the authorised audit company will be subject to a penalty amounting to 50% of the reassessed tax liabilities, in addition to the penalties already applicable on the concerned taxpayer. There is no guidance issued yet in relation to the methods of conducting and reporting a tax certification by authorised audit companies and there is no such process yet undertaken by any taxpayer/authorised audit company. In our view, in the way it is currently provided by law, the tax certification is hardly applicable since the benefit of a taxpayer in having certified tax declarations is way too low compared to the risk incurred by authorised audit companies. Re-evaluation of immovable property By means of a law introduced on 20 August 2016, individuals and legal entities were granted the possibility to re-evaluate their immovable properties at market value. Individuals and legal entities had the right to request before 31 May 2017 the re-evaluation of land and/or buildings under their ownership, as well as of property under the registration process. The tax payable on the revaluation of immovable property of individuals was 2% of the taxable base, whereas for legal entities it was 3%. Draft law on licensed fiscal experts A draft law on licensed fiscal experts was proposed by a group of members of Parliament and was reviewed and discussed in the Economic and Finance Commission of the Parliament in March 2017. It was not previously consulted with groups of interest and most of them were not aware of it until a few days before the Commission meetings. Groups of interest reacted promptly and firmly by stating their disagreement to: • the monopoly proposed by the draft law, i.e. restriction of the fiscal advisory services only to individuals and companies obtaining the fiscal expert licence and disallowance of such services by other parties such as auditors, accountants, lawyers, etc.;

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• lack of consultation with groups of interest, including current fiscal experts and advisors; and • lack of any transitional period provided in the draft law. The draft law has been currently suspended. Inspired by international developments Double tax treaties Albania has entered into double tax treaties with 41 countries, of which 38 are effective (Austria, Belgium, Bosnia & Herzegovina, Bulgaria, China, Croatia, the Czech Republic, Egypt, France, Germany, Greece, Hungary, Ireland, Italy, Kosovo, Kuwait, Latvia, Macedonia, Malaysia, Malta, Moldova, the Netherlands, Norway, Poland, Qatar, Romania, Russia, Serbia & Montenegro, Singapore, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, the United Arab Emirates and the United Kingdom) and three are not yet effective (Estonia, India and Luxembourg). They are principally based on the OECD Model Convention and they have certain differing provisions compared to each other based on the year in which they were respectively signed. Provisions of a tax treaty prevail only when an application is filed by the Albanian taxpayer requesting a benefit under such treaty, i.e. exemption from withholding tax or obtaining an authorisation to apply a reduced rate. In practice, taxpayers are facing an increasing number of cases where the implementation of the provisions of the tax treaty remain on hold until the exchange of information procedures between the tax authorities of both contracting states are concluded. Anti-avoidance measures Albanian tax legislation provides to local tax authorities the right to re-characterise or disregard transactions in case of a lack of substantial economic reasons and effects. With the introduction of the detailed transfer pricing regulation in 2014, this provision of the income tax legislation was improved. In this context, there is now increased scrutiny over transactions involving ‘tax havens’. Transactions between an Albanian resident person or a non-resident person having a PE in Albania and a person resident in a jurisdiction out of the 65 listed in the transfer pricing regulation, are deemed ‘controlled transactions’ and are subject to transfer pricing requirements, regardless of the relationship between the parties. This list of 65 jurisdictions includes the British Virgin Islands, Guernsey, Hong Kong, Jersey, Liechtenstein, the Marshall Islands, Monaco, Panama, the Philippines, San Marino, the U.S. Virgin Islands, etc. Exchange of tax information Albania has adhered to the Convention on Mutual Administrative Assistance in Tax Matters since 2013. Pursuant to this Convention, the Albanian tax administration has the right to receive information not only from banks and non-bank financial institutions but also from each individual who possesses the information concerned. In March 2016, Albania approved the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and assigned the Ministry of Finance and the General Tax Directorate as the appointed competent authority for Albania. The intended first information exchange for Albania is in September 2018. FATCA Twenty-four Albanian financial institutions (mostly second level banks and subsidiaries of foreign financial institutions) are currently listed as with approved FATCA registration.1

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These financial institutions have therefore committed to reporting about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. BEPS Although Albania is not a member or a candidate country of the OECD, representatives of the Ministry of Finance have directly participated in the BEPS meetings. However, Albania has not yet introduced any legislation in response to the OECD’s project and there are no publicly expressed intentions to adopt any legislation against BEPS, either within or beyond the OECD’s recommendations.

Tax climate in Albania Based on the most recent World Bank report on Doing Business,2 Albania stands at 58 in the ranking of 190 economies on the ease of paying taxes. One of the main positive factors in this ranking is the increased ease of paying taxes. Albania launched an upgraded online platform for filing corporate income tax, VAT and social insurance contributions as of 1 January 2015. Consolidated online return for mandatory contributions and payroll taxes was integrated within the online system. Albania has also significantly reduced the time spent in customs by adopting a digital risk-based border inspection process and by implementing an electronic facility, based on ASYCUDA modules for risk management. The tax climate over the last few years has been reflective of the Albanian government’s measures against fiscal informality, initiatives to increase efficiency in tax collection and simplify procedures of tax reimbursement, implementation of a new e-tax filing system for the declaration and payment of taxes as well as for electronic communication between taxpayers and the tax administration.

Developments affecting attractiveness of Albania for holding companies Albania generally does not provide for specific tax incentives or attractions for holding companies. The following may, however, be of interest in case of a holding company established in Albania: • For inbound dividends distributed to an Albanian holding company by its subsidiaries: • In case of domestic subsidiaries, dividend income is exempt from corporate income tax. • In case of foreign subsidiaries, dividend income is subject to corporate income tax but credit of foreign tax paid is available (up to 15%) if there is a double tax treaty in place with the country of the foreign subsidiary. In this regard, a certain administrative inconvenience is caused by the current format of the corporate income tax return, which does not provide for such credit option. • For outbound dividends distributed by an Albanian holding company to its shareholders: • In case of resident shareholder entities subject to Albanian corporate income tax, no withholding tax liability is applicable. • In case of resident shareholder individuals, withholding tax of 15% is applicable. • For foreign shareholders, withholding tax of 15% is applicable. However, if such shareholders are resident in countries with a double tax treaty in place, the

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withholding tax rate may be reduced or even zero-rated depending on the respective treaty provisions. • Please see above in relation to possible income tax on the future sale of shares of an Albanian holding company by its shareholders.

Industry sector focus Banking The provisions for impairment losses on loans have been subject to large disputes between the majority of banks in Albania and the tax administration. Banks apply IAS/IFRS for statutory financial reporting purposes. On the other hand, banks apply a special manual of accounting for regulatory reporting to the Central Bank of Albania (BoA). Up to 2010, the Law on Income Tax recognised as deductible for corporate income tax provisions for impairment losses calculated in accordance with BoA rules. Since 2011 and up to 2013, a change in the Law determined that provisions for impairment losses as assessed in the IAS/ IFRS audited statutory financial statements would be deductible, but in any case without exceeding the amounts determined based on BoA rules for the same purpose. This rule was unclear and caused confusion amongst banks and tax authorities. Since 2014, the limitation of deductibility up to BoA’s amounts/rules has been removed and the rule is now clear and acceptable by both parties. As of January 2017, it has been clarified that expenses incurred by banks for annual and extraordinary contributions will be considered deductible in determining the taxable result. Oil and gas Hydrocarbons contractors who have entered into Production Sharing Agreements with the Albanian government are subject to a special corporate income tax regime. They are taxed at 50% of the taxable profit calculated after recovery of all hydrocarbons recoverable costs (capital and operational), as provided by the respective Agreements. Services from subcontractors and imports of materials at the exploration phase may benefit from a VAT exemption if approved by the National Agency of Natural Resources by relieving hydrocarbons operators from an excessive cash burden at the exploration phase. In February 2017, the Albanian parliament approved law no. 6/2017 amending law no. 7746, dated 28 July 1993 “On Hydrocarbons”. These amendments aim to improve the provisions of law no. 7746 by reflecting the concepts laid down by Directive 94/22/EC of the European Parliament and the European Council, dated 30 May 1994 “On the Conditions for Granting and Using Authorisations for the Prospection, Exploration and Production of Hydrocarbons”. Energy On 2 February 2017, the Albanian Parliament approved law no. 7/2017, dated 2 February 2017 “On Promotion and Use of Energy from Renewable Sources”. The aim of such law is to incentivise the production of energy from renewable sources by partially adopting Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources. Strategic investors and operators of economic development zones In May 2015, the Albanian Parliament passed law no. 55/2015 “On Strategic Investments in the Republic of Albania”. This legal instrument aims for the encouragement and attraction of domestic and foreign strategic investments in the economic sector through the establishment of specific favourable administrative procedures that facilitate and accelerate services for and support to investors.

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Some noteworthy tax incentives and reliefs were introduced in September 2015 for operators and developers of technology and economic development zones such as the special VAT treatment of goods entering economic zones, exemption from corporate income tax for a certain time period, deductibility of various expenses for the purposes of corporate income tax, etc.

The year ahead Apart from the measures to combat fiscal informality and those to increase the efficiency of the tax administration, the major change expected to occur in the next one to two years is related to the new Law on Income Tax. Based on the draft law circulated for comment amongst groups of interest in August 2015, the following major changes to corporate income tax may be expected, amongst others: • New rules for PE determination, including a time limitation. • New rules for exemption of dividend income from corporate income tax related to a minimum shareholding and for a minimum period of time. • New thin capitalisation rule limiting the net interest expenses to a percentage of taxable earnings before profit and tax. • Special rules for the valuation of the shares received in connection with an incorporation or a transfer of a branch/branches of activity. • Special tax avoidance rules allowing the tax administration to disregard transactions lacking economic substance put in place for the main purpose of obtaining a tax benefit. • Recognition of revenue on long-term contracts based on the percentage of completion. • Taxation of capital gains on the transfer of business assets and liabilities. • Changes in the depreciation methods allowed for tax purposes and introduction of the concept book value ‘for tax purposes’. • Extension of the period for utilisation of tax losses. • Subjecting certain payments to withholding tax despite them being paid to resident taxpayers.

* * *

Endnotes 1. https://apps.irs.gov/app/fatcaFfiList/flu.jsf. 2. http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual- Reports/English/DB17-Report.pdf.

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Xheni Kakariqi Tel: +355 4 45 17 917 / Email: [email protected] Xheni is a Senior Tax Manager in Deloitte Albania. She has extensive tax and accounting experience with the big four consultancy firms, dating back to 2007. She is a fellow member of the Association of Chartered Certified Accountants (ACCA, UK) and a member of the Institute of Chartered Auditors of Albania (IEKA). Her experience includes tax advisory services, tax due diligence, tax litigation, transfer pricing and financial reporting under IAS/IFRS and Albanian National Accounting Standards for a wide range of clients and industries, mostly focusing on energy and utilities, telecommunication, consumer business, construction, insurance and banking, and technology. Xheni is a lector of national and international taxation in a professional Master’s programme of collaboration between the University of Turin (Italy), University of Tirana (Albania) and Deloitte. Xheni is fluent in English and Italian and proficient in French and Spanish.

Erlind Kodhelaj Tel: +355 4 45 17 939 / Email: [email protected] Erlind Kodhelaj is a Legal Manager in Deloitte Legal, a subsidiary of Deloitte Albania. He joined Deloitte in 2015 from a leading law firm in Albania. Erlind has more than nine years’ experience as a lawyer specialising in commercial/ corporate law, legal tax advice, employment law, public procurement, competition, project financing, real estate, concessions, privatisation, and oil and energy. He has participated in several projects conducted in Albania, with involvement in project financing regarding PPP, concessions and privatisations in the field of oil, energy and public infrastructure. Erlind is a member of the Albanian Bar Association. Erlind is fluent in English and Italian.

Deloitte Albania sh.p.k. Rr. Elbasanit, Pallati poshte Fakultetit Gjeologji – Miniera, Tirana, Albania Tel: +355 4 45 17 920 / Fax: +355 4 45 17 990 / URL: www.deloitte.com/al/en

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Jose María Alfin Martin-Gamero Cases & Lacambra

Key developments As the Andorran direct corporate tax system has been recently implemented (before 1 January 2011, Andorra did not have any corporate tax laws), we are going to briefly summarise the most important rulings that regulate the corporate tax system which entered into force in 2011. The Andorran tax system depends on the definition of residence. Residence is based on the following criteria that must be considered globally: A corporation is resident in the Principality of Andorra if: (i) it is incorporated there; (ii) it has its corporate address there; or (iii) it is effectively managed from there. The effective general tax rate in Andorra is 10% over profit, but there is a special tax rate for collective investment vehicles, which is 0%. Likewise, there is a special effective tax rate of 2% (this is the result of a deduction from the tax base) for certain companies, as follows: (i) international trading companies; (ii) financial intragroup companies; and (iii) intellectual and industrial property management companies. The regime regulated for ETVEs (holding companies investing only in foreign companies) is very attractive, since the tax rate for profits distributed by subsidiaries in the form of dividends or the capital gains arising from the sale of shares of foreign subsidiaries is 0%. As a consequence of this efficient corporate tax system, we have seen certain movements of businesses or companies to Andorra, especially companies related to some specific sectors that do not need a significant physical presence or to have a factory for manufacturing activities, such as: computer software companies; internet-related companies; and intellectual property or other similar businesses. Likewise, we have seen a movement of business people in order to manage groups of operational companies located in several countries within the European Union through Andorran parent holding companies. The introduction of the principle of tax neutrality (“roll over regime”) in the Andorran tax system is currently under discussion in the Andorran Parliament. This law would create opportunities for local companies to make decisions about corporate reorganisations and mergers and acquisitions. Notwithstanding, we do not expect the law to be approved before this summer. At present, Andorra has not yet introduced any “controlled foreign company regime” for companies. That means that any profits not distributed to the Andorran parent company by its subsidiaries is not taken into account in the calculation of its business profit and the taxable base.

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Another important point worthy of attention is the internal treatment of international double tax relief. The regime allows the unilateral application of a total exemption for tax withheld at the source up to the limit of the internal tax rate (10%). Another important key feature of the Andorran corporate tax system is the definitive decision of the Pyrenean country towards tax transparency. This has been a development of the decision taken by Andorra to join the common reporting standard of the OECD for the automatic exchange of tax information on April 2014, which was made a reality through an agreement executed with the European Union on February 2016 for the automatic exchange of tax information and the corresponding internal law, which entered into force on 1 January 2017. The main domestic laws regulating the tax regime for Andorran resident companies are as follows: • Corporate Income Tax Act, 29 December 2011 (Llei de l’impost de societats, 10/95, de 29 de desembre). • Decree developing the Corporate Income Tax, 23 September 2015 (Decret de 23 de setembre de 2015 del reglament de l’impost de societats). • International treaty with the European Union implementing the automatic exchange of tax information by means of an amendment to the Tax Savings Agreement for payments in the form of interests executed between Andorra and the European Union dated 26 February 2016. • Act on automatic exchange of Tax Information, 29 November 2016 (Llei d’intercanvi automàtic d’informació fiscal de 29 de novembre de 2016). • International Double Tax Treaty with Spain, 5 January 2015 (already in force). • International Double Tax Treaty with France, 1 July 2015 (already in force). • International Double Tax Treaty with Portugal, 27 September 2015 (will enter into force on 1 January 2018). • International Double Tax Treaty with Luxembourg, 2 July 2014 (already in force).

BEPS Andorra assumed the BEPS commitment on 15 October 2016 and is in the process of implementing the relevant actions and participating in follow-up meetings. The commitment to these minimum standards determines that Andorra has given its consent to the following points: • Meeting the minimum standards on tax treaty shopping. • Implementing a country-by-country reporting system on transfer pricing. • Imposing limits on the benefits of preferential tax regimes. • Implementing the mutual agreement procedure in its tax treaties. • The inclusion of Andorra in the BEPS Project will be subject to a peer-to-peer review process in order to commit to the implementation of the BEPS minimum package in Andorra. This minimum package encompasses the following Actions: • Action 1: address the tax challenges of the digital economy. • Action 2: neutralise the effects of hybrid mismatch arrangements. • Action 3: strengthen controlled foreign companies’ rules. • Action 4: limit base erosion via interest deductions and other financial payments. • Action 5: counter harmful tax practices more effectively, taking into account transparency and substance.

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• Action 6: prevent treaty abuse. • Action 7: prevent the artificial avoidance of permanent establishment status. • Action 8–10: assure that transfer pricing outcomes related to intangibles are in line with value creation. • Action 11: establish methodologies to collect and analyse data on BEPS and the actions to address it. • Action 12: require taxpayers to disclose their aggressive tax planning arrangements. • Action 13: re-examine transfer pricing documentation. • Action 14: make dispute resolution mechanisms more effective. • Action 15: develop a multilateral instrument. In essence, Andorra will have to: (i) develop standards in relation to remaining BEPS issues; (ii) review and be reviewed during the implementation of these standards; and (iii) support developing countries with implementation.

Holding companies The Andorran tax regime for holding companies is quite attractive for several reasons, which can be summarised as follows: The internal tax rate for holding companies whose corporate purpose is participation in the capital of foreign subsidiaries is 0%, either from income coming from dividends or capital gains arising from the sale of shares of their subsidiaries. There is neither a minimum threshold for participation nor a minimum period of holding, which is a major difference as compared to other neighbouring countries. Andorra is currently signing double tax treaties with a lot of relevant jurisdictions. This means that Andorra will not be discriminated against in the future with high internal withholdings applicable to countries which do not have double tax treaties in force.

Industry sector focus The industry sector in Andorra has been focused on the following areas: • Banking, investment entities, portfolio management companies and financial advisors. • Tobacco manufacturing and distribution. • Property and real estate. • Asset financing. • Group companies. • Intellectual and industrial management companies. • Software, computer and internet companies.

The year ahead There are currently three laws under discussion which will have a very important impact on the Andorran tax and legal system: 1. A law introducing the rollover regime (tax neutrality) in the Andorra Tax System. Once approved, we expect certain reorganisational movements (especially in certain sectors such as the financial sector, real estate or construction and others). 2. An amendment of the Criminal Code introducing a tax crime in the Andorran legal system. The amendment would imply that boards of directors or managers must be directly involved in decisions with tax implications and should put in place tax corporate defence procedures. 3. A law to introduce the spontaneous exchange of tax information.

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Jose María Alfin Martin-Gamero Tel: +376 728 001 / Email: [email protected] Jose María Alfin is a Partner of Cases & Lacambra, leading the Tax practice in the Principality of Andorra. He is a member of: the Barcelona and Andorra Bar Associations; the Spanish Association of Tax Advisors (AEDAF); the Andorra Association of Tax Advisors (AATF); and the International Fiscal Association (IFA). Jose María Alfin is specialised in estate planning, international and local tax, banking and financial law and has extensive experience advising: family offices; HNWI; and companies and enterprises, both locally and internationally. He is a regular speaker on banking, compliance, financial and tax matters in law and business schools. Additionally, he is the external correspondent for Andorra in relation to tax, social security and investment matters for the top international tax online magazine IBFD (International Bureau of Fiscal Documentation).

Cases & Lacambra C/ Manuel Cerqueda i Escaler 3-5, Planta Baja, Local A, AD 700 Escaldes-Engordany, Andorra Tel: +376 728 001 / URL: www.caseslacambra.com/en

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Henk Verstraete & Lizelotte De Maeyer Liedekerke Wolters Waelbroeck Kirkpatrick

Overview of corporate tax work over last year Types of corporate tax work The Belgian market is not structured in a way that it is possible to detect (and have an overview of) the main types of corporate tax work that is done. However, at present, two particular trends are noticeable in the Belgian corporate tax market. First, there has been an increase in transfer pricing audit and litigation cases. Second, there has been an increase in work related to corporate migrations. Significant deals and themes The Belgian market is not organised in a way that information regarding the corporate tax market is readily available or in the public domain.

Key developments affecting corporate tax law and practice Domestic – cases and legislation (a) Cases Case law in Belgium is very extensive. Nevertheless, judgments always need to be taken on a case-by-case basis, as judgments do not have a precedential value. There are a few exceptions to the aforementioned rule. First, annulment judgments of the Belgian constitutional court have an erga omnes effect. Second, judgments of the constitutional court on a preliminary ruling de facto also have an erga omnes effect. Third, judgments of Belgium’s highest court (the Court of Cassation) have in practice the value of precedents. We illustrate the Belgian tax jurisprudence with three sets of decisions from the last year. A significant portion of Belgian (tax) jurisprudence over the last year relates to Belgian tax procedure (for example concerning the use of illegitimate evidence by the tax authorities). Other judgments regard the so-called “remuneration theory”. Traditionally, the Belgian Court of Cassation judged that a company can deduct costs related to the allocation of benefits in kinds to directors, if the benefit in kind is taxed in hands of the director.1 The Court of Cassation confirmed this position by a judgment of 13 November 2014, by stating that costs made by a company to grant a benefit in kind to its director, are deductible. By way of two recent judgments of 14 October 2016, the Court of Cassation clarified the limits of this theory. The court clarified that not all costs made by a company to grant a benefit in kind to its director are deductible per se as a professional cost. The deduction as a professional cost can only be allowed to the extent that the company can prove that the benefit in kind is granted for real services effectuated by the director.2 By judgment of the Court of Cassation of 10 March 2016, the Court of Cassation ruled that if a company receives abnormal benefits (which often is a benefit that does not meet the

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Liedekerke Wolters Waelbroeck Kirkpatrick Belgium at arm’s length standard), the company will be effectively taxed on the benefit even if the company has tax attributes (for example losses) which it can in principle be used to offset taxable profits.3 b) Legislation General introduction Over the past few years, international movements have led to a shift in the corporate tax landscape. Indeed, in the aftermath of the BEPS project, substantial changes have occurred at the EU level which also have an impact in Belgium. Reference can be made to the recent modifications to the Parent-Subsidiary Directive, the Anti-Tax Avoidance Directives and the decisions of the European Commission regarding state aid and the excess profit rulings. The main changes that were influenced by BEPS or EU developments will be discussed below. In addition to the changing legal framework in the context of international developments, 2016–2017 was also a timeframe during which a number of domestic changes occurred in the corporate tax law. Purely domestic changes • Increase of the general withholding tax rate As of 1 January 2017, the principal withholding tax rate for dividends, interests and royalties increased from 27% to 30%.4 Reduced rates are available in a number of cases; for example 20% for liquidation reserves (whereas this was 17% before) and 15% for savings accounts (to the extent that the interests amount up to more than €1,880). • Reinforcement of fight against tax havens The Belgian legislator took further measures to reinforce its fight against tax havens by way of an extension of the obligation to report payments to tax havens and by introducing an obligation for financial institutions to declare transactions with tax havens with the Belgian Anti-Money Laundering Agency (the “CFI”).5 • Tax step up Since 1 January 2017, there has been a special rule in place which applies when a taxpayer- individual contributes shares into a company and thereby realises a tax-exempt capital gain. In such case, the paid-up capital of the acquiring company will in principle only increase with the value of the acquisition value of the shares in the hands of the individual. The amount of the fair market value of the shares which increases their acquisition value will be considered to be a taxed reserve. Where those reserves will later on be distributed to the shareholder, the distributing company will need to apply a withholding tax of 30% on the dividend amount.6 • Emigration of companies By a law of 1 December 2016, Belgium modified its exit tax regime to be in line with the jurisprudence of the Court of Justice of the European Union (National Grid Indus and DMC) and the relevant dispositions of the EU Anti-Tax Avoidance Directive. More specifically, Belgium introduced a deferred payment regime in case of an outbound transfer of assets (migration or restructuring) from Belgium towards a Member State of the European Economic Area (except for Liechtenstein) which entails a taxation of latent capital gains. The new regime is applicable as of 8 December 2016. Under the new regime, a taxpayer can chose between one of two options. Either the latent capital gains are taxable immediately,

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Liedekerke Wolters Waelbroeck Kirkpatrick Belgium or the tax can be paid in instalments over a period of five years. In case of a deferred payment, no interest can be imposed. The tax authorities can, however, subject the benefit of the deferral to the payment of a guarantee if they can prove that there is a real risk of non-recovery.7 The law provides that in case of a deferral, the outstanding balance becomes immediately recoverable in certain events. This will, for example, be the case when all (or even a part) of the assets are disposed of or transferred outside of the EU, Iceland or Norway. Another example is when the taxpayer does not comply with the yearly payments; contrary to what the EU Anti-Tax Avoidance Directive provides, the taxpayer hereby does not have the possibility to rectify the situation within a reasonable delay. The law of 1 December 2016 does not create new events under which an exit tax will be due. There will, therefore, still be no exit tax due on the transfer of assets from a Belgian company to a permanent establishment in the European Economic Area. • Belgian Specialised Real Estate Investment Funds (FIIS) A new Belgian real estate investment vehicle, the FIIS/GVBF (“Fonds d’investissement immobilier spécialisé”/“gespecialiseerd vastgoedbeleggingsfonds”), dedicated to institutional investors and corporate actors, was introduced by the program-act (II) of 3 August 2016 and a royal decree of 9 November 2016. The FIIS/GVBF regime is an attractive and flexible addition to the existing REITs, both from a regulatory and a tax perspective. The regulatory regime of the FIIS/GVBF is very flexible compared to that of other types of real estate investment structures. It enables (single) investors to invest in Belgian and foreign real estate through a structure with a beneficial tax regime. The attractive tax regime that applies to the FIIS/GVBF is identical to the one that is already applicable to existing REITs. It aims at making the FIIS/GVBF’s intervention in a real estate investment structure as tax neutral as possible. In short, the FIIS/GVBF is a semi-transparent vehicle. Although it has legal personality, it is characterised by almost no taxation at the level of the Fund. More specifically, the FIIS/GVBF is subject to Belgian corporate income tax at the ordinary rate of 33.99%, but its taxable base is limited to disallowed expenses and abnormal or gratuitous advantages received. As a matter of principle, rental income, capital gains on real estate assets, dividends and interest income of the FIIS/GVBF are untaxed. Indeed, as regards interest received by the FIIS/GVBF, a full exemption from withholding tax applies. The same applies to dividends received from foreign source (but foreign withholding taxes cannot be offset against the Belgian corporate income tax, nor deducted or recovered at the level of the FIIS/GVBF). The reduced rates provided for in double tax treaties remain, however, applicable. As regards Belgian source dividends, an exemption from withholding tax applies, provided that the FIIS/GVBF holds a participation in the distributing company of at least 10% for an uninterrupted period of at least one year. The FIIS/GVBF is subject to a so-called annual tax on collective investment institutions, which is equal to 0.01% of the total net assets invested in Belgium. Dispositions and acquisitions of shares issued by a FIIS/GVBF benefit from a full exemption from the Belgian stock exchange transaction tax. At the level of the investors, there is no withholding tax for dividends arising out of foreign source income. For dividends arising from Belgian source income, withholding tax is due, but general exemptions apply (such as for foreign pension funds). Special rules apply upon entry to or exit from the FIIS regime.

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European – CJEU cases and EU law developments a) Cases • Fairness tax Belgium has a so-called “fairness tax”. Under the fairness tax, large companies are liable to a 5.15% charge on the amount of dividends distributed out of current profits that have been offset by carry-over losses. By judgment of 17 May 2017, the Court of Justice of the European Union has ruled that the fairness tax is not in accordance with EU law (and more in particular with article 4 of the Parent-Subsidiary Directive) to the extent that it constitutes a tax on distributed dividends. The Court of Justice also ruled that the fairness tax might violate the European principle of freedom of establishment, but left it up to the Belgian Constitutional Court to decide on this point.8 • Taxation requirement On 8 March 2017, the Court of Justice of the European Union rendered a Judgment with regard to the interpretation of the subject-to-tax requirement of the Parent-Subsidiary Directive.9 The case concerned the application of the Parent-Subsidiary Directive to a dividend payment by a Belgian subsidiary to a parent company-investment fund located in the Netherlands. The investment fund was subject to corporation tax at a zero rate, provided that all of its profits are paid to its shareholders. Taking into account that the investment fund was not effectively taxed in the Netherlands, the Belgian tax authorities refused to grant a withholding tax exemption. The Court ordered that the Parent-Subsidiary Directive “must be construed to the effect that Article 5(1) does not preclude legislation of a Member State whereby an advance tax on investment income is levied on dividends paid by a subsidiary established in that Member State to a fiscal investment institution established in another Member State which is subject to corporation tax at a zero rate, provided that all of its profits are paid to its shareholders, since such an institution does not constitute a ‘company of a Member State’ for the purposes of that directive”. In other words, the Court interprets the subject-to-tax requirement from the Parent-Subsidiary Directive more strictly than a mere formal subjective tax liability. • Excess profit rulings and illegal state aid The European Commission considered the Belgian so-called excess profit rulings to constitute illegal state aid in January 2016, and ordered the recovery of this unlawful state aid granted.10 Under the excess profit rulings, multinational groups could pay substantially less tax in Belgium, pursuant to a reduction of the corporate tax base to discount for excess profits that allegedly result from being part of a multinational group.11 Belgium filed an appeal against the decision on 22 March 2016. In suspense of a decision of the General Court, the Belgian legislator introduced a law which determines the modalities of the recovery of this state aid from the beneficiaries.12 b) Legislation • General introduction In the aftermath of BEPS, the European Union is trying to create a “fair, efficient and growth-friendly taxation in the EU with new measures to tackle corporate tax avoidance”.13 One of the main examples thereof is probably the EU Anti-Tax Avoidance Package. The EU Anti-Tax Avoidance Directives (“ATAD”)14 contain various measures, regarding thin cap, CFC’s, general anti-abuse rules and exit taxation, which will all have to be implemented (if not implemented already) into Belgian law in the upcoming years. In

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Liedekerke Wolters Waelbroeck Kirkpatrick Belgium addition, other measures that have earlier been adopted at the EU level, are effective as of 1 January 2017 (such as with regard to the mandatory automatic exchange of cross-border rulings and cross-border pricing arrangements). • ATAD: Interest deduction limitation Belgian law currently contains limited thin capitalisation rules. The Belgian regime will most likely need to be amended to be in line with the interest limitation rule provided in the ATAD. The Directive limits the deduction of the net interest expenses to 30% of the taxpayer’s EBITDA (earnings before interest, tax, depreciation and amortisation). Up to €3m, the net borrowing costs remain fully deductible. The ATAD provides for certain (possible) carve-outs and exclusions, as well as for a possibility for carry-forwards and carry-backs of excess interest. The Directive also provides for grandfathering rules, for loans concluded before 17 June 2016. The limitation rule is consistent with the proposals in the BEPS Action 4 interest deduction limitation. The EU Member States, such as Belgium, will need to implement this rule by 1 January 2019 (or 1 January 2024 at the very latest for countries which have equivalent effective measures in place to date). • ATAD: Anti-abuse Belgium tax law currently contains a general anti-abuse rule that allows the tax authorities to requalify a legal act (or a series of legal acts) provided that a number of specific requirement are met, including that they can demonstrate the existence of tax abuse. The ATAD also provides for a general anti-abuse rule. This rule will have to be implemented by the EU Member States by 1 January 2019. The wording of this anti-abuse rule is similar to the existing Belgian anti-abuse rule. It is therefore unclear whether (and to what extent) the Belgian rule will need to be amended. • ATAD: Controlled foreign corporations Belgian tax law contained until recently no real CFC rules. In 2015, Belgium implemented for the first time a CFC-like rule known as the “Cayman Tax”. In short, the Cayman Tax implies a look-through taxation for income received by Belgian individuals and non-profit entities from some legal constructions (e.g. trusts and low-taxed entities). Apart from this rule, Belgian law contains a rule that allows the disregard of a transfer of ownership of assets by a Belgian company to a non-EU taxpayer whose income derived from these assets is taxed substantially more favourably than under the ordinary Belgian tax regime if made for the sole purpose of tax avoidance. In 2016, the Council of the European Union adopted a CFC rule as part of the ATAD (articles 7 and 8). Following this CFC rule, the Member State of a taxpayer will treat an entity (or a permanent establishment of which the profits are not subject to tax or are exempt from tax in that Member State) as a controlled foreign company where certain conditions are met. Taking into account that a CFC rule which would apply independent of the substance of a subsidiary would be incompatible with the current case law of the Court of Justice of the European Union, the Directive provides for a substance exclusion. This rule will have to be implemented in Belgium law by 31 December 2018. • ATAD: Exit taxation The ATAD also provides for an exit taxation regime. Since Belgium already transposed this regime into national law, this modification is discussed above under “Key developments affecting corporate tax law and practice”.

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• ATAD: Hybrid mismatches Finally, the ATAD provides for rules to close down hybrid mismatching arrangements (and this both in a purely European context as well as with third countries). In short, ATAD will serve to avoid the discrepant legal qualifications of legal or financing arrangements resulting in a double deduction or in a deduction without a corresponding taxation in the other jurisdiction. This will be realised in two ways: (i) refusal of a double deduction (the deduction will hereby be linked to the origin of the payment); and (ii) a refusal of the deduction in the absence of an effective taxation. Member States will have until 31 December 2019 to transpose the directive into national law and regulation (31 December 2021 for the rules regarding “reverse hybrids”). • Directive (EU) 2015/2376: International exchange of cross-border rulings and advance pricing arrangements Since 2003, Belgium has had an efficient and effective ruling system that is very similar to other more traditional ruling jurisdictions: as a rule, taxpayers may obtain from the Belgian tax authorities advance rulings on the application of tax laws to any contemplated transaction (including transfer prices), provided such transaction has not yet generated a fiscal effect. The Belgian ruling practice serves to create confidence for investors considering investing in Belgium. Indeed, a ruling ensures a legally binding accurate forecast of all the tax implications for an investment project.15 As a result of BEPS as implemented in the European Union, advance cross-border tax rulings and advance pricing arrangements need to be automatically communicated to the Commission and the tax authorities of all the other Member States as from 1 January 2017.16 • Amendments to the Parent-Subsidiary Directive (through Directive 2014/86/EU and Directive 2015/121/EU) This will be discussed below under “Developments affecting attractiveness of Belgium for holding companies”. BEPS General introduction Over the past five years, the international tax environment has fundamentally changed. As explained above, the European Union goes in the direction of a BEPS-compliant Europe. However, other BEPS compliant measures were introduced in Belgian law as well (or are likely to be introduced in Belgian law in the near future). Multilateral instrument and anti-abuse The double tax treaties’ limitation of benefit or anti-avoidance rules proposed in the BEPS Action Plans are likely to have an impact in Belgium because, so far, a fair number of Belgian DTCs have provided an exemption in the country of residence as soon as the income “may be taxed” in the source state. Belgium supports the implementation of anti-abuse rules via the outcome of the Multilateral Instrument. This Multilateral Instrument was signed by Belgium (together with 67 other jurisdictions) on 7 June 2017. The Multilateral Instrument will impact the existing bilateral tax treaties listed by both participating jurisdictions upon ratification by the signatories and after expiration of the waiting periods. In the meantime, Belgium takes the BEPS proposed rules into account in its negotiations for new treaties.17 Transfer pricing documentation requirements and country-by-country reporting By the law of 1 July 2016, Belgium introduced a transfer pricing documentation requirement

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Liedekerke Wolters Waelbroeck Kirkpatrick Belgium into Belgian tax law. The purpose of this requirement is to increase the transparency of the global operations of multinational enterprises. More specifically, Belgium introduced a three-tier documentation approach, as provided under Action 13 of the BEPS Plan, being a country-by-country report, a master file (covering information with regard to the group), and a local file (covering information on the local entity and its intercompany transactions).

Tax climate in Belgium Belgium has always had a competitive tax-policy objective (e.g. by way of its notional interest deduction, the advanced tax-ruling system and other attractive tax regimes such as the holding regime). In the aftermath of BEPS, a series of BEPS-compliant measures were announced over the last year (such as the recent replacement of the patent income deduction by the innovation income deduction – see below under “Industry sector focus”). Taking into account that the European Union is also taking steps towards a BEPS-compliant environment, the challenge for smaller EU countries like Belgium will be to keep their tax system competitive. The Belgian legislator may deal with this by fundamentally reforming the Belgian corporate tax regime, which is hoped to be completed by the end of 2017 (see below, “The year ahead”).

Developments affecting attractiveness of Belgium for holding companies Dividends received by Belgian companies/permanent establishments from subsidiaries are as a rule 95% exempt from corporate income tax (subject to certain conditions). As a result of the amendments to the Parent-Subsidiary Directive (through Directive 2014/86/EU and Directive 2015/121/EU) a general anti-abuse provision with regard to the withholding tax exemption for dividends has been introduced in Belgian law since 1 December 2016. This general anti-abuse provision will deny the withholding tax exemption where dividends originate from (a whole of) legal acts that are artificial and merely in place to obtain the withholding tax exemption. In addition, a dividend that a Belgian company receives from its foreign subsidiary will not be tax exempt if the subsidiary already deducted the dividend from its own income or when dividends originate from (a whole of) legal acts that are artificial and that have the main purpose or one of the main purposes to obtain the dividends received deduction, or the advantage of the Parent-Subsidiary Directive.18

Industry sector focus Pharmaceutical sector One of the main changes of the past year affects the Belgian innovation deduction, which is important for a large number of sectors in Belgium, including the pharmaceutical sector. Before 1 July 2016, resident companies (or Belgian establishments of a foreign company) were allowed an 80% deduction of gross qualifying patent income from the corporate tax base. Qualifying patent income included both licence income and royalties included in the sale price of patented products manufactured by the company or its subcontractor. Qualifying patents comprise self-developed patents on the one hand and supplementary protection certificates (specific to the pharmaceutical sector) on the other hand, subject to

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Liedekerke Wolters Waelbroeck Kirkpatrick Belgium the condition that the patents were at least partially developed by the taxpayer at a research centre in Belgium or abroad. If the patents or certificates were acquired from a third party, they needed to be at least partially improved or further developed by the taxpayer at a research centre located in Belgium or abroad. To be compliant with the modified nexus approach as provided for in the final report under Action 5 of the OECD/G20 BEPS Plan, the previous patent income deduction was replaced by an innovation income deduction regime since 1 July 2016 (with a grandfathering for existing situations until 30 June 2021).19 At the one hand, the scope of the innovation income deduction is substantially enlarged, by way of an extension of qualifying IP rights (e.g. the inclusion of copyrighted software and breeder’s rights). The new Belgian innovation deduction is at the other hand more restrictive than the previous patent income deduction, as it is tied to the requirements of the modified nexus approach as prescribed by the BEPS project. The current innovation income deduction provides for a 85% deduction of the net R&D income which arises from the qualifying intellectual property assets, subject to a restriction which is tied to the BEPS project’s modified nexus approach (and thus to the substantial innovation activity of the company). Sharing economy As of 1 July 2016, a new tax regime has entered into force in Belgium for persons who participate in the sharing economy without exercising a full profession. This regime foresees an effective 10% taxation of the income generated by these services (i.e. a 20% tax rate with a lump sum deduction for costs of 50%) and an exemption to request a VAT identification number. The regime only applies when the income generated by the sharing economy does not exceed €5,000 gross (for income year 2017).20 To benefit from this regime, the services, inter alia, have to be rendered exclusively within the framework of contracts accomplished by a recognised electronic platform or an electronic platform that is organised by the government. Fees related to the services can only be paid or settled through this platform. Banking Belgium has a tax on stock exchange transactions, which applies to purchases and sales on stocks and bonds, and to redemptions of capitalisation shares of collective investment vehicles. Since 1 January 2017, the scope of the tax expanded. As of 1 January 2017, the scope of the tax is expanded to cover certain transactions executed through non-Belgian financial intermediaries as well as Belgian intermediaries.21 More specifically, the tax also applies when the purchase or sale order is given by (i) natural persons having their habitual residence in Belgium, or (ii) legal entities from their registered office or permanent establishment in Belgium. The tax rate varies depending on the transaction (in general 0.09% on bonds, 0.27% on stocks, 1.32% on redemptions of capitalisation shares of CIVs, and 1.32% on sales and purchases involving capitalisation shares). The tax is capped to respectively €1,300 per transaction (bonds), €1,600 per transaction (stocks) and €4,000 per transaction (capitalisation shares). Real estate See above – “Domestic changes”.

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The year ahead Corporate reform The Belgian legislator is working on a major corporate law reform (to be expected in the course of 2018). The purpose of this reform is to provide more efficient tools to enterprises to and to make Belgium more attractive for investors and entrepreneurs. Corporate income tax reform To balance the Belgian competitive tax regime against the pressures of BEPS, Belgium is likely to shift its corporate tax system to provide a favourable entrepreneurial environment. For example, a reduction of the corporate income tax rate has been under consideration for years, but could so far never be achieved due to budgetary constraints. Proposed changes include an increase of the dividends received deduction from 95% to 100% and a limitation on the carry-forward of tax losses (which is up to date unlimited, both in terms of amount, as well as from a timing perspective), and the creation of new tax exemptions for small start-ups. The timing and the contents of such reform is still uncertain, as no official texts are available yet. Taking into account the newly BEPS-created environment, the upcoming corporate tax reform will be a challenge for the Belgian legislator. In addition, independently from the BEPS project, the pursuit of the Belgian competitive tax policy objective is also restricted by several EU and domestic law constraints. Every domestic favourable tax measure will indeed need to be evaluated on the basis of the European state aid rules and the European freedoms (freedom of establishment and free movement) and European Directives as well as the Belgian Constitution, in particular the principle of equality and non-discrimination.

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Endnotes 1. Court of Cassation 3 June 1983. 2. Court of Cassation 14 October 2016, nr. F.14.0203.N and F.15.0103.N. 3. Court of Cassation 10 March 2016, nr. F.14.0082.N. 4. Articles 93–95 of the Program Law of 25 December 2016, Belgian O.J. 29 December 2016. 5. Program Law of 25 December 2016, Belgian O.J. 29 December 2016. 6. Article 99 of the Program Law of 25 December 2016, Belgian O.J. 29 December 2016. 7. New article 413/1, §5, 1st indent of the Belgian Income Tax Code. 8. Judgment of the Court of Justice of the European Union of 17 May 2017, C-68/15. 9. Judgment of the Court of Justice of the European Union (5th Chamber) of 8 March 2017, Wereldhave Belgium and Others Case C-448/15. 10. Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (notified under document C(2015) 9837), EU O.J. 27 September 2016, L260, Vol. 59. 11. http://europa.eu/rapid/press-release_IP-16-42_en.htm. More information on this regime can be found in the press release of the European Commission (http://europa.eu/rapid/press-release_IP-16-42_en.htm). 12. Program Law of 25 December 2016, O.J. 29 December 2016 (ed. 2).

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13. http://europa.eu/rapid/press-release_IP-16-159_en.htm. 14. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, O.J. L 193, 19.7.2016, pp. 1–14 and Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries, O.J. L 144, 7.6.2017, pp. 1–11. 15. As a rule, a ruling is legally binding for five years (but renewable). 16. Council Directive (EU) 2015/2376 of 8 December 2015 amending Directive 2011/16/ EU as regards mandatory automatic exchange of information in the field of taxation, O.J. L 332, 18.12.2015, pp. 1–10. 17. Please note that treaty abuse is also playing a central role at a European level. On 28 January 2016, the European Commission issued a recommendation on the implementation of measures against tax treaty abuse. The recommendation advises Member States how to reinforce their tax treaties against aggressive tax planners, and covers a.o. the introduction of a general anti-abuse rule in tax treaties. 18. New article 203, §1, 6° of the Belgian Income Tax Code. 19. Articles 4–11 of the Law of 3 August 2016, Belgian O.J. 11 August 2016 (ed. 2). 20. Articles 35–43 of the Program Law of 1 July 2016, Belgian O.J. 4 July 2016 (ed. 2). 21. Program Law of 25 December 2016, Belgian O.J. 29 December 2016 (ed. 2).

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Henk Verstraete Tel: +32 2 551 15 56 / Email: [email protected] Henk Verstraete has been a partner at Liedekerke since 2008. Henk assists clients in the corporate, financial and private equity sectors on a range of tax matters, including international tax, corporate mergers and acquisitions, and financing transactions. Henk has considerable experience in tax litigation before the tax authorities and the courts. Henk is a part-time professor in tax law at the University of Leuven (KU Leuven) and at the Fiscale Hogeschool Brussel (Brussels Tax School). Henk is listed as an expert in Who’s Who Legal 100 (2016), as Up and Coming in Chambers Europe (2017) and as a Tax Expert in Expert Guides (2017). Henk studied law at the University of Leuven (KU Leuven) and obtained an LL.M. in taxation at the New York University School of Law in 2003 on a Fulbright Scholarship and a Fellowship from the Belgian American Educational Foundation. He also studied at the Law School of the University of Michigan, Ann Arbor, USA.

Lizelotte De Maeyer Tel: +32 2 551 14 79 / Email: [email protected] Lizelotte De Maeyer is part of the Tax Group. She holds a law degree from Ghent University (UGent 2011) and spent five months at Hofstra University School of Law (Hempstead, New York) as part of an overseas exchange programme. She also holds an LL.M. in tax law from the University of Brussels (ULB 2012) and obtained an LL.M. in International Taxation from New York University School of Law (NYU 2016) as a Fulbright scholar. In 2016, Lizelotte completed an internship at the United Nations in New York (Financing for Development Office). Lizelotte joined Liedekerke Wolters Waelbroeck Kirkpatrick in 2012.

Liedekerke Wolters Waelbroeck Kirkpatrick Keizerslaan 3, 1000 Brussels, Belgium Tel: +32 2 551 15 15 / Fax: +32 2 551 14 14 / URL: www.liedekerke.com

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Mauricio Dalman Guevara & Gutiérrez S.C.

Transfer pricing rules and their implementation As mentioned in a previous edition, the Plurinational State of Bolivia (hereinafter “Bolivia”) has finally issued transfer pricing rules by means of Law No. 549, dated July 21, 2014.1 In order to regulate the above-mentioned law, Supreme Decree No. 2227 was issued on December 31, 2014. The Tax Administration also issued specific administrative regulations in April 2015 (Board of Directors Resolution No. 10-0008-15) in order to standardise the previous regulations and therefore specifically determine the taxpayer’s formal obligations with regards to the new regulations. Although it’s been almost three (3) years since the promulgation of the law regulating transfer pricing rules, there’s still uncertainty and concern as to how the tax authorities will assess and review those transfer pricing reports presented by taxpayers that, pursuant to the new regulations, are bound to file. Most of the reports filed were drafted with the assistance of multinational audit and legal firms as there is not enough knowledge or experience in the country of how exactly the reports should be presented. Even those transfer pricing reports drafted locally were at a final stage reviewed by experts from other neighbouring jurisdictions in order to contemplate certain aspects that, based on their familiarity, were deemed to be relevant. The tax authorities, on their side, have been receiving some practical training from sources abroad in order to be prepared to carry out assessments in the future. With regards to transfer pricing regulations, pursuant to Board Resolution No. 101700000007, dated January 13, 2017, the tax administration has issued a list of those countries considered to be countries or regions with low or no taxation. Although Bolivia is not part of the Organization for Economic Co-operation and Development (OECD), the list of the countries and regions is based on the criteria handled by the OECD. The list comprises 76 countries including, amongst others, Hong Kong, the British and U.S. Virgin Islands, Panama, Trinidad & Tobago and Yemen. The list has an important effect on local companies that carry out business and/or commercial transactions with entities domiciled in those countries or regions. In that regard, operations carried with entities domiciled in those jurisdictions detailed in the list need to be analysed as if they were carried out between related parties, thus need to be reported in the annual Transfer Pricing Report to be filed and detailed in Electronic Form 601. Additionally, the Board Resolution determines that in case the local tax authorities enter into an Information Exchange Agreement with the tax administrations detailed in those jurisdictions, said countries or regions may be excluded from the detailed list. As mentioned above, Bolivia is in the process of attempting to achieve an applicable association and implementation of the transfer pricing regulations. As of today, it is not

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Guevara & Gutiérrez S.C. Bolivia clear if the existing guidelines issued by the OECD will be recognised as supporting means of interpretation once the tax authorities carry out assessments of transfer pricing reports in the future. Consequently, based on the existing regulations issued on the matter, we believe that it is important for the tax authorities to issue further regulations aimed to clarify and complete several existing legal voids that could, in the future, create complications and challenges between the tax authorities and the taxpayers. For that matter, not only further regulations need to be enacted, but also private and public practitioners need to be properly instructed. Also, the participation of specialists of the private sector within the Transfer Pricing Commission created by the transfer pricing regulations should be achieved in order to allow participants other than tax authorities and the Ministry of Economy and Finance, as that is the body in charge of regulating and developing any unresolved features in the regulations with the responsibility of resolving and/or amending any imperfections identified in the regulations. Regarding the Base Erosion and Profit Shifting (BEPS) Actions and the transfer pricing regulations, Bolivia’s internal regulations have in time somehow included certain principles or methodologies towards the implementation of those guidelines and the determined plans of action. There is no specific public policy or intent, however, specifying that our country will include these guidelines in its local tax system.

Application of the statute of limitations and further changes to local legislation As mentioned in a previous edition, article 59.I. of the Bolivian Tax Code (Law No. 2492) has been amended on several occasions and, therefore, the term to control, investigate, verify and assess taxes was changed at different opportunities. In that regard, in 2012, Law No. 291, dated September 22, 2012, was issued in order to amend the previous article 59.I. of the Bolivian Tax Code (Law No. 2492) as follows: “[the] Tax Administration’s actions to control, investigate, verify and assess taxes ends: In four (4) years in the fiscal year 2012, five (5) years in the fiscal year 2013, six (6) years in the fiscal year 2014, seven (7) years in the fiscal year 2015, eight (8) years in the fiscal year 2016, nine (9) years in the fiscal year 2017 and ten (10) years in the fiscal year 2018. The statute of limitation for each year as determined in the previous paragraph will apply to those tax obligations and contraventions that had occurred in said year.” Later that year, on December 11, 2012, Law No. 317 was issued and inexplicably eliminated the last part of the previous article. With that exclusion, doubt was generated as to whether the statute of limitations regime would increase in time beginning in the year 2012 and going forward regarding those tax obligations and contraventions that had occurred in the year 2012, 2013 and so on. Finally, pursuant to Law No. 812, dated June 30, 2016, a new amendment was introduced by specifying that the Tax Administration’s actions to control, investigate, verify and assess taxes statute of limitations is eight (8) years. As may be evidenced from the regulations issued recently, the laws need to be applied in different moments depending on when the taxable event and the obligation to pay had occurred. Unfortunately, both the regional and national tax courts (Autoridades de Impugnación Tributaria) have ruled in the previous years in favour of the Tax Administration’s understanding that such laws could be applied retroactively. On the bright side, the Supreme Tribunal issued last year two rulings (No. 39, dated May 13, 2016 and No. 47, dated June 16, 2017) detailing that laws specifying new statute of limitations terms could not be applied retroactively as that would be understood as a fracture

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Guevara & Gutiérrez S.C. Bolivia of the principle of rule of law, legality, hierarchy and the non-retroactivity of the law. In that regard, both article 123 of the Bolivian Constitution and 150 of the Tax Code prevailed.2 Regrettably and despite the rulings issued by the Supreme Tribunal, which basically explain the extent of the laws and how or when they should be applied from an accurate constitutional perspective, administrative and judicial tax courts have continued – this year – ruling against those taxpayers that have attempted to declare the statute of limitations on taxes pursuant to the laws issued recently. Please note that Supreme Tribunal rulings are not necessarily binding in tax matters unless they deal with sanctions as in the criminal arena. We believe that the tax authorities and administrative and judicial tax courts are waiting to see if the Constitutional Tribunal takes a stand and eventually issue a ruling on this matter and, pursuant to said ruling, decide to abide by the Supreme Tribunal’s rulings. The decisions issued by the Constitutional Tribunal are no doubt binding and applicable erga omnes. We trust that the Constitutional Tribunal will rule in the same manner as the Supreme Tribunal as it is the judicial body called by the Constitution and the law to oversee that the Constitution and its principles are observed by judicial, administrative and executive authorities. As a consequence of the new regulation issued in 2016 and the rulings issued by the Supreme Tribunal in the same year, as of today the statute of limitations should be interpreted as follows: • Eight (8) years for obligations that were due in the year 2016. • A term of seven (7), six (6), five (5) and four (4) years is applicable to years before 2016, respectively as follows: • Seven (7) years for obligations that were due in the year 2015. • Six (6) years for obligations that were due in the year 2014. • Five (5) years for obligations that were due in the year 2013. • Four (4) years for obligations that were due in the year 2012. In light of the previous, currently the tax administration is authorised to assess taxes up to the fiscal year 2012. The years 2011 and before could not be assessed pursuant to the statute of limitations regime being modifiedrecently.

Electronic notifications Law No. 812, issued June 30, 2016, determined that the Tax Administration would develop and implement a virtual platform that would allow said entity to carry out notifications and/ or notices of administrative resolutions and acts pursuant to electronic means. In that regard, Board Resolution No. 101700000005, dated March 17, 2017, was issued in order to implement the use of electronic procedures to carry out notifications to taxpayers. Pursuant to said regulation, the tax authorities may notify taxpayers of several administrative resolutions including, but not limited to, collection requests. Notifications will be made through email accounts to be opened for every taxpayer via PDF files or through electronic documents. The notices will be deemed to be made when: a) the taxpayer opens the document sent; or b) five (5) business days after the documents were sent to the taxpayer’s email, whichever occurs first. In case the taxpayer is unable to visualise a notification sent by the tax administration due to circumstances attributable to the taxpayer (viruses, software glitches or others), the notifications could not be deemed to be invalid and, therefore, will be considered to have been duly acquainted. The previous, of course, may in the future create several problems for taxpayers as there will be no documentary registry of notices and, therefore, the ability to bind a taxpayer with

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Guevara & Gutiérrez S.C. Bolivia a specific resolution may be questioned. In this regard, electronic notices may not be the most secure method for determining what rights have been preserved and asserted through notice in order to satisfy the requirement to prove compliance (legally valid proof)3 of what the notice said, whether or not it was delivered, and if it was delivered, precisely when.

Tax climate in Bolivia Based on the most recent World Bank Report (2016) on Doing Business,4 Bolivia stands at 189 in the ranking of 189 economies on the ease of paying taxes. According to the Global Competiveness Report (2016–2017) of the World Economic Forum (which assesses the competitiveness landscape of 138 economies) Bolivia places at number 121.5 Also, the Total Tax Rate report of the World Bank finds Bolivia in the fourth level with one of the highest tax burdens on a global level. Another problem is that members of the administrative and/or judicial courts are in the majority officers at the tax administrations and, therefore, sometimes fail to issue impartial rulings as they are in some way still bound to the tax administration. Strangely enough, some individuals from the administrative and/or judicial courts go back to serve as officers in the tax administration, thus creating a sense that they are in a way working, at the end of the day, for the government and its collection purposes.

The year ahead The Bolivian Congress has appointed a special commission in order to investigate ninety- five (95) offshore companies with Bolivian links that were listed in the leaked “Panama Papers” documents. The investigation that is being carried will focus on those companies with Bolivian ties. The investigation aims to determine if the entities that were incorporated in said jurisdiction had tax avoidance purposes and if any monies sent from Bolivia failed to be subject to Bolivian taxes. Please note that Bolivia taxes income based on the principle of “source”. Therefore, it taxes taxpayers’ income only from sources within its territory. Pursuant to the aforementioned source principle [article 42 of the current Tax Law (Law No. 843) and article 4 of its regulatory supreme decree (Supreme Decree Nº 24051) of the Corporate Income Tax (“IUE”, from its Spanish acronym)], Bolivia considers as taxable only that income which is generated in the Bolivian territory. In light of the aforementioned source principle of taxation, any amount contributed by an individual abroad would not be subject to any tax in the country as it would be considered to be a payment to a foreign beneficiary in the form of an investment. Likewise, any distribution of monies from an entity not domiciled in Bolivia would also not be subject to any local tax as said monies would be deemed to be of foreign source and, therefore, not taxable in Bolivia pursuant to the aforementioned source principle of taxation. For that matter, offshore companies may not be easily used as part of tax avoidance schemes but more of a way to create wealth planning structures and secure monies from local individuals and/or companies who wish to retain their funds elsewhere. In any case, it will be quite interesting to see how the appointed commission will construe the true purposes of said entities and, if possible, determine tax obligations in Bolivia.

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Endnotes 1. The law basically sets forth that in order to readjust or revalue transaction values between related parties, any of the following methods could be employed: a) Comparable Uncontrolled Price Method; b) Resale Price Method; c) Cost Plus Method; d) Profit Split Method; e) Transactional Net Margin Method; and f) Publicly Quoted Prices in Transparent Markets Method. 2. Pursuant to article 123 of the Bolivian Constitution: “The law may only regulate for the future and shall not have a retroactive effect, except in labor law, when it favors employees; in criminal law, when it benefits the accused; in corruption cases, in order to investigate, process and sanction crimes committed by public servants against the State and in other cases as set forth by the Constitution.” Likewise, article 150 of the Tax Code (Law No. 2492) specifies that: “Tax regulations shall not have a retroactive character unless those that eliminate tax crimes and or contraventions, set forth more favorable sanctions, those that shorten statute of limitations terms or that, in any manner, benefit taxpayers or responsible third parties.” 3. The regulation eliminates, to our understanding, key legal principles that would likely constitute a legally valid and curt admissible piece of evidence such as the delivery of proof, content proof, official time stamp, admissible evidence and consent. 4. http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Annual- Reports/English/DB16-Full-Report.pdf. 5. http://www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitiveness Report2016-2017_FINAL.pdf.

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Mauricio Dalman Tel: +591 2277 0808 / Email: [email protected] Mauricio Dalman is a partner at Guevara & Gutiérrez, and is admitted to practise law in Bolivia. He is the head of the Tax Department at the firm, and has extensive experience in tax litigation and international tax planning, offering authoritative advice to national and international clients. Mr. Dalman’s prior experience includes working as a consultant at the International Finance Corporation (IFC) in Washington, D.C. and at the Bolivian Internal Revenue Service. Mr. Dalman holds an LL.M. in International Legal Studies from Georgetown University Law Center and undertook postgraduate courses in Financial and Tax Law both in Bolivia and in Spain. He is fluent in Spanish and English. He is a member and co-founder of the International Fiscal Association (Bolivia Chapter), and is currently a Board Director at the Bolivian Institute of Tax Studies (IBET).

Guevara & Gutiérrez S.C. Calle 15 No. 7715, Esquina Calle Sánchez Bustamante, Torre Ketal, Piso 4 Oficina No. 2, La Paz, Bolivia Tel: +591 2277 0808 / Fax: +591 2279 6462 / URL: www.gg-lex.com

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Claudio d’Agostino & Tina Xia DLA Piper Shanghai Representative Office

Overview of corporate tax work over last year Types of corporate tax work In China, the current tax regime is relatively new and has been in development since the 1980s. China’s legal system is a socialist system of law based primarily on the civil law model. Laws and regulations are codified in statutory instruments which are derived from various sources at different levels of government from national to local with a hierarchy of authority. The Chinese tax legislation system mainly includes the following: • tax laws promulgated by the National People’s Congress or its standing committee; • administrative regulations issued by the State Council; • other administrative documents in the form of tax circulars, notices and decrees issued by the State Administration of Taxation (“SAT”) or other regulatory authorities, such as the Ministry of Finance (“MOF”) and the General Administration of Customs (“GAC”); and • local tax regulations and rules issued by the local People’s Congress or local tax authority. From the corporate tax perspective, China imposes direct and indirect taxes on corporate taxpayers: • Direct tax, which is levied on income and profits, in China refers to the Enterprise Income Tax (“EIT”). • The main forms of indirect tax operating in China are Value Added Tax (“VAT ”), which applies to all goods and services, and consumption tax, which applies to selected goods. • Historically, China had a dual system of indirect tax, under which VAT is levied on the sales and importation of tangible goods and the provision of processing, repair and replacement services, whereas business tax is levied on the provision of other services and the transfer of intangibles and real properties. Starting from 1 January 2012, a pilot program for converting the business tax to VAT has been rolled out in China and on 1 May 2016, the VAT pilot program was completed with business tax being fully replaced by VAT in all industries. Under the current VAT regime, there are still two sets of VAT regulations governing: (i) VAT on goods and processing, repair and replacement services (“Traditional VAT”); and (ii) the Pilot VAT program relating to services previously subject to business tax (“Pilot VAT”). (a) Enterprise Income Tax The most important pieces of legislation on EIT are the PRC Enterprise Income Tax Law, promulgated by the National People’s Congress and the Implementation Regulations of the

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PRC Enterprise Income Tax Law, promulgated by the State Council, both of which took effect on 1 January 2008. General Both domestic companies and foreign invested enterprises in the PRC are subject to EIT on their income derived from production, business operations and other sources at a rate of 25%. The taxable income for EIT purposes is computed as the difference between its total income, less deductible items, in the order of: non-taxable income; exempted income; deductible expenses; and any qualifying tax losses brought forward from prior years. In calculating an enterprise’s taxable income, where there are differences or inconsistencies between accounting standards and the tax law, the latter prevails. The EIT filings in China consist of provisional quarterly filings and final settlement (i.e., annual filing). Normally, the quarterly EIT returns should be filed within 15 days after the quarter end, i.e., from 1–15 of January, April, July and October of each year on a provisional basis. The EIT annual filing should be performed on or before 31 May of each year. When performing an annual filing, the taxpayer should submit its audit report issued by a qualified accounting firm together with its tax returns and other required documents to the relevant local tax authority. Withholding Income Tax (“WIT”) The PRC Enterprise Income Tax Law provides for 20% WIT on the passive income (including dividends, interests, royalties, rental income, etc.) derived by foreign enterprises from China. However, the Implementation Regulations of the PRC Enterprise Income Tax Law provides a reduction of the rate from 20% to 10% (which could be further reduced under an applicable double tax treaty). The PRC Enterprise Income Tax Law imposes the withholding liability for WIT on the payer in China. The payer is the withholding agent and is required to withhold at source the WIT on the earlier of when the overseas payment is actually made or becomes due. Specifically, the withholding obligation arises: • for dividends, when the dividend is declared; and • for royalties, interest and rental, when the payment is due according to the relevant contract. Guoshuifa (2009) No. 3, issued by the SAT on 9 January 2009, introduces a contract filing requirement, under which the withholding agent must submit a “Contract Filing and Registration Form for Income Tax Withholding”, a copy of the contract (which refers to a contract in respect of the China-source dividends, interests, rent, royalties, capital gains or other income derived by a foreign company) and other relevant documents to the in- charge tax authorities within 30 days from the date the contract is entered into (or amended, supplemented, extended) by the withholding agent. Profit repatriation Further to the WIT section above, the dividends distributed by foreign invested enterprises in China to foreign investors will be subject to 10% WIT (unless a lower tax rate is provided under an applicable double tax treaty). In this regard, the overall Chinese income tax burden for income generated from within China may escalate to 32.5% after including the 10% WIT.

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Please refer to the following table as an example for easy reference:

Chinese Subsidiary Level Tax Rate Income Statement Net profit before tax - 100 EIT liability @ 25% (25) Profit after income tax - 75 Foreign Investor Level PRC WIT @ 10% (7.5) Net Repatriation to the Foreign Investor - 67.5 Overall Chinese Tax Burden - 32.5%

Transfer pricing In China, any transactions between related companies should be conducted on an arm’s- length basis. If a taxpayer’s inter-company transactions are not considered to be at arm’s length and result in the reduction of its taxable income in China, the China tax authority is empowered to impose a tax adjustment on the taxpayer’s inter-company transactions unless the transactions are purely conducted onshore between Chinese companies. The PRC Enterprise Income Tax Law imposes a late payment interest on transfer pricing adjustments. On 8 January 2009, the SAT released the Special Tax Adjustment Implementation Measures (Trial) (“STAIM”) which is a master transfer pricing regulation under China’s EIT law and has been modified and updated over the years by regulations issued by the SAT in response to the development of the macro economy and the OECD guidelines. The STAIM and its amendments generally require that enterprises doing business in China should have contemporaneous transfer pricing documentation (“TPD”) in place. However, enterprises are exempt from the TPD requirements if they meet any of the following criteria: • taxpayers with an annual inter-company buy-sell transaction value of less than RMB 200m, and an annual value of other types inter-company transactions (i.e., services, royalties, interest, etc.) of less than RMB 40m; • taxpayers whose inter-company transactions are covered by an agreed Advanced Pricing Arrangement; or • taxpayers that only have domestic inter-company transactions, and whose foreign investors hold less than 50% of its equity interest. (b) VAT China’s VAT system is one of the most complex in the world and requires significant efforts to stay on top of the changing environment. Similar to other VAT regimes throughout the world, Chinese VAT is designed to be “neutral” by relieving the burden of VAT on transactions between businesses through an input VAT credit mechanism and having the VAT cost ultimately borne by end consumers of goods and services. For export-oriented enterprises, no VAT is payable on export sales and VAT incurred domestically may also be refunded, if certain conditions are satisfied. The most important regulations governing Traditional VAT are the Interim Value-Added Tax Regulations of the People’s Republic of China (2016) issued by the State Council and the Implementing Rules for the Interim Regulations of the People’s Republic of China on Value- added Tax (2011) issued by the MOF.

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The guiding policy on Pilot VAT is Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax (Caishui [2016] No. 35) jointly issued by the MOF and the SAT. There are also countless detailed implementation rules and regulations on VAT matters to be complied with by taxpayers. It is challenging for taxpayers to keep abreast of the latest developments of the VAT legislations, though necessary for day-to-day VAT matters. Failure in following the requirements can result in significant VAT-related costs hitting the P&L of taxpayers. The following sections provide an overview of the current VAT regime, including Traditional VAT and Pilot VAT, in China: • VAT Scope: VAT applies to the sale and importation of all goods in, from or to China and the provision of all services in, from or to China. • VAT Payer Types and Registration: There are two types of taxpayer in China: general taxpayers; and small-scale taxpayers, classification of which depends on the sophistication of the accounting system they use and their annual turnover. Small-scale taxpayers are those with an annual sales turnover of not more than certain thresholds based on the business industries they are engaged in. It is possible for taxpayers that fail to meet the thresholds to register as general taxpayers if they are able to demonstrate to the tax authority that they have sound accounting systems that can produce accurate tax information required for tax filings. Registration as a small-scale taxpayer or general taxpayer determines whether VAT is payable at a 3% levy rate, with no eligibility for input VAT credits, or VAT is payable by adopting the standard tax rates with input tax credits. • VAT Rates: The standard VAT rate for the sale and importation of goods, the provision of repair, replacement and processing services, as well as the leasing of tangible moveable assets is 17% for general VAT taxpayers. A 6% rate applies to most of the services provided by general VAT taxpayers. VAT exemption applies to agricultural products, contraceptive drugs and devices, antique books, and certain exported services. VAT refund is available for the export sale of goods and certain services. For small-scale taxpayers, a 3% VAT levy rate is applied on all taxable income. • VAT Credit Mechanism: In order to claim input VAT credits in China, a business must first be registered as a general taxpayer and it must also obtain valid VAT vouchers, including special VAT invoices for domestic purchases, customs receipts for import VAT paid, agricultural products purchase vouchers, etc., which should be verified within 360 days of issuance. If there are excess input VAT credits, the credit balance can be carried forward indefinitely to offset future output VAT. Any input VAT without being supported with legitimate VAT vouchers, or input VAT incurred for purchases related to non-taxable items, tax-exempted items, collective welfare or abnormal losses, etc., are not creditable and have to be expensed by the business. • VAT Filings: Most of the businesses file VAT returns on monthly basis. The VAT returns contain a main form and several appendixes and information reporting forms. Significant deals and themes The year 2017 is the 2nd year of the “13th five-year plan”, a critical period for the transformation and reform of the Chinese economy. Following the principles and guidelines in the plan, a series of tax policies have been promulgated by Chinese authorities on goods importation to support the industrial reform and restructuring. To strengthen the administration of the related party transactions and following the OECD guidelines, in 2016 and 2017, the SAT issued several circulars to update its anti-tax

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© Published and reproduced with kind permission by Global Legal Group Ltd, London DLA Piper Shanghai Representative Office China avoidance rules, including the reporting of related party transactions, contemporaneous documentation, special tax investigation adjustments, mutual agreement procedures and advance pricing arrangements. The relevant regulations include: • Announcement of the State Administration of Taxation on Relevant Matters relating to Improvement of the Filing of Related-Party Transactions and the Management of Contemporaneous Documentation (Announcement of the SAT [2016] No. 42) (“Announcement 42”); and • The Administrative Measures on Special Tax Investigation Adjustments and Mutual Agreement Procedures (Announcement of the SAT [2017] No. 6) (“Announcement 6”). The Chinese government has been making efforts to stimulate Small- and Medium-sized Enterprises (“SMEs”) and encourage them to engage in more innovative activities. More tax incentives were implemented as a measure to continuously support SMEs in 2017.

Key developments affecting corporate tax law and practice Import tax exemption In December 2016, the MOF, GAC and SAT jointly issued several regulations on the preferential tax treatment for the import of certain items in response to the guideline of the “13th five-year plan”. Among others, Circular CaiGuanShui [2016] No. 70 was issued to encourage the importation of scientifically and technologically innovative items, under which, inter alia, qualified institutions and entities may import items for scientific research, technological development and education (which cannot be produced domestically) on a tax-free basis. The expanded scope of incentive policies shows the Chinese government’s efforts in pushing for innovation-driven development and support for industry restructuring to boost China’s economy. Transfer pricing update On 29 June 2016, the SAT released Announcement 42 to improve the reporting of related party transactions and contemporaneous documentation. Announcement 42 replaced a number of articles in the existing STAIM: • Announcement 42 updates the related party relationship definitions under the current STAIM and also clarified certain issues such as the determination of the debt-to-equity ratio, and provides that two parties will be considered related if they have “other substantial common interest”. • Announcement 42 introduces the formal templates and filing instructions for the Annual Related Party Transaction Reporting Forms (“New RPT Forms”). The total number of New RPT Forms have now increased to 14, while under STAIM it numbered nine. The New RPT Forms also include the country-by-country (“CbC”) reporting form, which follows the requirements of BEPS Action 13. The CbC reporting form will be required for Chinese resident enterprises that are (a) the ultimate parents of a multinational enterprise group, with consolidated revenue greater than RMB 5.5bn in the last fiscal year, or (b) nominated by the multinational group as the filing entity. • Announcement 42 also introduces a three-tiered documentation framework, including a master file, local file, and special issue file, as set out in the OECD’s final report on BEPS Action 13. Announcement 6, released on 17 March 2017 by the SAT, updates China’s rules on special tax investigations, special tax adjustments and mutual agreement procedures. Announcement 6

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© Published and reproduced with kind permission by Global Legal Group Ltd, London DLA Piper Shanghai Representative Office China also superseded the corresponding provisions under the existing STAIM. The SAT also expects to strengthen the monitoring of taxpayers’ profit levels and to improve taxpayers’ compliance through implementation of Announcement 6, together with Announcement 42. Announcement 6 contains many significant provisions that are expected to impact how multinationals implement their transfer pricing policies and practices in respect of subsidiaries in China. In particular, Announcement 6 contains far-reaching measures to: • Encourage self-review and voluntary adjustment by taxpayers: As well as empowering local tax authorities to identify taxpayers with special tax adjustment issues, it also encourages taxpayers to conduct voluntary adjustments, either upon receipt of notification from the tax authorities or by way of a self-review. • Expand the scope of taxpayers with high-risk features for special tax investigations: In addition to taxpayers with long-term losses, consistently low profits, highly volatile profits and/or other usual transfer pricing risk features, Announcement 6 also identifies as high-risk taxpayers those that: (i) earn profits below the industry average; (ii) engage in inter-company transactions with affiliates located in low-tax countries/regions; or (iii) earn profits which are not commensurate with their business risks and functions. • Clarify the special tax investigation procedures and burden of proof: Announcement 6 sets out the rights and obligations of the investigated taxpayer and reinforces the burden of proof on the investigated taxpayer. Taxpayers are obligated to provide relevant overseas information with indication of source, and may also be required to notarise the overseas information. At the same time, tax authorities are guided on what to require and how to collect, review and document paper, electronic or verbal evidence provided by the investigated taxpayer. • Revise guidelines on comparable analysis: Cost savings and market premiums are identified as two special geographic factors to be evaluated in comparability analysis in China, in line with Actions 8 through 10 of the G20/OECD BEPS Action Plan. • Revise guidelines on use of transfer pricing methods: Announcement 6 introduces the valuation method for intangibles adopted in Action 8 of the G20/OECD as an additional transfer pricing method in China. Under this new method, intangibles can be valued based on market price, replacement cost and projected revenue. • Include guidelines on assessment of intangible-related inter-company transactions: The new guidelines require proper allocation of intangible related returns based on each parties’ contributions to the development, enhancement, maintenance, protection, exploitation and promotion of intangibles (DEMPEP functions). • Strengthen administration on inter-company services: Tax authorities may disallow the deduction of services fees related to six types of “Non-Beneficial Services”. Such services include duplicated services, shareholder activities, services that provide benefits to the Chinese subsidiary only through “passive association”, services with overlapped compensation, services that are irrelevant to the recipient’s business activities, and services that are not directly beneficial or would not have been purchased in an uncontrolled business environment. • Clarify principles for working capital adjustment: Announcement 6 limits the application of a working capital adjustment so that it can be applied only to assess the arm’s-length return of a toll processing service provider, subject to certain conditions. If the working capital adjustment results in a change to the profit level of over 10%, reselection of comparable companies is required. • Clarify expectation on profit level of single-function entities: Single-function entities that only provide contract R&D or contract manufacturing services should not bear any

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market risks and should earn a stable and reasonable profit level. If a single-function entity suffers losses derived from mismanagement, underutilisation of capacity, poor sales or R&D failure, tax authorities may deny such losses and impose a special tax adjustment. • Clarify and standardise mutual agreement procedure: Announcement 6 outlines a specific mutual agreement procedure, and clarifies the rights and obligations oftax authorities at different levels in the procedure. It also emphasised that the tax authorities may reject a taxpayer’s application or terminate a mutual agreement procedure if the taxpayer fails to provide relevant and necessary information required by the tax authorities. R&D expense deduction for EIT To promote and encourage technology development by Chinese enterprises, the current PRC EIT regime allows a resident enterprise to deduct 150% of qualifying R&D expenses actually incurred in computing its tax liability, if the expenses do not result in the creation of an intangible asset. If intangible assets are developed, the qualifying R&D expenses that have been capitalised may be amortised based on 150% of the actual R&D costs. In March 2017, when Premier Li Keqiang announced the government work report for 2017, he said that the additional deduction percentage of R&D expenses for small- and medium- sized science and technology enterprises (“SMSTEs”) would be significantly increased from 50% to 75%. Following Premier Li’s work report, the Circular on Increasing the Pre-tax Deductions of Research and Development Expenses for SMSTEs (Caishui [2017] No. 34) was jointly issued by the MOF, the SAT and the Ministry of Science and Technology on 2 May 2017. On 3 May 2017, the three government bodies issued additional guidance (GuoKeFaZheng [2017] No. 115) to further clarify the evaluation criteria and rules for companies applying for the benefit. According to the said circulars, an SMSTE that incurs R&D expenses may deduct an additional 75% of the actual costs incurred when computing its EIT liability for the period 1 January 2017 to 31 December 2019, provided no intangible asset has been developed. If an intangible asset has been created as a result of the R&D, the costs may be amortised at a rate of 175% of the pre-tax cost of the assets for the above period. The additional deduction effectively lowers the taxable income of the SMSTEs and thus the EIT payable, if any. This shows the policy direction of the Chinese government of encouraging enterprises to engage in more innovative activities and investment. Pilot VAT program With the remaining four industries covering construction, real estate, financial services and consumer services being included in the pilot VAT scope, the Pilot VAT program was officially completed on 1 May 2016 with VAT replacing business tax in all sectors. China’s VAT is now one of the broadest based systems amongst countries across the globe implementing VAT (or similar) systems.

Tax climate in China With the recent slowdown of the Chinese economy, the tax system in China is full of opportunities and challenges. On the one hand, the central government would like to provide more tax benefits to taxpayers and investors in order to stimulate the economy through tax reforms and simplifying the relevant tax application formalities; on the other hand, the tax authorities need to collect more tax revenue to deal with the increased financial pressure

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© Published and reproduced with kind permission by Global Legal Group Ltd, London DLA Piper Shanghai Representative Office China of the governments (especially the local governments). In recent years, we have seen tax authorities in major cities across China making stricter efforts to tighten the tax compliance requirements and tax collection.

Developments affecting attractiveness of China for holding companies Generally speaking, China is not an attractive location for incorporation of holding companies. As discussed above, China has a tight foreign exchange control regime and foreign investment is highly regulated by the governmental authorities. Historically, a foreign invested enterprise has business scope and foreign exchange restrictions in making equity investments in China with its registered capital. Thus foreign investors would have to resort to the option of setting up a China Holding Company (“CHC”) as a vehicle for equity investments in China. However, such restrictions have since been relaxed, which makes the CHC structure less attractive. That said, a CHC would still be preferable if foreign investors already have multiple investments in China and would like to streamline the management and also cater for envisaged further expansion by either setting up new companies or acquiring existing business in China. This is because a CHC can offer certain economies of scale in operations and management through its investments under a single corporate identity. These include centralised purchasing of raw material, sale of finished products, and marketing efforts for subsidiaries, collective training of project personnel of subsidiaries, coordination of project management, etc. Setting up a CHC would show the foreign investors’ commitment of investments and expansion in China and thus would have a better position to get favourable support of local government bodies in day-to-day business operations. The registered capital of and foreign loans borrowed by a CHC contributed by a foreign investor can be directly used for equity investment in China. Compared with normal foreign invested enterprises, CHCs are able to borrow foreign loans of up to six times its registered capital. But the capital requirements of CHCs are also much higher than normal foreign invested enterprises. China sets a high threshold on foreign investors which want to set up a CHC in China. To be qualified to invest in a CHC, a foreign investor must qualify under one of the following two approaches: • One approach to qualifying is to meet the following three requirements: • The total (gross rather than net) asset value of the foreign investor must be at least $400m. • Existing China investment: the applicant company’s paid-up capital contribution in its existing PRC invested companies must exceed $10m. • Future additional plans: in addition to its existing investments in China, the applicant company must have and provide summary descriptions of three or more additional intended investments in PRC companies. • An alternative approach to qualify is for the foreign investor to have more than 10 existing investments in China, in which its total paid-up capital contribution exceeds $30m. In practice, only big MNCs with a huge amount of Chinese investment (most of them are Top 500 companies) could set up CHCs in China. From a tax perspective, the SAT does not provide special tax incentives or exemptions for CHCs in China. However, many local governments provide financial subsidies in the form of tax refunds or cash rewards to CHCs incorporated in their locality in order to attract foreign investment.

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The year ahead With the continuous efforts in the implementation of the BEPS package by the SAT, it is expected that the Chinese tax authorities will pay more attention to international tax administration, which can be seen reflected in the rising transfer pricing adjustment initiated by the SAT and year-by-year revenue increases on taxation of non-resident taxpayers over the past several years. To echo China’s “One Belt One Road” (“OBOR”) strategy, which is essentially a concept of “going abroad” of Chinese entities, the SAT released the Notice Regarding the Tax Services and Administration to Implement the Development Strategy of the “One Belt One Road” (ShuiZongFa [2015] No. 60) on the direction of tax management of enterprises making outbound investments. The key message of the OBOR tax policy is that the Chinese tax authority will proactively formulate and implement specific tax policies associated with enterprises’ outbound investments to protect the interest of Chinese enterprises, improve the tax services of tax authorities and provide guidelines for tax compliance by enterprises making outbound investments.

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Claudio d’Agostino Tel: +86 21 3852 2186 / Email: [email protected] Claudio d’Agostino is a Partner in the Corporate team, based in DLA Piper’s Shanghai office. Claudio has been based in China for almost 20 years, engaging in a broad variety of commercial, corporate and tax matters, advising on foreign direct investments and acquisitions across a number of industries, having often led a number of innovative transactions. Claudio focuses on consumer goods and services for the fashion, cosmetics, food and beverage, hospitality and entertainment industries with a broad experience in products registration and approvals. His expertise covers the full range of transactions including commercial agreements, tax planning, licensing and franchising, manufacturing/sourcing supply/wholesale/retail distribution, competition and regulatory compliance.

Tina Xia Tel: +852 2103 0440 / Email: [email protected] Tina Xia has extensive experience in supply chain and customs compliance management, PRC direct investment, PRC general tax advice, corporate structuring, and cross-border equity transactions. She is a PRC certified tax agent and certified public accountant and has been with DLA Piper for more than 10 years. Prior to joining DLA Piper, Tina was a tax manager in the Big Four accounting firms. She also has experience working in-house in a multinational corporation as a tax manager.

DLA Piper Shanghai Representative Office 36th Floor, Shanghai World Financial Center, 100 Century Avenue, Pudong, Shanghai, China Tel: +86 21 3852 2111 / Fax: +86 21 3852 2000 / URL: www.dlapiper.com

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Philippos Aristotelous & Marissa Christodoulidou Elias Neocleous & Co LLC

Introduction The years 2015 and 2016 have seen some significant amendments and refinements of existing legislative provisions in the field of taxation, as well as the introduction of new provisions aimed at providing incentives for investment in Cyprus and ensuring fairness, effectiveness and efficiency. In addition to domestic legislation, within the past couple of years Cyprus has also demonstrated its full commitment to comply with EU and international initiatives including the Organization for the Economic Cooperation and Development (“OECD”) initiative on tackling harmful tax practices and unjustified tax avoidance, by introducing appropriate mechanisms and closing any remaining loopholes in its domestic legislation. The main reforms undertaken during 2015, 2016 and early 2017 are outlined below.

Types of corporate tax work Tax practitioners in Cyprus, including those in our firm, have been kept busy over the past year advising on and implementing the attractive incentives introduced during 2015, including the notional interest deduction on new equity investment, income tax exemptions for individuals relocating to Cyprus and exemptions for individuals who are resident but not domiciled in Cyprus. The tax authorities issued detailed guidance on implementation of several of these issues during 2016. In addition, the new intellectual property box regime, amended to follow the modified nexus approach, has received considerable interest. While the changes restrict the range of qualifying IP assets from mid-2016, there are grandfathering provisions to cover the transition. Our firm has recently assisted in setting up a corporate structure holding and managing valuable intangible assets and software tools used by international firms involved in the automobile industry which gives favourable tax treatment in Cyprus under the revised regime. We have also seen increased interest in the establishment of alternative investment funds in Cyprus following the modernisation of the legal framework relating to funds, which can be very effectively combined with the tax and non-tax benefits that Cyprus offers. Cyprus law is based on English law, which is familiar to international investors. The mutual funds industry in Cyprus is developing well, and law and accounting firms are establishing specialist departments and independent firms specialising in funds are also springing up. The tax landscape on a global and domestic level is changing at an unprecedented rate, with an enormous volume of new practices and standards imposed by European and international initiatives for tax practitioners to keep abreast of, analyse and assess. Cyprus

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Elias Neocleous & Co LLC Cyprus has made significant progress in amending its primary and secondary legislation to align its tax practices with the OECD’s project on base erosion and profit shifting (“BEPS”), demonstrating its full commitment to complying with the new global demands. It is equally important for Cyprus to offer fair, effective and competitive solutions to entrepreneurs wishing to invest in Europe through the island, and to meet their expectations to the fullest extent possible.

Significant deals and themes Notwithstanding the many confident predictions of the demise of tax planning andtax mitigation, Cyprus holding companies continue to be utilised by investors wishing to combine the already attractive features of Cyprus’ tax laws with the newly introduced provisions. Cyprus does not impose withholding taxes on dividends or interest paid to non- residents. Royalties paid to non-residents are subject to withholding taxes (at 10%, or 5% in the case of cinema films) only if they arise from use of an intellectual property asset within Cyprus. There is no tax on capital gains, apart from gains tax on the sale of immovable property situated in Cyprus or on the sale of shares in a company directly or indirectly owning such immovable property. The sale of shares is generally exempt from income tax in Cyprus, except in some limited circumstances. These long-established features of the Cyprus tax system, in combination with the new incentives, have prompted investors and multinational corporations alike from all over the world to include Cyprus holding companies in their structures and in some instances set up a significant economic presence in Cyprus or relocate to the island. A recurring theme during 2016 was requests for advice and assistance from a Cyprus law and tax point of view with respect to the correct application of the new Notional Interest Deduction (“NID”) regime. Projects the authors were personally involved in included the incorporation of Cyprus tax resident companies by USA-based multinational corporations with an annual turnover exceeding $1bn and the subsequent contribution of debt instruments into the share capital of the Cyprus companies as consideration in kind for the issue and allotment of shares to shareholders. In parallel, we also provided detailed in-depth advice on operational and management substance and anti-avoidance issues in order to ensure that the proposed structures will comply with applicable requirements. In addition to activity arising from new developments and initiatives, there is a constant flow of work on restructurings aimed at improving governance, operational effectiveness or tax-efficiency. Many substantial international businesses make use of Cyprus holding and finance structures and the Cyprus aspects are often central to the entire restructuring. These restructuring projects may not only involve companies, but also trusts, foundations, partnerships and other structures registered or resident in any of a wide range of jurisdictions. Our analysis focuses on domestic legislation, anti-avoidance provisions, procuring tax rulings, existing DTTs and informing clients on international initiatives which may affect the proposed transactions.

Key developments affecting corporate tax law and practice Double tax treaties (DTTs) The years 2016 and 2017 have seen Cyprus’ already large network of DTTs expand even further, offering great opportunities to facilitate business with rising economies such as Iran, with which a new DTT was signed in 2015, and India, with which an updated DTT was signed in 2016.

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The new DTTs with Guernsey and Switzerland entered into effect at the beginning of 2016. Both were signed in 2014 and entered into force in 2015. In addition, ratification of several DTTs was completed in 2016, triggering their entry into force. The DTTs with Georgia and Bahrain, which were signed in 2015, and with Latvia and India, which were signed in May 2016, entered into force on 4 January, 26 April, 27 October and 14 December 2016, respectively, and their provisions took effect from the beginning of 2017. They closely follow the 2014 OECD Model Tax Convention. A new DTT with Jersey was also signed in 2016. Ratification was completed on 17 February 2017 and its provisions will take effect from the beginning of 2018. Ratification of the DTT with Iran was also completed in early 2017 and its provisions will take effect in Cyprus from the beginning of 2018. The conclusion of new DTTs has continued into 2017, with new agreements with Barbados and Luxembourg, and a protocol to the DTT with San Marino having been signed during the first five months of the year. One of the most significant developments regarding DTTs was not the conclusion of a new agreement, but the deferral of the implementation of amendments to the DTT with Russia, one of Cyprus’s most important DTTs. As 2016 drew to an end, the Cyprus Ministry of Finance announced that the Russian government had agreed to defer the introduction of new provisions allowing for source-based taxation of capital gains on shares in “property- rich” Russian companies, which were due to take effect on 1 January 2017. Under the 1998 double taxation agreement between Cyprus and Russia, gains on disposals of shares are taxable only in the country of residence of the person disposing of the shares. Since Cyprus does not impose any capital gains tax on disposals of shares in companies unless they own immovable property in Cyprus, this makes Cyprus a very advantageous location for holding shares in Russian companies. The Protocol to the 1998 double taxation agreement, which was signed in 2010, provided that gains on the disposal of shares in companies which derive their value principally from immovable property in Russia (so-called “property-rich” companies) would be subject to tax in Russia after a transitional period, which was due to expire at the end of 2016. Shares in other companies were not affected. However, the application of this provision of the Protocol has now been deferred until similar provisions are introduced into Russia’s double taxation agreements with other European countries, and disposals of shares in property-rich companies will continue to be taxable only in the country of residence of the person disposing of the shares, in the same way as other shares. According to the official announcement, an additional Protocol is being prepared in order to formalise the deferral. Notional interest deduction – NID In order to align the tax treatment of debt and equity finance, the Income Tax (Amendment) Law introduced a notional interest deduction on new equity capital (paid-up share capital and share premium) contributed after 1 January 2015 into companies and permanent establishments of foreign companies in order to finance business assets. NID is deducted from the taxable profit of the Cyprus tax resident entity and is limited to 80% of its total taxable profit. Unclaimed NID cannot be carried forward to be offset against future years’ profits. For the purposes of NID, new equity may be contributed in cash or in the form of other assets, in which case the value of assets should be supported by an independent valuation report. An independent valuation is not necessary under certain circumstances such as if the

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Elias Neocleous & Co LLC Cyprus assets are listed on an open market on which similar assets are sold on a regular basis or if the registrar deems it unnecessary since the assets have been recently acquired from a third party and no event has occurred from the date of their acquisition which would significantly affect their value. No NID is available in respect of capitalisation of reserves, revaluation of assets or for companies benefiting from the re-organisation exemptions included in the tax laws. NID may be refused if the Tax Department considers that the transaction concerned has no economic or business purpose. The NID is calculated by applying a so-called reference rate to the new capital. For capital introduced during a year, a time-apportionment is carried out. The reference rate is the 10- year government bond yield of the country in which the assets funded by the new equity are utilised, plus 3 percentage points, or the 10-year Cyprus government bond yield plus 3 percentage points, whichever is the higher. The bond yield rates to be used are as at December 31 of the year preceding the year of assessment. In February 2017, the Tax Department announced the 10-year government bond yields at 31 December 2016, which will be used as the basis for the notional interest deduction for the 2017 tax year, for the following countries:

Country Bond yield rate Reference rate for 2017 Cyprus 3.489% 6.489% Czech Republic 0.414% 3.414% Germany 0.204% 3.204% India 6.878% 9.878% Latvia 0.894% 3.894% Poland 3.627% 6.627% Romania 3.748% 6.748% Russia 8.380% 11.380% (Expressed in US dollars) 4.409% 7.409% Ukraine 8.705% 11.705% United Arab Emirates 3.326% 6.326% United Kingdom 1.326% 4.326%

SDC tax anti-avoidance Individuals who are resident and domiciled in Cyprus are liable to pay Special Defence Contribution, commonly referred to as SDC tax, on dividends, passive interest and rents received. SDC is also levied on Cyprus tax resident companies. Dividends and passive interest (but not rents or active interest) are exempt from personal or corporate income tax. The SDC Amendment Law of 2015 introduced a new anti-avoidance measure to deal with a common device used to reduce or postpone the payment of SDC tax on dividend income of a Cyprus tax resident individual. The newly enacted provisions insert a new article 3(4) into the Special Defence Contribution Law, enabling the tax authorities to disregard the interposition of a company without any real business or economic purpose between an individual and a company making profits, if this has been done with the principal objective of reducing or deferring the payment of SDC tax. Improvements to the tax rulings procedure In preparation for the automatic exchange of tax rulings, in October 2015 the tax authorities issued a circular introducing new procedures for obtaining advance tax rulings and setting

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Elias Neocleous & Co LLC Cyprus out the terms on which they are binding. The new arrangements took effect on 1 October 2015. Advance tax rulings are a key element in giving taxpayers and their advisors the assurance they desire, and the clarification and formalisation of the advance rulings procedure is highly beneficial. Substance requirements At around the same time, the tax authorities announced a new procedure for companies to obtain a certificate of tax residence. Applications for tax residence must be made on the prescribed form, which essentially comprises a questionnaire setting out the factors which the tax authorities regard as decisive in determining the location of management and control. These include the location of board and shareholders’ meetings, the location of the company’s records, whether the board of directors exercises control and makes key management and commercial decisions necessary for the company’s operations and whether the company issues general powers of attorney. The new procedures have been welcomed as further progress in implementing Cyprus’s commitment to modernisation, with a more sophisticated method of evaluating applications for tax residence certificates on a case-by-case basis. They also align Cyprus’s approach with international best practice and the approach followed by other EU jurisdictions, giving investors the reassurance of a stable, responsive and reliable business environment. Tax incentives The government has also been proactive in offering incentives aimed at encouraging wealthy individuals to relocate to Cyprus or encouraging companies to relocate their operations to the island. The “non-domiciled” regime Up until and including 15 July 2015, both Cyprus-resident individuals and Cyprus-resident companies were liable to pay Special Defence Contribution, commonly referred to as SDC tax, on dividends, passive interest and rents received, at rates of 17%, 30% and 3% (applied to 75% of the rent) respectively. Dividends and passive interest (but not rents or active interest) are exempt from personal or corporate income tax. With effect from 16 July 2015, the Special Defence Contribution (Amendment) Law exempts individuals who are not domiciled in Cyprus for the year of assessment concerned from liability to SDC tax. Coupled with the income tax exemptions applying to such income, this provides individuals who are resident but not domiciled in Cyprus with complete exemption from any form of Cyprus tax on dividends and passive interest, regardless of source. Companies are not affected by the change. For the purposes of determining liability to SDC tax, the principles set out in the Wills and Succession Law regarding domicile, which follow the principles of English common law, apply. In summary, an individual acquires a domicile of origin at birth. It is generally the same as the domicile of the father at the time of birth, and, in exceptional cases, that of the mother. A domicile of origin may be replaced by a domicile of choice if in actual fact an individual permanently establishes himself or herself in another country with the intention of living there permanently and dying there. An individual will be deemed to be domiciled in Cyprus if he or she has been a tax resident for 17 or more of the 20 tax years immediately preceding the year of assessment. The amendments are very attractive to individuals with investment income who consider re-locating to Cyprus and conducting their business from the island.

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Incentives for new taxpayers For many years there has been an exemption available to new taxpayers relocating to Cyprus, with 20% of the total emoluments or €8,550 (whichever is the lower) exempt from taxation for five years following the commencement of employment in Cyprus, provided that the individual concerned was not a tax resident of Cyprus during the previous tax year. This exemption may be claimed until 2020 but will then be withdrawn. An alternative exemption was introduced in 2015, aimed at high-paid employees. For employees with total annual earnings of €100,000 or more, 50% of the emoluments earned from employment in Cyprus are exempt from income tax. The exemption is available for the first 10 years from the commencement of employment in Cyprus, provided that the individual was not a Cyprus tax resident during the tax year preceding the year in which the employment began, or for three or more of the tax years preceding the year in which the employment began. Alignment with international initiatives As an EU member, Cyprus is committed to implementing EU initiatives such as ATAD2 and automatic exchange of information and international initiatives adopted by the EU. In addition, although it is not a member of the OECD, Cyprus is fully committed to implementing OECD best practice, including the BEPS initiative. Changes to the IP box In October 2016, the Cyprus parliament passed Law 118(I) of 2016, which amended the Income Tax Law to align its provisions on taxation of income from the use or sale of intangible assets with the “modified nexus” approach. This approach allows taxpayers to benefit from an intellectual property taxation regime, commonly known as an IP box, only to the extent that they can show material relevant activity, including a clear connection between the rights which create the IP income and the activity which contributes to that income. Regulations issued under the law, which had retroactive effect from 1 July 2016, provide detailed guidance on the calculations and application of the new IP regime. Transitional arrangements for IP assets developed prior to 30 June 2016 The original IP box, which was introduced in 2012, provided for 80% tax exemption of income from the use of a wide range of intangible assets. Coupled with Cyprus’s low corporate income tax of 12.5%, it gives an effective tax rate on such income of 2.5% or less. Taxpayers already benefiting from the existing scheme may continue to claim the same benefits on all assets within the scheme from 30 June 2016 until 30 June 2021, subject to certain conditions regarding assets acquired from related parties in the first six months of 2016. Assets acquired in this period from a related party qualified for benefits only until the end of the 2016 tax year, unless at the time of their acquisition they were benefiting under the Cyprus IP box regime or under a similar scheme for intangible assets in another state. New arrangements for IP assets developed from 1 July 2016 The arrangements for assets developed after 1 July 2016 follow the modified nexus approach. Qualifying assets are restricted to patents, software and other IP assets which are legally protected. IP rights used to market products and services, such as business names, brands, trademarks and image rights, do not fall within the definition of qualifying assets. Relief is geared to the cost incurred by the taxpayer in developing the IP through its research and development activities. Costs of purchase of intangible assets, interest, costs relating to the acquisition or construction of immovable property, and amounts paid or payable directly or indirectly to a related person are excluded from the definition of qualifying expenditure.

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As was the case under the existing scheme, 80% of the overall profit derived from the qualifying intangible asset is treated as deductible expense, preserving the effective tax rate of less than 2.5% on such income. Transfer pricing – back-to-back financing arrangements In February 2017, the tax authorities announced their intention to abolish the minimum margin scheme which had applied on back-to-back financing arrangements between related companies since 2011. The minimum margin scheme provides for a deemed interest rate to be imputed for tax purposes on back-to-back finance arrangements between group companies. The imputed rate ranges from 0.125% for loans of more than €200m to 0.35% for loans of less than €50 million. The scheme will continue to apply until 1 July 2017 and from that date it will be replaced by detailed transfer pricing legislation for intra-group financing transactions, based on the OECD Transfer Pricing Guidelines. The new rules, which have yet to be announced, will apply both for the purposes of issuing tax rulings as well as for the purposes of tax assessments. The rationale behind this development is to reduce base erosion and profit shifting by ensuring that transfer prices are based on real economic activity and valuation. Taxable profits for intra-group financing schemes which are in existence at 1 July 2017 will have to be re-calculated based on two different sets of rules. The minimum margin scheme will apply for the first six months of 2017 and the new transfer pricing rules will apply for the second six months. Any tax rulings already obtained in relation to such arrangements will no longer apply from 1 July 2017. Country-by-country reporting On 30 December 2016, the Minister of Finance issued a ministerial order requiring large multinational enterprise groups (defined as having a consolidated annual turnover exceeding €750 million) to report their results on a country-by-country basis. A revised ministerial order, issued on 26 May 2017, contains detailed guidance on implementation. Every “ultimate parent” entity or “surrogate parent” company of a large multinational enterprise group that is resident in Cyprus for tax purposes is required to file an electronic country-by- country report on behalf of the group. Cyprus tax resident companies belonging to a multinational enterprise group that does not exceed the turnover threshold may also be required to submit country-by-country reports in certain circumstances. The format of the report follows the template of the OECD and EU Directive 2016/881. A constituent entity of an MNE group must notify the Cyprus tax authorities of the reporting entity within the group. The deadline for the first notification is 20 October 2017. Anti-avoidance provisions on hybrid mismatches Cyprus has already transposed the anti-avoidance provisions set out in the new EU Parent Subsidiary Directive, allowing the tax authorities to disregard artificial or fictitious transactions and withhold the corporate tax exemption on dividends received by companies in Cyprus from elsewhere in the EU if the dividend is treated as a tax-deductible expense in the accounts of the company paying it. Anti-Avoidance Directive Like all other EU Member States, Cyprus will also be required to implement the EU Anti- Tax Avoidance Directive (EU) 2016/1164 by 1 January 2019. The directive combats abusive tax practices in the field of corporate taxation and contains rules aimed at addressing

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Elias Neocleous & Co LLC Cyprus some of the practices most commonly used by large companies to reduce their tax liability, including: • a controlled foreign company (CFC) rule to deter profit shifting to low tax jurisdictions; • an exit tax to prevent tax avoidance; • an interest expense limitation; • a broadly worded anti-avoidance rule; and • a rule targeting hybrid mismatches among Member States. A further directive (ATAD II) extending the rule to hybrid mismatches with non-EU countries will have to be implemented by 1 January 2020. Common reporting standard (“CRS”) As a member of the EU, Cyprus is required to implement Directive 2014/107/EU in its national legislation. This directive effectively incorporated the Common Reporting Standard within EU Council Directive 2011/16/EU as regards administrative cooperation in the field of taxation. Cyprus signed the Multilateral Competent Authority Agreement for the automatic exchange of financial information in its own right on 29 October 2014. The requirements of the common reporting standard (CRS) were transposed into domestic law by The Assessment and Collection of Taxes (Amendment) Law 79(I)/2014 and ministerial orders issued under the Assessment and Collection of Taxes Law. The first reports, covering the 2016 tax year, must be submitted by 30 June 2017. Developments affecting Cyprus’s attractiveness as a jurisdiction for holding companies The strategy adopted by successive governments to develop Cyprus as an international financial centre has been to offer a competitive environment in terms of tax ratesand incentives, while maintaining an impeccable reputation in terms of not allowing any abuse of the system for money laundering, tax evasion and other criminal activities. While the new international initiatives, which are driven by the larger economies, create increased reporting and compliance burdens, the Cyprus tax authorities are committed to minimising the impact on taxpayers by modernising their internal systems to make the process as trouble-free as possible. Cyprus’s geographic position, its membership of the EU and the Eurozone, its common law legal system and familiar business infrastructure, combined with the benign tax environment, mean that it should always be on the shortlist when choosing a holding company jurisdiction. A Cyprus company which meets the necessary substance requirements can offer significant benefits, and the quality of life and low operating costs compared to other destinations make Cyprus an attractive proposition.

Industry sector focus The Cyprus economy is largely built on tourism, financial and professional services, shipping and agriculture. Cyprus is one of the world’s leading shipping centres. The Cyprus registry ranks tenth among international fleets and the island is among the world’s top five ship management centres. One of its attractions is a very competitive EU-approved tonnage-based system of shipping taxation, which can give substantial savings for Cyprus- resident shipping and ship management companies.

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The year ahead The Cyprus government recognises that one of the most desirable features of a holding company jurisdiction is stability and predictability, so major changes of direction are unlikely. We see the emphasis being on implementing international initiatives as efficiently as possible, and modernising the operations of the Tax Department to improve interaction with taxpayers and eliminate delays.

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Philippos Aristotelous Tel: +357 25 110 110 / Email: [email protected] Philippos Aristotelous is a partner in the corporate and commercial department of Elias Neocleous & Co LLC. He graduated in law from the University of Kent in 2003. He is a barrister of the Inner Temple and was admitted to the Cyprus Bar in 2005. Philippos heads the firm’s tax, tax planning and advanced business structuring department, and specialises in international taxation and trusts. He was the national reporter for the Tax Committee of the International Bar Association from 2009 to 2011 and he is a member of the Society of Trust and Estate Practitioners and the International Tax Planning Association.

Marissa Christodoulidou Tel: +357 25 110 110 / Email: [email protected] Marissa Christodoulidou is an associate in the corporate and commercial department of Elias Neocleous & Co LLC. Marissa graduated in law, with first class honours, from the University of Leicester in 2013. Shealso holds an LL.M. in International Commercial Law (with distinction) from the University of Leicester. She was admitted to the Cyprus Bar in 2015, having achieved first place and an award for exceptional performance in the professional examinations. She was also awarded the “Felicidad Martinez Purrinos Memorial Prize” for International Commercial Law in 2014.

Elias Neocleous & Co LLC Neocleous House, Makarios Avenue, PO Box 50613, Limassol, CY-3608, Cyprus Tel: +357 25 110 110 / Fax: +357 25 110 001 / URL: www.neo.law

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Jean-Marc Tirard, Maryse Naudin & Ouri Belmin Tirard, Naudin

Overview of corporate tax work In 2016, France did not escape the global depression in the M&A sector. The overall amount of M&A suffered a 9% drop to €148.5bn in 2016. However, a portion of €85.7bn represented the acquisition of French companies by foreign investors, a level unseen since 2008. This number shows the growing attraction of French companies for investors. Indeed, cross-border transactions accounted for 52% of the overall transactions performed in France in 2016, whereas such transactions only represented 39% in 2016. This decrease should not, however, be viewed as a general trend, since it can be explained by numerous conjunctional events, including the US elections, Brexit and the coming elections in France and other EU countries. In particular, the number of transactions performed in 2016 is extremely high compared to previous years with a level unseen since 2007, the year of election of former president Nicolas Sarkozy.

Key developments affecting corporate tax law and practice France’s implementation of BEPS measures: country-by-country reporting At the beginning of 2016, the European Commission published a draft Directive to fight against tax evasion which included provisions introducing a country-by-country reporting mechanism. This draft (EU Directive n° 2016/881), which was adopted on 25th May 2016, amended EU Directive n° 2011/16/EU on administrative cooperation and in the field of taxation. According to EU Directive n° 2016/881, Member States had to implement in their legislation the new reporting rules by 5th June 2017. However, the French Parliament took the lead and introduced, as from 1st January 2016, a country-by-country reporting obligation for French parent companies holding foreign entities or branches. This reporting obligation affects French companies subject to consolidated accounting reporting obligations and having an annual turnover of over €750m, and which are not by held by French or foreign entities already subject to the country-by-country reporting obligation. In a nutshell, companies which hold foreign subsidiaries or branches, establish consolidated accounts and realise a consolidated turnover of over €750m, are subject to this specific reporting obligation.

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France’s implementation of the common reporting standard (CRS) As a follow-up to EU Directive n° 2011/16/EU on administrative cooperation in the field of taxation and EU Directive n° 2014/107 as regards mandatory automatic exchange of information in the field of taxation, the French government published, on th5 December 2016, a Decree (n° 2016/1683) providing the domestic procedural framework for French financial establishments to implement the automatic exchange of information on financial accounts under the Common Reporting Standard. The Decree provides in particular for specifications concerning the persons and financial accounts entering into the scope of the reporting requirements as well as the diligence procedures to be undertaken by financial institutions in this respect.

Tax climate A growing trend: new opportunities for challenging the provisions of the French tax codes based on fundamental principles and superior norms, whether constitutional, European or conventional In recent years, France has tried to increasingly prevent tax fraud and evasion by introducing new anti-abuse mechanisms and more severe sanctions into the French tax legislation. However, despite the legitimate aim of such provisions, their application was, in many cases, unjustified or non-proportional to the infringements it sought to sanction. A recent trend shows that several provisions of the French tax code, as well as their (too) extensive application by the French Tax Authority (FTA), have been increasingly challenged by the taxpayers and eventually censored by the French Constitutional Court or the European Court of Justice. A striking example of this trend is that of the so-called “Google tax” project, aimed at bringing into the scope of the French corporate income tax certain profits made indirectly by entities established outside of France, by granting to the French tax authorities an absolute discretion in determining when a business and corporate structuring should be viewed as implemented with the objective of avoiding or reducing taxation in France. This mechanism was eventually held unconstitutional on the ground that the French tax authorities were granted too great powers in this respect, whereas taxation can only result from the law (please refer to the section below).

Developments affecting the attractiveness of France for holding companies Corporate income tax at the level of the holding company Corporate income tax rates: decrease of the tax burden Up until 31st December 2016, the standard corporate income tax (CIT) rate was 33⅓%. However, entities having an annual turnover inferior to €7.63m and fulfilling certain conditions were subject to a CIT rate of 15% for the fraction of their net profit lower or equal to €38,120. As from 1st January 2017, SMEs now benefit from a reduced CIT of 28% on the fraction of their net profit which does not exceed €75,000. Entities formerly eligible to the 15% rate of CIT will keep benefiting from this reduced rate, and will be subject to the 28% rate only on the fraction of their net profit exceeding €38,120 and lower or equal to €75,000. The 33⅓% rate will remain applicable to the net profit exceeding €75,000. The 28% CIT rate will be progressively implemented for all entities subject to CIT and should be applicable to all fiscal years open on or after st1 January 2020. The 15% CIT rate

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France will remain applicable to the portion of the net profit lower or equal to €38,120, but will be extended as of 1st January 2019 to companies having an annual turnover lower or equal to €50m, provided that certain conditions are fulfilled. “Google tax”: The new scope of French CIT censored by the French Constitutional Court The French government tried to introduce a new provision in the French tax code (FTC) (Article 209 C) of which the purpose was, in a nutshell, to extend the scope of French CIT to the profits generated indirectly by certain tax entities incorporated outside France (though French controlled entities or with the assistance of intermediaries established in France), when there are serious reasons to believe that the purpose of this structuring for the entity incorporated outside is to avoid or reduce taxation in this country. This mechanism was aimed in particular at targeting e-commerce websites operating in France for the benefit of entities incorporated outside this country. However, the FTA was granted in this respect almost absolute discretion in order to apply such mechanism to audited taxpayers. This provision was censored by the French Constitutional Court (“Conseil Constitutionnel”) in its decision n° 2016-744 DC of 29th December 2016 on the ground that it would have given the FTA the power to decide which foreign entities would be subject to CIT in France, in total contradiction to Article 34 of the French Constitution, which provides that taxation can only result from the law. Legal qualification of foreign “Partnerships” and “Limited liability companies” for French tax purposes In a ruling dated 27th June 2016 (n° 386842, Emerald Shores LLC), the French Administrative Supreme Court (“Conseil d’Etat”) confirmed that the so-called “legal equivalence” methodology that was set out in a previous ruling dated 24th November 2014 (n° 363556, Sté Artémis SA) must be used in order to determine the French tax treatment of foreign entities (with no proper French civil law equivalent, and especially for foreign partnerships). In the Sté Artémis SA case law, the French Supreme Court had stated that in order to determine whether income from a US partnership could qualify as a “distribution”, and therefore benefit from the French parent-subsidiary regime (which provides for a partial exemption of income distributed to a French parent company provided that certain holding conditions are met, including a direct holding of the subsidiary), the taxpayer must first determine the French corporate equivalent of the foreign entity (based on its terms and the corporate law of its country of incorporation), and only then apply in a second stage the tax treatment that would have been applicable to its French equivalent. In the case at hand, the French parent company held a 98.82% stake in a US general partnership which in turn was holding a 10% stake in a US LLC. The French parent company considered that, since the intermediary general partnership was considered fully transparent for US tax purposes, the dividend distributed by the underlying US LLC should be deemed directly distributed to the French parent company, and treated as such for French tax purposes. The French Supreme Court rejected that analysis on the ground that since US corporate law provided that a general partnership had an independent legal existence, it was not fully transparent and had to be assimilated to a French “société de personne” at the level of which a net profit is established and then allocated to its partners and taxed at their level. As a result, the French parent company could not be considered as having received dividend from the US LLC but was found to have been attributed a portion of the net result of the general partnership resulting in the non-application of the French parent-subsidiary regime.

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In the Emerald shores LLC case law, a US LLC held a property in the south of France which was used free of payment by the partners of the LLC. As a consequence, the US LLC did not hold any book accounts in France, was not reporting any income and therefore did not pay any corporate tax in France. The FTA considered that despite the tax transparency of the US LLC, its French equivalent was a commercial company which, in the same circumstances, would have been subject to CIT in France on the notional rental income of the property. The lower Courts did not agree with the FTA and ruled in favour of the taxpayer. However, the French Administrative Supreme Court cancelled the decisions of the lower Courts and reminded them that in order to determine the tax treatment to be applied to a foreign entity, the Courts must first identify the French equivalent of the legal entity, and apply the tax treatment that would have been applied to such entity, without taking into consideration the tax treatment applied in the country of incorporation of the foreign entity. Taxpayers should therefore carefully review their current structuring to avoid adverse consequences that may result from the application of the above-mentioned case law. Taxation of distributed income Application of double-tax treaties being effectively subject to tax in the Contracting State In two decisions dated 9th November 2015 (n° 370054, min. c/ LHV, and n° 371132, Sté Santander Pensionnes SA EGFP), the French Administrative Supreme Court ruled that the benefit of the application of double-tax treaties is subject to being a tax resident of the other State, i.e. being effectively subject to taxation in that State. As a result, a company which is exempt from taxation does not qualify for application of the treaty. The outcome of these rulings was much anticipated by professionals as there has been, so far, some inconsistency regarding the interpretation of the criteria to qualify as a resident within the meaning of double-tax treaties. According to the French Administrative Supreme Court, a person qualifies as resident in a jurisdiction if it is effectively taxed there, and not only liable to tax. As a result, persons exempt from taxation because of their activities or their nature should no longer be able to benefit from the application of the provisions of a double-tax treaty. The above-mentioned cases concerned a German provident fund (LHV) and a Spanish pension fund (Sté Santander Pensionnes) which had both invested in securities in France and received dividend distributions (between 2000 and 2005) which were subject to a withholding tax of 25%, as provided by the applicable law in France at that time. Both entities requested the application of the reduced rate of 15% applicable under the France-Germany and the France-Spain double-tax treaties. However, the FTA refused the application of the reduced rate on the ground that each company was not effectively taxed in their respective country and could not be considered as resident within the meaning of the double-tax treaties, and therefore could not benefit from the provisions of these treaties. The French Supreme Court ruled in favour of the FTA and explained that the terms of the provision dealing with tax residence had to be interpreted in light of their ordinary meaning, within the context of double-tax treaties and in light of their main purpose, which is to avoid double-taxation. In this respect, both of the above-mentioned double-tax treaties specified that a person is considered to be a resident of a Contracting State when such person is, according to the legislation of such State, subject to taxation in this State.

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Unfortunately, the ruling of the Supreme Court should be considered as establishing a general principle applicable to all tax treaties concluded by France which contain a similar definition of the term “resident” as the one stipulated in the France-Germany and France- Spain tax treaties. Foreign entities receiving income from France should therefore carefully review their current eligibility to the double-tax treaties concluded with France. The French Supreme Court confirmed its interpretation of the provisions of double-tax treaties regarding the residence of persons or entities in a recent ruling dated 20th May 2016 (n° 389994, min c/. Sté EasyVista). It is, however, interesting to point out that in this latter case, the ground on which the French Supreme Court refused to apply the provisions of the double-tax treaty between France and Lebanon are slightly different. In this case, a Lebanese offshore company was exempt from tax on its profit realised in Lebanon, but was still subject to a minimum flat-rate taxation. However, the French Supreme Court ruled that since the lower Courts did not analyse whether such flat-rate tax was similar to the taxes defined in the France-Lebanon double-tax treaty, the Lebanese entity could not be considered to be resident in Lebanon in the meaning of the double-tax treaty. In light of the “territoriality principle” (i.e. foreign profits are not taxed in France) applicable in France, one could also wonder whether a French entity only doing business in foreign states, and therefore being not effectively subject to tax in France, could be considered as a resident of France within the meaning of double-tax treaties and request the application of their provisions. Parent-subsidiary regime: the end of discrimination Article 216 of the FTC provides for a partial exemption of CIT in respect of income distributed by subsidiaries to their French parent companies provided that the French parent companies meet certain conditions set out in Article 145 of the FTC. A fixed portion of 5% of the dividends (deemed to represent non-deductible expenses incurred in respect of the participation) is, however, added back to the taxable profit. Such regime was reserved to French parent companies holding at least 5% of their subsidiaries’ share capital and voting rights. However, it was not applicable if the shares did not carry voting rights (except for subsidiaries located in an EU Member State which were subject to the less restrictive EU Parent-Subsidiary Directive). The French Supreme Court ruled in its decision dated 8th July 2016 (n° 2016-553 QPC) that such difference in treatment was contrary to the principle of equality before the law and charges levied by the State. As a result, the French parent-subsidiary regime is now applicable, without limitation, as to the rights attached to the shares held, to all subsidiaries irrespective of their location (except for subsidiaries located in “non-cooperative states”, for which the parent company has to demonstrate that its purpose was not to avoid taxation). “Group Stéria” case law: the end of the exemption from taxation of the portion of cost and expenses of 5% within French tax consolidated groups As mentioned above, distributions made by a subsidiary to its French parent company are, as a general rule, exempt from CIT, except for a portion of costs and expenses of 5%. However, within French tax consolidated groups (“groupe d’intégration fiscale”), such portion of costs and expenses was “neutralised”, leading to a full exemption of distributions made between companies that are members of the same French tax consolidated group.

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The result was a difference of tax treatment between: • distributions made by French subsidiaries to their French parent companies which were fully exempt from CIT when such subsidiaries were members of a French tax consolidated group; and • distribution made by EU subsidiaries which remained subject to French CIT in a portion representing 5% of the dividends, even if these subsidiaries were meeting the conditions to be members of a French tax consolidated group, except for the payment of CIT in France. The European Court of Justice ruled on 2nd September 2015 (C-386/14, Groupe Stéria SCA) that such difference of treatment was contrary to the EU freedom of establishment principle. To comply with the Stéria case law, the French government abolished the “neutralisation” available for companies that are members of a French tax consolidated group. In addition, since 1st January 2016, the same tax treatment applies to distributions made by French or EU/EEA subsidiaries to French parent companies, which are now subject to CIT on a portion of costs and expenses representing 1% of the dividends received, provided that: • for French subsidiaries, they meet the conditions to be a member of a French tax consolidated group; and • for EU/EEA subsidiaries, they meet all the conditions that would have been required for a French subsidiary to be a member of a French tax consolidated group, apart from being subject to CIT in France. The 3% contribution on distributed income Until 31st December 2016, dividends paid by certain French companies (SMEs were not concerned) were subject to a 3% contribution. Such contribution did not apply to distributions made within French tax consolidated groups, whereas an EU parent company could not benefit from such exemption (despite the fact that it could have been a member of a French tax consolidated group if it would have been incorporated in France). French subsidiaries were therefore subject to the 3% contribution depending on the country of incorporation of their parent company. The French Constitutional Court ruled on 30th September 2016 in its decision n° 2016-571 QPC, Layher SAS, that the 3% contribution exemption available to members of a French tax consolidated group was unconstitutional. Indeed, such favourable tax treatment resulted in an unjustified difference in treatment between entities that are members of a French tax consolidated group and entities that are not, contrary to the principle of equality before the law and charges levied by the State. As a consequence, the Finance Bill for 2017 extended the scope of the exemption of the 3% contribution to the following distributions made on or after 1st January 2017: • distributions between companies that meet the requirements to be part of a French tax consolidated group; and • distributions made to companies that cumulatively: • are subject to a tax that is equivalent to the French CIT in an EU Member State or in a state that has concluded with France an administrative assistance agreement on tax matters covering tax evasion and avoidance; and • would satisfy the conditions to be part of a French tax consolidated group with the distributing company.

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However, such exemption has not been extended to distributions made to companies located in a non-cooperative state unless the distributing company can demonstrate that the activities conducted by the company located in the non-cooperative state are real and that their purpose is not to commit tax fraud or locate profits in a non-cooperative state. Please also note that a recent decision of the European Court of Justice dated 17th May 2017 (C-365/16, AFEP) ruled that the 3% contribution applied to distribution of income made by French companies to their parent companies was contrary to EU Parent-Subsidiary Directive when such distributions consisted in the redistribution of income previously distributed by EU subsidiaries of the French companies. Exemption of withholding tax on distributed income: a new anti-abuse provision Article 119ter of the FTC provides for the exemption of withholding tax of income distributed by French parent companies to their parent companies located in an EU/EEA Member State. Prior to 1st January 2016, if a EU/EEA parent company was controlled by a non-EU/ EEE company, such exemption might be conditioned to demonstrating that the EU/ EEA intermediary company had not been set up only for tax purposes (i.e. to avoid the withholding tax). This provision was amended by the Amending Finance Bill for 2015 n° 2015-1786 to comply with the EU Directive 2015/121 adopted on 27th January 2015 which adds an anti- abuse provision within the EU Parent-Subsidiary Directive. The new provision provides that it will be up to the FTA to bear the burden of proof that the interposition of an EU/EEA company between a French company and a non-EU/EEE company is “non-authentic” and of which the main purpose is the pursuit of a tax benefit based on the application of the parent-subsidiary regime. If this new provision is welcomed, it is, however, to be noted that this provision has a larger scope than the provision applicable until 31st December 2015 and could lead to more litigation with the FTA. CFC Rules: changes affecting the taxation of individuals, partners or beneficial owners of corporate structures Taxation of capitalised income within certain entities: CFC rules of Article 123bis of the FTC partly held unconstitutional Article 123bis of the FTC provides in substance for the taxation, under certain conditions, of all the income capitalised within “entities” established outside France and subject to a favourable tax regime, as deemed distributed income in the hands of French resident individuals who are the beneficial owners. In particular, such provisions were applied by the FTA to foreign trusts having a French resident settlor, irrespective of the nature of the trust, which is debatable as it is contrary to the purpose of the law. In addition, when the concerned “entity” is established or incorporated in a non-cooperative state or in state which has not concluded an agreement providing for the exchange of information with France, said article provides that the amount of undistributed income subject to taxation in France tax cannot be lower to a notional amount computed by multiplying the market value of the assets by a specific rate provided each year by the FTA. The above CFC rules are not applicable to entities established or incorporated in the European Union (EU), provided that taxpayers are able to demonstrate that the use of such

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Tirard, Naudin France entities was not artificial and therefore not for tax evasion purposes. In other words, the application of Article 123bis of the FTC could only be avoided for entities established or incorporated in the EU. The French Constitutional Court ruled in a decision dated 1st March 2017 (n° 2016-614 QPC), that such difference in treatment between entities established or incorporated outside the EU and those in the EU was contrary to the principle of the equality of treatment. As a consequence, tax resident individuals of France will no longer be subject to income tax on a deemed distributed income if they can demonstrate to the FTA that no income was capitalised within entities established or incorporated outside the EU and subject to a favourable tax regime. The French Constitutional Court also ruled that taxpayers who are within the scope of Article 123bis of the FTC must be allowed by the FTA to demonstrate that the income effectively distributed by the entity is lower than the above-mentioned notional amount.

Industry sector focus E-business Accounting and tax treatment of domain names: clarification of the criteria under which the right to use a domain name qualifies as an “intangible fixed asset” In a decision dated 7th December 2016, the French Administrative Supreme Court ruled that the administrative authorisation – held by the company “eBay France SA” with the competent registration body (AFNIC) – to use the domain name “ebay.fr” met the criteria traditionally retained by the French Courts to qualify as an intangible asset. As a consequence, the Conseil d’Etat held that such authorisation should have been recorded in eBay France SA’s book accounts in respect of the relevant audited years (2003 to 2006). The French tax authorities were therefore allowed: • to reinstate on the company’s opening balance sheet of 2003 the estimated market value of “this intangible fixed asset” (irrespective of whether such acquisition was made free of charge or for a consideration); • to reintegrate in eBay France SA’s taxable profit subject to corporation tax the corresponding amount in respect of 2003; and • to consider that the effective use of the domain name “ebay.fr” by a non-French parent company (which operated on a free licence basis) should have given rise to the payment of royalties to eBay France SA (for a rate eventually fixed at 2%), the amount of which should be reintegrated in the company’s taxable profits and should also trigger a withholding tax in France. In practice, the criteria consistently retained by the Conseil d’Etat for an asset to qualify as an intangible fixed asset are the following: • being a regular source of profit (which was debated in the present case since the use of the domain name had been granted to a parent company on a free licence basis); • being of a lasting nature (which was debated in the present case since the right to use a domain name is a mere administrative authorisation which must be renewed annually with the competent authority, the AFNIC); and • being transferable (which was also debated since an administrative authorisation with the AFNIC could not in proper terms be transferred but only abandoned to the benefit of another person).

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This decision should serve as a reminder for holders of domain names of significant importance to take a specific care in properly booking the right to use a domain name, valuating it and a domain name and having its use duly remunerated. Real estate Entry into force of the 4th amendment to the France-Luxembourg tax treaty On 1st February 2016, the 4th amendment to the France-Luxembourg tax treaty entered into force. This amendment notably aimed at modifying the stipulations of its Article 3, by implementing a new section related to the taxation of capital gain resulting from the disposal of shares within real estate entities. The provisions of this amendment will apply in France as follows: • concerning taxes on income levied by way of withholding: to amounts taxable as of 1st January 2017; • concerning taxes on income not levied by way of withholding: to amounts relating to year 2017; or to financial year open on or after st1 January 2017; and • for other taxes, to taxes whose taxable event occurs on or after 1st January 2017. These provisions will affect the widely used structuring consisting in holding French real estate properties through one or several entities located in Luxembourg to avoid the taxation of the overall capital gain on the disposal of shares. Financial services End of the so-called “undue risk theory” (“théorie du risque manifestement excessif”): the French Supreme Court limits the power of interference of the FTA Under the French tax legislation, the FTA is not allowed to interfere within the business and management decisions of companies. A common example of this principle is the freedom given to a business owner to choose between financing the investments a company through loans, bearing interests, or equity. In recent years, however, the French Administrative Supreme Court (see decision n° 327764, Sté Legeps, dated 27th April 2011) has developed the principle of “abnormal act of management”. Under this principle, the FTA can disregard certain business decisions for the computation of the taxable profit of an entity. Typically, when the FTA considers that certain acts, bearing an excessive risk and resulting in significant losses for an entity, have not been made in the interest of this entity, it will disallow the deductibility of such acts. In a ruling dated 13th July 2016, n° 375801, SA Monte Paschi Banque, the French Supreme Court limited the power of interference of the FTA by reminding that an act of management can be disregarded for the computation of the taxable profit of an entity only if it has been performed in contradiction with the purpose of such entity. The FTA cannot disallow the deductibility of losses on the grounds that the business owner of an entity took excessive risks. In the case at hand, the Monte Paschi Bank agreed to provide payments facilities to a tech company which was unable to repay them. The FTA tried to disallow the deductibility of the provisions booked by the bank for the computation of its taxable profit. The French Supreme Court ruled that since the purpose of a bank is to grant loan or payment facilities to clients, the FTA could not disallow the deductibility of such provision, regardless of the excessive risks taken by the bank. This decision was welcomed by the financial sector as well as by business owners and tax practitioners.

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However, because of the “territoriality” principle applicable in France, entities still cannot deduct losses incurred abroad for the computation of the taxable profit in France. This principle limits the ability of French companies to develop their business activities abroad and provides a significant advantage to foreign competitors not subject to the same rules in their country of incorporation.

The year ahead Contemplated evolutions resulting from President Macron’s programme regarding the taxation of corporate entities Progressive decreases of the CIT rates President Macron has made few propositions in respect of the taxation of companies, although a key element of his elective campaign was the reduction of the corporate income tax. The government under President Hollande already enacted plans for a gradual decrease of the CIT rate from 33⅓% to 28% between 2018 and 2020 (see “Developments affecting the attractiveness of France for holding companies” above). However, President Macron wishes to go further and reduce the CIT rates for all companies to 25% by the end of his term in 2022, specifying that the reduced 15% CIT rate would keep applying to the portion of net profits lower than or equal to €38,120. Replacing the specific “CICE” tax credit by a decrease of employers’ social levies The Competitiveness and Employment Tax Credit (CICE) is a 7% tax credit which is based on a company’s gross wages up to 2.5 times the minimum wage. Wages over this amount do not count towards the tax credit, even for the portion within the cap. The minimum wage for determining this cap is calculated for one year based on statutory working hours. The CICE is determined on a calendar-year basis, regardless of the date or length of a company’s financial year. President Macron wishes to remove this tax incentive and replace it by a durable decrease of employers’ contributions. Contemplated evolutions resulting from the expected transposition into domestic law of the Anti-Tax Avoidance Directive On 20th June 2016, the ECOFIN Council approved the Anti-Tax Avoidance Directive (EU) 2016/1164 (“ATAD”). The EU Member States must implement into their domestic legislation ATAD-compliant provisions by 31st December 2018, at the latest, with the provisions applying from 1st January 2019. As a reminder, the ATAD sets out minimum standards that Member States need to adhere to in several areas covered by the OECD work on base erosion and profit shifting (BEPS) including interest deductibility limitations, an exit tax mechanism, a general anti-abuse rule, new CFC rules and provisions aiming at preventing double deductions resulting from hybrid mismatches. The impact of the entry into force of the ATAD will, however, be limited to the extent that several domestic provisions in relation to the above issues already exist.

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Jean-Marc Tirard Tel: +33 1 53 57 36 00 / Email: [email protected] Jean-Marc Tirard is recognised as an authority in French and international tax law. He has more than 40 years’ experience advising major French and foreign companies on domestic and international corporate tax issues as well as negotiating with tax authorities and handling tax litigation. He notably negotiated, together with Maryse Naudin, the first France-US transfer pricing APAs for Visteon Corporation (an American global automotive electronics supplier spun off from the Ford Motor Company in 2000). Jean-Marc Tirard was a member of the EU Commission Advisory Panel on the choice of methodology for the evaluation of the effective tax rates in Member States (2001) and, more recently, of the tax experts panel on the preparation of the French government's Assises de la fiscalité (2014). He was Chairman of the Tax Commission of the French Committee of the International Chamber of Commerce (ICC) and Co-Chairman of the International Tax Commission of the French Committee of the ICC.

Maryse Naudin Tel: +33 1 53 57 36 00 / Email: [email protected] Maryse Naudin has a wealth of experience in French and international tax, as well as in litigation with a particular emphasis on international tax issues (including European community freedoms and fundamental law principles). She now has more than 30 years’ experience in advising and defending a varied clientele, from multinational corporations to high-net- worth individuals, in relation to cross-border tax issues. She is experienced in setting up and structuring multinational large and medium-sized groups in Europe (notably in the e-business sector) and also has proven expertise in comparative corporate taxation of trading and holding companies within the EU. She negotiated, together with Jean-Marc Tirard, the first France-US transfer pricing APAs for Visteon Corporation.

Ouri Belmin Tel: +33 1 53 57 36 00 / Email: [email protected] Ouri Belmin started his career working on corporate transactional matters and real estate issues for the Paris offices of reputed UK law firms, before joining the financial services department of one of the Big 4 audit firms. After several years of practice as a senior lawyer at Tirard, Naudin, Mr. Belmin is now in charge of the firm’s Paris team. He advises French or foreign companies as well as high-net-worth individuals on all French aspects of international taxation. Mr. Belmin has been involved in numerous tax litigations and has an excellent knowledge of all steps and aspects of the French tax procedure.

Tirard, Naudin 9 rue Boissy d’Anglas, 75008 Paris, France Tel: +33 1 53 57 36 00 / Fax: +33 1 47 23 63 31 / URL: www.tirard-naudin.com

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Dr. Gunnar Knorr & Marc Krischer, LL.M. Oppenhoff & Partner mbB

Overview of corporate tax work over last year Types of corporate tax work German corporate tax work in 2016/2017 primarily focused on M&A transactions together with subsequent restructurings – particularly avoiding forfeiture of CIT/trade tax losses after a change of control due to new legislation – and transfer pricing issues, mainly forced by increased queries of tax auditors as well as the introduction of country-by-country reporting. Moreover, the German tax authorities have steadily increased application of the instruments of criminal enforcement law to tackle structures and put pressure on management. This was strengthened by discussions on tax policies of multinationals. Hence, the demand for tax compliance issues and advice on tax-related criminal proceedings remains high, in particular against the background of a Finance Ministry decree from 20161 concerning the distinction between a (non-criminal) amendment of tax returns and a valid (voluntary) self- disclosure which stipulates relief by way of implementing an Internal Tax Control System. Still on top are administrative and criminal investigations around so-called cum/ex-trades concerning multiple withholding tax refunds which had only been deducted and paid once. Significant deals and highlights illustrating aspects of corporate tax Major deals in 2016/2017 were not predominantly tax-driven, but nearly all deals required intensive corporate tax work, inter alia: Bayer AG: The announcement of the planned acquisition of “Monsanto Co.”, the world’s largest producer of seed, by “Bayer AG” for a purchase price of approximately €66bn, was a bombshell. The merger is expected to be completed by the end of 2017. After the shareholders of Monsanto have agreed to the deal, the approval of the antitrust authorities of the USA and the EU is awaited. However, Bayer will have to sell parts of its own seed and crop science activities for competition reasons before the merger. Peugeot: In the spring of 2017, the planned acquisition of the German “Adam Opel AG” and the British “Vauxhall Motors” by the French automobile group “Peugeot Société Anonyme” (Groupe PSA) was unveiled. Both brands have so far been part of the General Motors Group (GM), which is now selling them for around €1.3bn. A further €900m will be paid by PSA for the financing division “GM Financial”. PSA would rise to the second largest automobile manufacturer in Europe with a market share of approximately 17%. By 2026 PSA expects annual synergies of €1.7bn through the merger. Closing is planned for the second half of 2017, while the authorisation of the merger by the antitrust authorities is still pending. In particular, tax issues and the future handling of pensions were identified as the main working areas.

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A.P. Moller-Maersk Group: The worldwide shipping company, simply known as Maersk and headquartered in Denmark, acquired the competitor “Hamburg Süd” (Hamburg Südamerikanische Dampfschifffahrts-Gesellschaft KG) from “Dr. Oetker Group” in March 2017. The purchase price amounted to approximately €3.7bn. Blackstone Group: After an unsuccessful IPO of the IVG subsidiary “Office First” at the beginning of November 2016, the company now got acquired by the Blackstone Group for €3.3bn. This was also the largest commercial real estate deal in Germany in recent years. Office First’s portfolio includes approximately 100 commercial properties with a total area of around 1.4m square metres. Office First’s former owner is“IVG Immobilien AG”, which was insolvent in the meantime and has since been successfully restructured. Fresenius: At the end of January 2017, the medical group “Fresenius SE & Co. KGaA” acquired the Spanish clinic operator “Quirónsalud” for €5.8bn, supported by the issuance of several bond packages totalling €2.6bn. In the meantime, the next acquisition is already in the pipeline: Fresenius plans to acquire “Akorn Pharmaceuticals”, the American generics company, at the price of €4.4bn (including debt) and is expected to close the deal by the end of 2017.

Key developments affecting corporate tax law and practice Domestic – cases and legislation On March 29, 2017,2 the German Federal Constitutional Court (BVerfG) decided that the restriction of loss deduction pursuant to Sec. 8c Par. 1 S. 1 of the German Corporation Tax Act (KStG) is unconstitutional regarding its version between January 01, 2008 and December 31, 2015. The provision stipulates that loss carry-forwards of a corporation forfeit pro rata in cases of change of control if more than 25% (and up to 50%) of the subscribed capital of a corporation is transferred to an acquirer or closely related persons within a period of five years. The loss deduction is contrary to the general principle of equal treatment, guaranteed by Article 3 Par. 1 of the German Constitution. The Court pointed out that it is a legitimate aim to combat undesirable tax planning arising from the trading of company shells including its losses. However, in case of an isolated link to the transfer of shares of more than 25%, the limit of permissible constitutional typification is exceeded. The scope of the provision is too wide, so that it not only combats the trade of company shares including its losses but also cases where the acquisition of the equity is justified by other reasons. The Court also noted that the economic identity between the loss-producing and the loss- making taxpayer is not forfeit if more than 25% of the subscribed capital of a corporation is transferred. Although a shareholder with a proportion of more than 25% had a blocking minority under German company law, only a majority shareholder would have a direct influence on the company’s identity. Apart from that, the economic identity of the company continues to depend on the extent to which the majority stake takes advantage of its influence. Moreover, the Court also requested the legislature to adopt a new regulation with effect from January 01, 2008, and at the latest by 31 December 2018. Otherwise, Sec. 8c Par. 1 S. 1 German Corporation Tax Act (KStG) shall become invalid as of January 01, 2019, retroactively. Before the German Federal Constitutional Court (BVerfG) made its aforementioned decision concerning transfers of shares of more than 25% and below 50%, the legislator

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Oppenhoff & Partner mbB Germany introduced Sec. 8d German Corporation Tax Act (KStG) on December 20, 20163 with retroactive effect from January 01, 2016. The Provision states that, at the election of the taxpayer, loss carry-forwards are not forfeit if several conditions are met. The loss company must have carried out on the same business for at least three years before the share transfer. “Business” means the company’s entire business activities, continued with a consistent profit motivation and further characteristics to be maintained, suchas services or products, customer and supplier base, markets and qualification of the employees. The election cannot be made by the taxpayer in case of: • the business is put on hold; • the business is pursued with a different purpose; • the corporation starts an additional business; • the corporation participates in a joint venture; • the corporation takes the position of an parent company for a tax group; and/or • assets are transferred to the corporation below their fair market value. On November 28, 2016, the Federal Tax Court has decided that tax privileges for restructuring profits according to the so-called Restructuring Decree (Sanierungserlass) violate the constitutional principle of legality of administrative actions.4 The Decree stipulated for a tax deferral or abatement of taxes resulting from waiver of debt for the purpose of a company restructuring. As a direct reaction to the decision of the Federal Tax Court, the legislator has enacted an amendment to the Corporate Tax Act reintroducing a (statutory) tax exemption for restructuring gains (Sec. § 3a EStG).5 To benefit from the new rule, the taxpayer must demonstrate the necessity and capacity of a recapitalisation at the time of the waiver, the adequacy of the waiver for business purposes and the creditor’s recapitalisation intention. At the same time, restructuring costs (e.g. expenses for the restructuring plan and related advisory) are not deductible for tax purposes. The new provision applies to waivers made after February 08, 2017. However, it still requires an approval under state aid law by the EU Commission before becoming applicable. With effect January 01, 2017 a new “anti-treaty shopping rule” (Sec. 50j EStG)6 was introduced in order to avoid so-called cum-cum-structures (dividend stripping) which works in conjunction with the new Sec. § 36a EStG7 enacted with effect from July 27, 2016. Sec. 36a of the German Income Tax Act (EStG) stipulates that for full crediting of the withholding tax on dividends, an investor is required to hold shares for at least 45 days (around the dividend record date) as legal and economic owner and assume at least 70% risk of loss in value.8 The provision of Sec. 50j of the German Income Tax Act (EStG) requires the same conditions for foreign creditors, seeking a full or partial relief under a Double Tax Treaty. European – CJEU cases and EU law developments In the area of EU legislation, the Council Directive known as “ATAD 1”9 was first and foremost important in 2016. It lays down rules against tax avoidance practices that directly affect the functioning of the internal market. The Directive is supposed to represent the minimum standard on anti-tax avoidance within the EU. It implements the OECD’s recommendations from BEPS. Its concrete aims are to combat tax avoidance practices, to restore trust in the fairness of tax systems and to allow governments to effectively exercise their tax sovereignty. Taxpayers that are subject to corporate tax in one or more Member States as well as permanent establishments in one or more Member States of entities resident for tax purposes in a third country are within the scope of the provisions of ATAD 1.

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Article 4 provides interest rate barrier rules, whose intentions are to prevent companies from using tax-deductible interest expenses for the transfer and minimisation of profits. Article 5 provides rules concerning exit taxation. A comprehensive taxation of hidden assets is foreseen in the case of a transnational transfer of those assets which is not only temporary, or the transfer of taxation or business activities from one Member State to another EU Member State or to another third country. Article 6 contains a general anti-abuse rule, which states that a tax arrangement whose main purpose is to obtain a tax advantage which is contrary to the aim or purpose of the applicable tax legislation is inappropriate and not to be taken into account in taxation. Articles 7 and 8 include controlled foreign company rules implementing BEPS Action 3. The purpose is to prevent domestic enterprises from transferring income to low-taxed, controlled foreign companies or establishments. This income is subject to a (scheduled) tax deduction. Article 9 provides rules on so-called hybrid mismatches, arising through differences in the legal classification of financial instruments or companies and the possibility of a double deduction of payments or a deduction with simultaneous non-taxation of the income. Where a deduction is made with simultaneous non-taxation, the Member State of the payee shall refuse to deduct the payment. The provisions of Article 9 are solely applicable within the EU at the moment. Furthermore, there already exists a draft of an EU Council Directive known as “ATAD 2”,10 amending ATAD 1 regarding hybrid mismatches. Therefore, the scope of Article 9 should be extended to additionally include hybrid mismatches between EU Member States and third countries. A new Article 9a should cover mismatches resulting from reversed hybrid enterprises and a new Article 9b should cover double-resident companies. In general, the regulations of the ATAD 1 are to be transposed by the Member States into national law by December 31, 2018 and have to be applied from January 01, 2019. Concerning Article 4 (interest barrier rules), the Directive gives allowance to the Member States to apply their (equally effective) interest barrier rules until January 01, 2024. This poses problems because the term ‘equally effective’ is not explained in detail. Article 5 (exit taxation) shall be implemented no later than December 31, 2019 and shall be applied from January 01, 2020. In Germany, regulations are already in force that largely meet or even surpass ATAD’s specifications, i.e. the interest rate barrier rules, the exit taxation and the general anti-abuse rule. Nevertheless, the directive has far-reaching implications, since the interpretation of numerous national regulations will ultimately be made by the CJEU without consideration of German constitutional law. BEPS On June 07, 2017, 68 countries, including Germany, signed the “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” (hereafter “MLI”) in Paris. As the first multilateral treaty of its kind, it will result in manifold and profound changes in international taxation. The agreement requires the partaking countries to implement a series of anti-avoidance rules in their network of tax treaties without renegotiating them in turn. This is a sensible procedure, as comprehensive changes to the OECD Model Tax Convention and the bilateral tax treaties concluded by countries are required in view of the anti-avoidance measures. Considering the number of these internationally concluded agreements, this would lead to a delay in the adoption of the measures agreed in the OECD/ G20 BEPS Action Plan.

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In case of an existing treaty that is covered by the Convention, the Convention will come into effect three months after both parties to the treaty have deposited their instrument of ratification, acceptance or approval. The Convention will not function as an amending protocol to a treaty. Instead of directly amending the text of a covered tax agreement, the Convention will be applied alongside existing tax treaties and modifies their application. The Convention contains tax treaty measures reflecting minimum standards agreed to by countries as part of the OECD/G20/BEPS work as well as tax treaty measures reflecting optional anti-avoidance provisions. Countries that have signed the Convention have to consider the provisions reflecting minimum standards. Those are the provisions on the prevention of treaty abuse (cf. Article 6 and 7 MLI) and the provisions on improving dispute resolution (cf. Article 16 and 17 MLI). However, the Convention does provide flexibility within the minimum standards (e.g. in deciding whether to adopt provisions on “limitation on benefits” or the “principal purpose test”). Besides the minimum standards, the Convention also allows the governments to apply other anti-abuse measures within their tax treaty networks. However, the Convention contains specific anti-avoidance rules on transparent entities (cf. Article 3 MLI), dual resident entities (cf. Article 4 MLI) methods for elimination of double taxation (cf. Article 5 MLI), dividend transfer transactions (cf. Article 8 MLI), capital gains from the alienation of shares or interests of entities deriving their value principally from immovable property (cf. Article 9 MLI), permanent establishment situation in third states (cf. Article 10 MLI) and artificial avoidance of permanent establishment status cf( . Article 12 to 15 MLI). The Convention provides for a system of various options for an opting out that individual signing countries can exercise.11 In general, it can be stated that the Convention will particularly expand the definition of permanent establishment. In the future, even minor business activities abroad (e.g. a key account manager) may result in the registration of a permanent establishment. Furthermore, the so-called “principal purpose test” will lead companies to demonstrate that their structures are economically justified and not merely set up due to tax advantages. Another new feature is that, in the event of a double residence of a company (legal domicile in one country, management in the other country), an agreement procedure will determine the question of which double tax treaty needs to be applied. At the end of 2016, the Anti-BEPS I Act12 was adopted. Thus, the national regulations on transfer pricing documentation were adjusted to match the OECD guidelines. In the future, the national transfer pricing documentation will consist of three parts: the local file; the master file; and the country-by-country report. Up to now, the master file as well as the country-by-country report were missing. A master file is now to be drawn up by companies which form part of a multinational business group and whose revenue was at least €100m during the past business year. The preparation of a country-by-country report pursuant to Sec. 138a German Fiscal Code is only obligatory for companies where: (i) the consolidated financial statements include at least one foreign group company; (ii) the consolidated revenue reported in the consolidated financial statements amounted to at least €750m; and (iii) the domestic group parent company is not included in the consolidated financial statements of an external group parent company. The country-by-country report must be prepared for the first time for financial years starting after December 31, 2015. In addition to the regulations on transfer pricing documentation, the Anti-BEPS-I Act also provides national regulations on the automatic cross-country exchange of information with regard to tax rulings. In Germany, the new provision covers binding rulings

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(verbindliche Auskünfte), binding confirmations subsequent to a tax audit (verbindliche Zusagen), unilateral advance pricing commitments (Sec. 178 Par. 1 General Tax Code), as well as advance pricing agreements. Since January 01, 2017, EU Member States are obliged to exchange information on new, amended or renewed tax rulings every six months. In order to implement Action 5 of the BEPS project, the Act to Counter Harmful Practices in connection with the Licensing of Rights13 was enacted to restrict the tax deductibility of royalty expenses and other expenses for the licensing of rights that are not taxed or only taxes at a low rate due to a preferential regime to be considered as harmful applicable to the recipient (so-called IP boxes or licence boxes). According to § 4j EStG, the scope of application shall be limited to payments between related persons where the recipient benefits from an income tax burden of less than 25% and which is based on a privilege for the income from the licensing of rights that deviates from standard taxation. In turn, if this preferential regime requires a substantial activity in the recipient’s state the expenses restriction does not apply in Germany which, however, cannot be assumed if the right has been purchased or developed by related persons. Moreover, if the regime applicable to the recipient is consistent with the so-called “nexus approach” (chapter 4 of Action 5), it is deemed to be harmless. The non-deductible share of the expenses is calculated on the basis of the difference between 25% minus the effective income tax burden for the recipient divided by 25% (the lower the tax rate, the higher the non-deductible share). The restriction applies to expenses accruing after December 31, 2017. The new Tax Evasion Enforcement Act14 attempts to confront the problems revealed by the so-called Panama Papers. The Federal Government aims to improve the possibilities of uncovering offshore structures and preventing tax evasion. This shall be achieved by increased notification obligations and by stricter sanctions. Taxpayers and certain institutes (such as banks) are subject to new notification, cooperation and information obligations. These obligations primarily relate to participation in third country companies (more than 10%) or business activities with such companies (without being a shareholder). At the same time, the requirements for punishable tax evasion in case of (enduring) tax evasion through an offshore vehicle as well as the administrative offence regime concerning the notification obligations were amended accordingly. Moreover, tax secrecy under Sec. 30a German Fiscal Code concerning bank customers will be eliminated. Additionally, the obligation to cooperate with the authorities in case of collective requests was strengthened and the verification obligations of credit institutions as well as the bank account enforcement procedures were intensified (Sec. 93, 93b, 154 German Fiscal Code).

Tax climate in Germany Compared to other asset classes, the German real estate market still offers safe and profitable opportunities for domestic and international investors. As prices for land in first-tier cities like Munich or Frankfurt steadily rise, second- or third-tier places are also being focused on by investors which target not only office spaces, but also residential property and special real estate. This strong demand for German real estate has already triggered desires of fiscal authorities and politicians and led to real estate transfer tax (RETT) rates of up to 6.5% (depending on the federal state) of the purchase price, and respectively the fair market value in cases of absence of a purchase price. Besides the relatively high rates, the German tax authorities are currently discussing further restrictions on RETT-exempted share deals

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(e.g. lowering the 95% threshold for an exempted sale of shares or extending the so-called retention period from five to 10 years). Additionally, the RETT exemption rule applying to group internal reorganisation is under fire from the Federal Tax Court, inter alia with respect to EU state aid rules, which will probably take a very narrow view on the exemption requirements leading to inapplicability with retroactive effect. The behaviour of the tax authorities concerning multiple refunds of German withholding tax on dividends until 2011 (so-called cum/ex-trades) provoked the setting up of an enquiry commission in the lower house of the German parliament (Bundestag). The investigation and interrogation of well-known witnesses led to increased media attention on this complex issue, which might complicate the tax issues of banks operating in Germany.

Developments affecting attractiveness of Germany for holding companies Apart from a general 95% tax exemption on capital gains and dividends for substantial shareholdings (more than 10%), Germany does not provide for further specific tax incentives or attractions for holding companies.

Industry sector focus Before the strong and enduring effect of the Fukushima catastrophe massively changed German energy policy, legislators introduced the nuclear fuel tax with effect from 1 January 2011. Between 2011 and 2016 it yielded €6.3bn for the German budget. However, this tax has been heavily criticised as violating German constitutional law since the Federal Government is regarded to not have been competent to enact the nuclear fuel tax act. Responding to a formal query of the Fiscal Court of Hamburg, the German Federal Constitutional Court decided on June 07, 2017 that the Nuclear Fuel Tax Act is formally unconstitutional with retroactive effect. The Constitutional Court’s verdict will allow the nuclear operators RWE, E.ON and EnBW to claim their respective taxes back.

The year ahead Due to the ongoing BEPS discussion, it can be expected that German legislators and tax authorities will continue tackling tax structures and increase formal notification requirements with respect to aspects of cross-border tax. Due to the upcoming general election to the Bundestag in September 2017, the legislators’ activities on tax law updates or innovations have already faded out. It cannot be predicted what the tax policy of the next Federal Government will be like. However, despite some forerunners to the core campaign pleading for tax decreases for individuals, the big parties currently do not seem to have entered the race for decreasing corporate tax rates. Moreover, any tax policy will also depend on the distribution of votes in the second chamber of the German parliament, which is determined by the Federal state elections.

* * *

Endnotes 1. German Federal Ministry of Finance on May 23, 2016, Federal Tax Gazette I 2016, 490. 2. German Federal Constitutional Court on March 29, 2017, 2 BvL 6/11, DStR 2017, 1094.

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3. German Federal Law Gazette I 2016, 2998. 4. German Federal Tax Court on November 28, 2016, GrS 1/15, Federal Tax Gazette II 2017, 393. 5. Part of the “Act to Counter Harmful Practices in connection with the Licensing of Rights”, final draft BT-Drs. 18/12128, p. 12 et seqq., adoption BR-Drs. 366/17(B). 6. Act implementing the amendments of the Mutual Administrative Cooperation Directive and of further measures to counter base erosion and profit shifting (“Anti-BEPS I Act”), December 20, 2016, Federal Law Gazette I 2016, 3000. 7. German Investment Tax Reform Act, July 19, 2016, Federal Tax Gazette I 2016, 1730. 8. See also the administrative decree on this: German Federal Ministry of Finance of April 03, 2017, Federal Tax Gazette I 2017, 726. 9. Council Directive (EU) 2016/1164 of July 12, 2016. 10. Draft of a Council Directive from February 21, 2017, 6333/17 FISC 46 ECOFIN 95, amending Directive (EU) 2016/1164. 11. For the concrete implementation of Germany’s opting out, see also: http://www.oecd. org/tax/treaties/beps-mli-position-germany.pdf. 12. Act implementing the amendments of the Mutual Administrative Cooperation Directive and of further measures to counter base erosion and profit shifting (“Anti-BEPS I Act”), Federal Law Gazette I 2016, 3000. 13. “Act to Counter Harmful Practices in connection with the Licensing of Rights”, final draft BT-Drs. 18/12128, p. 12 et seqq., adoption BR-Drs. 366/17(B). 14. Tax Invasion Enforcement Act, final draft BT-Drs. 18/12127 dated April 26, 2017, adoption BR-Drs. 365/17(B).

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Dr. Gunnar Knorr Tel: +49 221 2091 541 / Email: [email protected] Dr. Gunnar Knorr specialises in tax advice on mergers and acquisitions and corporate financing, in particular with regard to cross-border transactions, the structuring and restructuring of corporate groups and advice on tax audits, including proceedings before fiscal courts. Gunnar is a partner of Oppenhoff & Partner. He was an associate and managing associate at Oppenhoff & Rädler/Linklaters LLP from 2002 to 2007. He studied law at the Universities of Cologne and Bonn (Dr. iur.). He has been a Tax Adviser since 2005. During his legal training he worked for two of Deloitte’s predecessor companies in London and Paris and at the Commission of the European Communities, Brussels. Dr. Gunnar Knorr is a lecturer at the Frankfurt School of Finance and lectures on the mergers & acquisitions Master’s programme.

Marc Krischer, LL.M. Tel: +49 221 2091 481 / Email: [email protected] Marc Krischer specialises in providing tax and balance sheet advice in M&A matters, in the structuring and restructuring of corporate groups as well as advice on external audits, extrajudicial and judicial legal remedies. He also advises on VAT and Insurance Premium Tax matters and tax compliance requirements. A further focus of his activities is national and international accounting law. Marc Krischer is a partner and has been a tax adviser at Oppenhoff & Partner since 2008. During his vocational training he worked at PricewaterhouseCoopers (PwC) in Frankfurt am Main and Ford-Werke AG in Cologne. From 2003 to 2008 he worked in the tax law department of Hecker, Werner, Himmelreich & Nacken and Morison Köln GmbH WPG. He completed his vocational training as an assistant tax consultant and studied business law in Cologne (Diploma) as well as taxation in Münster (Master of Laws). He also qualified as a German CPA in 2009 (Wirtschaftsprüfer in eigener Praxis).

Oppenhoff & Partner mbB Konrad-Adenauer-Ufer 23, D-50668 Cologne, Germany Tel: +49 221 2091 0 / Fax: +49 221 2091 333 / URL: www.oppenhoff.eu

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Eric Mensah Sam Okudzeto & Associates

Overview of corporate tax work over last year Types of corporate tax work The new Income Tax Act which became operational in 2016 has governed the corporate taxation field for the past 18 months or more. There were a number of challenges with the law, especially the provision that required that capital allowances granted for a year of assessment are to be utilised and not deferred. The perceived harshness of this provision is ameliorated by the provision that allowed losses to be carried forward for periods of three years for non-priority areas and five years for priority areas. Priority areas for which carry forward of losses is allowed for five years have been defined by the new Income Tax Regulations that are in force. Some amendments have been made to the Income Tax Act to address other concerns of taxpayers, notably the exemption from withholding tax on interests earned by non-residents on bonds issued by the government. For the year under review, 2016, the most significant corporate tax issues have been the challenges faced by enterprises and the tax authorities in the implementation and application of the Income Tax Act. Significant deals and themes For 2016, as in 2015, there were no major transactions that had tax implications. However, the Central Bank has signalled its intention of increasing the capital requirements for commercial banks. The recapitalisation of banks is likely to have significant tax implications. New Income Tax Regulations were passed to complement the Income Tax Act. The Regulations sought to bring clarity to critical provisions of the Act that had implications for corporate taxation. Importantly, another new piece of tax legislation was enacted: the Revenue Administration Act, known as Act 915. This law was passed in August 2016 but the date for its coming into force was deferred by Parliament to January 2017. The law consolidated into one enactment all the administrative and procedural provisions of the various revenue laws administered by the tax authorities. Salient aspects of this law and the Income Tax Regulations are discussed in the next section.

Key developments affecting corporate tax law and practice Domestic – cases and legislation • The Income Tax Regulations limited the deduction of financial costs provided in the Income Tax Act to Chargeable Income incurred in the course of a business or investment. It also recognised the interest portion of annuities as income in the hands of the payee and as an expense in the hands of the payer.

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• Rules were made for the calculation of Capital Allowances for general business enterprises and separate rules for enterprises in petroleum operations. • The Revenue Administration Act aimed to reduce obstacles to compliance by taxpayers. • The key development in the Act is the statutory right of taxpayers to be informed of the basis of their assessment, assisted and heard by the tax authorities. • The right to privacy, confidentiality and secrecy. • Right to representation. • There is a restriction on representation and giving tax advice only by approved tax consultants. • The power to license approved tax consultants was given to the Tax Authorities. • Enterprises are required to maintain necessary records within the country. • Taxpayers’ right to object to a tax decision is, however, circumscribed by very tough conditions including paying all outstanding taxes including 30% of the tax in dispute. • A provision has been made for taxpayers to apply to have excess tax paid to be set off to other tax types that are outstanding.

Tax climate in Ghana The tax climate has become more favourable following a change in political authority. The current administration is pro business and intends to create favourable conditions for business to thrive. A reduction of the rate of corporate income tax is under discussion and may be implemented at a future date.

Developments affecting attractiveness of Ghana for holding companies Legislative changes The government has removed what has been described as nuisance taxes, including 17.5% VAT on financial services, domestic airline tickets and removal of import duty on imported spare parts, as well as concessionary tax rates for manufacturing companies located in different regions.

Industry sector focus There have been no major changes from the 4th edition of this book, that being oil & gas, banking and mining. Taxation of the oil & gas industry is no longer regulated under separate legislation. The new Income Tax Act has brought the taxation of this sector under the general tax laws, and even though there are special provisions for the sector, other provisions of the income tax law apply to this sector with the necessary modifications. The same applies to the banking and mineral & mining sector.

The year ahead With the year ahead, a new policy on exemptions is being rolled out, wherein companies enjoying tax exemptions are required to pay the tax upfront and then apply for a refund. This has implications for companies with respect to fiscal planning and future cash flows. Proposals have also been floated on granting a 10-year tax holiday to companies that relocate their group headquarters to the country.

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From the evidence so far, there is likely to be further reductions in taxes across most tax types with a possible reduction in corporate income tax. The tax environment is projected to become more liberalised. The application of transfer pricing rules and other enforcement procedures has become robust.

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Eric Mensah Tel: +233 202 050 281 / Email: [email protected] Eric Mensah holds a Bachelor of Arts degree in Sociology and Political Science from the University of Ghana, a Qualifying Certificate in Law from the Ghana School of Law, a Certificate in Business Tax and Modernising Tax Administration from the University of Pretoria and a Postgraduate Certificate in Legislative Drafting from the Ghana School of Law and the Commonwealth Secretariat. He was called to the Ghana Bar as a lawyer in 1998 and specialises in Tax Law.

Sam Okudzeto & Associates First Floor, Total House, Liberia Road, Accra, Ghana Tel: +233 302 666 377 / Fax: +233 302 668 115 / URL: www.senachambers.com

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Prakash Shah & Dileep C. Choksi VoxLaw

Overview of corporate tax work during the year The Indian economy has become one of the fastest growing G-20 economies with a growth rate of around 7.5%. Having mentioned this, the last year was marked by many international developments on the political and policy level, which may bring about a tectonic shift in international trade. Brexit and the policy decisions of the new US administration are likely to have a significant impact on global economies. In India, the three-year-old Modi government is striving hard to make India one of the leading investment destinations and to improve its ranking on the global index of ‘Ease of Doing Business’. In pursuit of this, there have been many transformational reforms in the last year. The amendment to the Constitution paved the way for the Goods and Service Tax and the implementation of the Insolvency Code were amongst key long-awaited structural and economic initiatives. Apart from these, the demonetisation of large currency notes signalled a regime shift to punitively deal with the menace of corruption. On the corporate tax front, the Finance Act 2017 enacted a slew of amendments, some of which will be discussed later in the chapter. While the basic corporate tax rate for domestic companies remains at 30%, a lower rate of 25% has been introduced for small manufacturing companies with turnover of up to INR 500m (USD 7.4m). Considering the peak surcharge of 12% and mandatory education cess of 3%, the effective corporate tax rate ranges from 25.75% to 34.608% for Indian companies. For foreign companies, the effective rate of tax ranges from 41.2% to 43.26%. With the mandatory adoption of Indian Accounting Standards (‘Ind AS’), which provides for fair value accounting as a measure for reporting of financial statements by Indian corporates, a major area of concern was its impact on the income tax. While the normal tax computation will be governed by Income Tax Computation and Disclosure Standards (‘ICDS’), the Finance Act 2017 provides that the Minimum Alternate Tax (‘MAT’) will be determined by book profits as per Ind AS. However, the impact on book profits because of first time adoption of Ind AS would be spread equally over a period of five years starting with the first year of adoption of the Ind AS. On the international tax front, the Indian Government has signed the Organisation for Economic Co-operation and Development’s (OECD’s) Multilateral Convention to implement tax treaty-related measures to prevent Base Erosion and Profit Shifting (BEPS). This instrument, which has been signed by 67 other countries, once implemented, will have the effect of amending most of the bilateral tax treaties of the signatory jurisdictions under the BEPS package for preventing artificial tax avoidance and prevention of treaty abuses. Various changes have been made to the transfer pricing rules. These include the introduction of secondary adjustments to be made subject to certain conditions, modification of safe

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© Published and reproduced with kind permission by Global Legal Group Ltd, London VoxLaw India harbour limits and removal of domestic transfer pricing provisions except in cases of companies availing of tax holidays. Further, transfer pricing implications of Advertising Marketing and Promotion expenses incurred by Indian entities continue to be controversy- ridden. Separately it is seen that, in practice, the tax authorities tend to dispute even issues which have been settled by Courts. With an eye on reducing litigation, the Government has been issuing administrative circulars on such issues, advising the tax authorities not to litigate such matters.

Key developments affecting tax law and practice While there have been a number of amendments and developments impacting different areas of tax law, this section seeks to focus on some of the key ones impacting foreign investment and international tax. International tax Indirect transfer of share/interest in an entity outside India Any income/gains arising to the transferor on the transfer of share or interest in an entity outside India, which derives its value substantially from assets situated in India, is subject to tax in India to the extent of income attributable to assets located in India. A share or interest is deemed to derive substantial value from assets situated in India if such value exceeds INR 100m (USD 1.5m approx.) and represents at least 51% of the fair market value of all assets owned by the company or entity (without reduction of liabilities) on the specified date (being the date of transfer or the preceding year end accounting date). The Government in June 2016 notified the final rules for computing the fair market value of the share or interest of the overseas company or entity deriving its value from Indian assets. The final rules provide the methodology for determination of value ofIndian assets as well as total assets of the foreign company/entity. • In case of shares listed on a stock exchange in a company where the foreign company/ entity also has management rights/control, etc., the price is determined based on market capitalisation plus the book value of liabilities. • For unlisted shares, the price is as determined by a merchant banker based on internationally recognised methods plus the book value of liabilities. • Similar methodology is followed for the valuation of the total assets of a foreign entity. The above rules are effective from 28 June 2016, though indirect transfer provisions apply retrospectively. It has not been clarified whether these rules will be applied for transactions effected at an earlier date. While the definition of ‘book value of liabilities’ excludes general reserves and surplus and securities premium in relation to the paid-up capital for equity ownership, the value towards convertible instruments have not been excluded, which inflates the Fair Market Value (‘FMV’) of equity shares. Foreign Portfolio Investors (‘FPIs’) [formerly known as Foreign Institutional Investors (FIIs)] make investments in listed shares/securities on a portfolio basis. Any transfer of shares/beneficial interest in such FPIs/FIIs typically triggers indirect transfer provisions. However, Finance Act 2017 has exempted Category 1 (Sovereign funds) and Category 2 (broad-based funds) FPIs from indirect transfer provisions which obviate any Indian tax on transfer of shares/beneficial interest in the FPI. However, category 3 FPIs (hedge funds, etc., which employ leverage) will continue to be hampered by the indirect transfer provision where there is a transfer of shares/beneficial interest at the overseas level in the FPI entity.

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India’s tax treaty with Singapore and Cyprus renegotiated Close on the heels of the re-negotiation of India’s tax treaty with Mauritius, which removed the exemption from capital gains in the source state in respect of purchase and sale of shares, effective 1 April 2017, the Indian tax treaties with Singapore and with Cyprus were also renegotiated to remove similar benefits. Akin to the Mauritius tax treaty, the Singapore and Cyprus tax treaties with India also provide for grandfathering of the investments made prior to 1 April 2017 and the concessional tax rate (50% of the applicable tax rate under domestic law) in respect of investments made from 1 April 2017 to 31 March 2019. The concessional rate/grandfathering benefits under the Mauritius as well as Singapore tax treaties are subject to fulfilment of conditions prescribed in limitation of benefits (‘LOB’) articles under the respective tax treaties. Interestingly, there is no LOB clause in the revised India-Cyprus tax treaty. However, any tax benefit under the said treaty would be subject to General Anti-Avoidance Rules (‘GAAR’) provisions under the Income-tax Act, 1961 (‘Act’). The tax treaty with the Netherlands which exempts capital gains (in certain circumstances) on sale of shares of Indian companies has not been re-negotiated so far. Further, it may be noteworthy that Singapore, Mauritius and Cyprus tax residents would continue to be exempt from tax in respect of capital gains arising from debt/derivative transactions as well as those arising on indirect transfer of shares of Indian companies (discussed above). Notification treating Cyprus as a ‘Notified Jurisdictional Area’ (‘NJA’) On 1 November 2013, Cyprus as a jurisdiction was notified as a NJA under section 94A of the Act owing to inadequate exchange of information by Cyprus tax authorities. This meant prohibitive costs of transacting with a Cypriot person, viz. higher withholding tax of 30%, any transaction with a Cypriot entity being deemed as between associated enterprises, thus requiring maintenance of transfer pricing documentation and denial of deduction in the hands of the payer (in India), unless specified documentation is maintained. The above notification was rescinded in December 2016 and it has been clarified that the recession will have retroactive effect from 1 November 2013. This is a welcome development and could enable remitters from India to claim tax refunds (if falling within the limitation period) in respect of taxes withheld during the time the NJA status subsisted. Cap on interest deduction Finance Act 2017 introduced section 94B of the Act to address the issue of thin capitalisation. It provides that where an Indian company/permanent establishment of a foreign company incurs any expenditure by way of interest in respect of loan borrowed from a non-resident associated enterprise, then the deduction for interest shall not exceed 30% of earnings (of the borrower) before interest, depreciation, tax and amortisation (‘EBITDA’) or actual amount, whichever is less. The amount which is disallowed can be carried forward to subsequent years (for a period up to eight years) and allowed in accordance with the provisions of this Act. Further, it is provided that where a debt is issued by a lender which is not an associated enterprise, but an associated enterprise provides guarantee or places a deposit of a corresponding amount of funds with the lender, then the debt is deemed to have been issued by an associated enterprise. Section 10(38) exemption Section 10(38), inter alia, exempts from tax any long-term capital gains arising from the sale of equity shares, where such transaction is subject to Securities Transaction Tax

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(‘STT’). STT is payable upon a transaction for sale of equity shares which are executed on the stock exchange and certain other specified transactions. Finance Act 2017 provides that the above exemption will not be available if no STT was paid at the time when the shares were acquired (except where shares were acquired prior to 1 October 2004). The rigour of this provision has been diluted as certain specified transactions have been exempted from its ambit by a notification. For example, acquisitions made under the Employees Stock Option Scheme as per the SEBI guidelines, IPOs, acquisitions made under SEBI Takeover Code Regulations, acquisition by non-residents in accordance with foreign investment guidelines, acquisitions by Category I, Category II Alternative Investment Funds, Venture Capital Fund and Qualified Institutional Buyers, etc., will continue to be eligible for this exemption. Sale of unquoted shares and gift provisions The Finance Act 2017 has introduced a new section (section 50CA) to the Act which treats the difference between the FMV and the sale price of unquoted shares (i.e. unlisted shares or listed shares which are not quoted on the stock exchange with regularity) held as a capital asset as part of the capital gains of the transferor. Further, section 56 of the Act (deemed gift provisions) have been amended to widen its scope. As regards private companies and firms, these provisions were applicable in respect of shares of closely-held companies received by them without consideration or for less than adequate consideration. In other words, receipt of shares of closely held companies by private companies/firms at less than FMV was regarded as income in their hands (transferee). Now, these provisions apply to them in respect of all assets including immovable property. Moreover, listed companies are also now covered by the provisions of section 56 of the Act. The draft rules for determining the FMV for the purpose of section 50CA and section 56 have been issued by the Central Board of Direct Taxes (‘CBDT’) for seeking public comment. As per the draft rules, the shares of an unquoted company will be valued based on the underlying assets of the company as against the book value determined as per the balance sheet of the company (which is the prevailing methodology for the purpose of section 56 of the Act). This would have major impact on share sale transactions of unlisted companies holding real estate assets at historical costs as the underlying stamp duty value could be high. The above provision seeks to bring an element of reasonable pricing even in the context of transactions between unrelated parties. This may result in a double whammy in the context of sale of shares of unlisted companies, where transferred at less than the FMV (as prescribed). While the difference between the FMV and the transfer price will be taxed as ‘Capital Gains’ for the transferor, the same amount will also be taxed as ‘Income from Other Sources’ for the transferee. The FMV, so determined, will be treated as the basis/cost in the hands of the transferee company in case of subsequent transfer of shares by it. The above provisions will not be applicable where the consideration for the transfer of shares is more than FMV. However, where the transferor is a non-resident, the transfer pricing provisions under section 92 of the Act could be triggered in the hands of the transferee resulting in denial of deduction of excess payment in computing capital gains when it subsequently disposes of the shares. If implemented in the present manner, the proposed valuation rules could have a significant impact on corporate re-organisations and could raise the tax cost. Place of Effective Management (POEM) A foreign company is regarded as resident in India if its POEM is in India. In case the

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POEM of a foreign company is in India, it will be taxed on its worldwide income in India. The CBDT has issued a Circular laying down final guidelines considered in determining whether the POEM of a company exists in India. The guidelines determine POEM based on whether the foreign entity carries Active Business Outside India (‘ABOI’). A company is considered to have ABOI if the passive income of the company does not exceed 50% of its total income and less than 50% of its assets, employees and payroll expenses are in India. The term ‘Passive Income’ means the aggregate of: • income from transactions where both purchase and sale of goods is from/to its associated enterprises; and • income by way of royalty, dividend, interest, capital gains and rental income. However, interest earned by banking companies or financial institutions is not regarded as Passive Income. Where a company has ABOI, the POEM is presumed (unless established otherwise) to be outside India if the majority of the Board meetings are outside India. In case a company does not have ABOI, a two-stage process for determination of POEM is provided as follows: • Identifying or ascertaining the person or persons who make the key management and commercial decisions for the conduct of the company’s business as a whole. • Determination of the place where these decisions are being taken. The POEM guidelines do not apply to companies which have a turnover of less than INR 500m (USD 7.7m) in the relevant financial year. Further, for initiating POEM determination in India, the concerned tax authorities must obtain a prior approval of the Commissioner/ Principal Commissioner. The decision on such determination shall be approved by a collegium of three Principal Commissioners/Commissioners. The Government has recently issued a draft notification inviting comments and suggestion on the method to be adopted and adaptations to be made for computing the income and tax of a foreign company which is deemed to have a POEM in India. As per the draft notification, the foreign company will continue to be taxed at the rate applicable to a foreign company; i.e. 40% (plus applicable surcharge and cess) even though it is regarded as resident in India because it has its POEM in India. However, such a company will get credit for taxes paid in the jurisdiction outside India in accordance with the relevant tax treaty between India and such other jurisdiction or under section 91 of the Act (where there is no such tax treaty). There could be some double taxation if India grants credit only for those taxes paid in the overseas jurisdiction which are payable in accordance with the relevant tax treaty. Thus, where the taxes are paid in the overseas jurisdiction not because the source of income is the overseas jurisdiction but because the company is treated as resident in that jurisdiction, the credit for the same may not be available in India. Further, despite the fact that the company is regarded as resident in India, it would still retain the status of foreign company and not be subject to any dividend distribution tax applicable to Indian companies. The dividend distributed by such foreign company would be taxed in the hands of the Indian parent (where such parent holds at least 26% shareholding in such foreign company) at a 15% rate (plus surcharge and cess). Indian headquartered groups should carefully evaluate their organisational/management structures to ensure that they do not have a POEM exposure, as the tax implications of the same could be quite steep. Indian signs multilateral instruments BEPS refers to the artificial shifting of profits by multinational enterprises to low or zero tax locations. Such shifting of profits is achieved through gaps in the tax rules of different

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© Published and reproduced with kind permission by Global Legal Group Ltd, London VoxLaw India countries along with the governing tax treaties. Such actions erode the tax base of the country where the value was created and is therefore considered to be an abuse of the tax framework. To address BEPS concerns, the BEPS project was developed by the OECD Committee on Fiscal Affairs and endorsed by the G-20 leaders in September 2013. It identified 15 Action Plans to deal with BEPS. Implementation of certain BEPS Action Plans required amendments to tax treaties across the world, which was a monumental task as there exist more than 3,000 tax treaties. To address this, the OECD constituted an ad hoc group of member countries to prepare the text of the Multilateral Instrument (‘MLI’), which, once implemented, will simultaneously amend a large number of tax treaties. India was one of the 68 nations which signed the MLI on 7 June 2017 in Paris. The signing of the MLI is the first step in the process of expressing consent to be bound by the Convention, which will become binding only upon ratification. A list of Covered Tax Agreements, reservations made and options chosen by a country are required to be made at the time of signature or when depositing the instrument of ratification. The MLI implements certain minimum standards relating to treaty abuse and dispute resolution through mutual agreement procedures. The MLI provides for insertion of Principle Purpose Test (‘PPT’) as a minimum standard. As per PPT, the benefit of the tax treaty shall not be granted if obtaining such benefit was one of the principal purposes of any arrangement or transaction. It may be noted that the PPT has a wider coverage as it applies even if one of the principal purposes was availing of a tax benefit, whereas the General Anti-Avoidance Rules (‘GAAR’) (under the Act) apply where the main purpose was availing of a tax benefit. In addition to the PPT rule, India has agreed to a Simplified Limitation of Benefits clause (‘SLOB’). The SLOB seeks to create supplementary conditions to be satisfied to avail of the benefit of a tax treaty. India has not accepted the MLI provisions relating to arbitration proceedings for dispute resolution and methods for elimination of double taxation. The double taxation relief will continue to apply as per the existing bilateral tax treaties. India has accepted the provisions for prevention of artificial avoidance of permanent establishment (‘PE’) under commissionaire structures, specific activity exemptions and artificial splitting of contracts. Some of India’s treaty partners have accepted these provisions. Hence, the expanded PE exposure for Indian marketing operations of a multinational enterprise could vary from country to country. Germany has not notified its tax treaty with India as a Covered Tax Agreement under the MLI. Therefore, India’s existing bilateral treaties with Germany would remain unaffected. Mauritius has announced that it will sign the MLI by 30 June 2017. General Anti-Avoidance Rules (‘GAAR’) GAAR provisions under the Act have been in force since 1 April 2017. GAAR provides where the main purpose of an arrangement is obtaining a tax benefit and where the transaction is not arm’s length, there is no commercial substance, it is not bona fide or which third parties would not have entered into, such arrangement could be treated as impermissible and the tax authorities can re-characterise the same. Significantly, the Act provides for grandfathering of any income arising from transfer of investments made prior to 1 April 2017. It has been clarified by an administrative circular of the CBDT that equity shares acquired pursuant to conversion of compulsorily convertible debentures, preference shares, global

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© Published and reproduced with kind permission by Global Legal Group Ltd, London VoxLaw India depositary bonds and foreign currency convertible bonds (under the terms finalised at the time of such issuance), where such instruments were acquired prior to 1 April 2017, are eligible for grandfathering. Similarly, shares acquired pursuant to bonus, share split and consolidation will also be eligible for such grandfathering. It may be noteworthy that a similar clarification in respect of grandfathering benefits granted for capital gains under the Indian tax treaties with Mauritius, Singapore and Cyprus, has not been granted. Transfer pricing Scope of domestic transfer provision reduced Payments by any person to a related party [as defined in section 40A(2)(b)] were covered within the scope of transfer pricing and the person making the payment was required to maintain prescribed documentation in support of the arm’s-length price and obtain an accountant’s report certifying the arm’s-length nature of the payment. However, this provision has been deleted by the Finance Act 2017 with effect from 1 April 2016. This provision will, however, continue to be applicable to entities/units which claim certain tax deductions/tax holidays. Secondary adjustment Section 92CE of the Act introduced by the Finance Act 2017 provides that where a primary adjustment has been made to a transfer price exceeding INR 10m either (a) suo moto by the taxpayer in the return of income, (b) by the tax officer and accepted by the taxpayer, or (c) determined in an advance pricing agreement, under safe harbour rules or pursuant to mutual agreement procedure, then the assessee shall make a secondary adjustment, i.e. books of accounts shall be adjusted to reflect that the actual allocation is in accordance with transfer pricing. Further, the excess money lying with the associated enterprise (the difference between the transfer price and the arm’s-length price) shall be repatriated to India within a prescribed time limit, else the same shall be deemed to be advanced to associated enterprise and interest on such advance shall be computed in a prescribed manner. While the language of section 92CE seems to suggest that in case the tax officer has made the adjustment and the same has been appealed against then the secondary adjustment cannot be made even if the appellate authority upholds the adjustment made by the tax officer and the same is not further contested. However, the rule (Rule 10CB) that prescribes the time limit for repatriation and the interest rate, which have been notified recently, seems to suggest otherwise. The rule prescribes a period of 90 days from the specified date for repatriation of the money. In case of adjustments made by the tax officer, the specified date is the date of the order of the tax officer or the order of the appellate authority in case the same is accepted by the taxpayer. Other changes Carbon credits Taxation of carbon credits has been a vexed issued in India. While there have been a few decisions which have held that the same to be a ‘capital receipt’ and therefore not taxable, the attempt of the revenue authorities has been to treat the same as ‘business income’ and recover tax at the rate of 30% (plus applicable surcharge and education cess). The Finance Act 2017 has introduced a new section (section 115BBG), which provides that any income by way of transfer of carbon credit shall be taxed on a gross basis at 10% (plus applicable surcharge and education cess). While the amendment seeks to annul all

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© Published and reproduced with kind permission by Global Legal Group Ltd, London VoxLaw India the decisions which held such receipt as ‘capital receipt’, it may be noted that no specific amendment to the definition of income under section 2(24) of the Act has been made to include receipts from transfer of carbon credit. Having mentioned this, the intention of the Government is clear and any such claims are likely to prompt a clarifying amendment by the Government. Joint development agreements In a joint development agreement, the landowner typically gives the rights to a developer to develop the property on the land owned by him, which is eventually conveyed to the society formed by the occupants; the consideration for this transfer being a share in constructed property. The timing of taxation of capital gains and the methodology of computing such gains arising on the transfer of land has been a matter of litigation. In many cases, the courts have held that the capital gains on the transfer of land are taxable in the year when a general power of attorney to enter the land (to develop the same) is given to the developer, even though the consideration is received much later. This leads to a mismatch in the timing of payment of tax and the receipt of consideration. Section 45(5A) of the Act introduced by the Finance Act 2017 provides that such capital gains accruing to individuals and Hindu Undivided Family (‘HUF’) arising on transfer of land, building or both shall be taxable in the year when the certificate of completion of the project is received from the relevant municipal authorities, except where the share in the project is transferred by the landowner prior to the completion of project, in which case it is taxed in the year of such transfer. The developer is required to deduct tax at 10% as per section 194-IC in respect of the monetary consideration. The stamp duty value of the land/building ceded for development of the property plus the monetary sum received, if any, is deemed as consideration. This also becomes the cost of the new property acquired in the developed project. It may be noteworthy that the above regime is applicable to landowners being individuals and HUFs. Thus, joint development agreements executed by a Company, Firm, LLP, etc., will continue to be governed by judicial decisions which seek to maintain that the capital gains on transfer of land/buildings will be taxable in the year of its transfer and not in the year of completion of project. Key judicial decisions DIT (International Taxation) II v Marks & Spencer Reliance India Pvt. Ltd. (Bombay High Court) [I.T.A. No. 893 of 2014] Issue for consideration: Whether reimbursement of salary expenditure of employees deputed to India to carry out function in the areas of management, setting up of business, property selection and retail operation, etc., amounts to fees for technical services (‘FTS’). Ruling: • The taxpayer, an Indian Company, was a JV between a UK Company (‘UK Co.’) and another Indian Company. UK Co. entered into a service agreement with the taxpayer under which it provided personnel to the taxpayer to carry out functions in the areas of management, setting up of business, property selection and retail operation, etc. The taxpayer reimbursed UK Co. for salary and other expenditure incurred on the personnel deputed to the taxpayer. • The tax authority noticed that the taxpayer had made payments to UK Co. without deducting any taxes. It contended that payment was in the nature of business strategies and advisory and hence qualifies as FTS.

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• The Mumbai Income-tax Appellate Tribunal (‘ITAT’) held in favour of the taxpayer that since the “make available” clause under the India-UK treaty was not satisfied, the said payments did not qualify as FTS under the tax treaty but was merely in the nature of reimbursement and hence there was no requirement to withhold taxes on the payments. • Aggrieved, the tax authority appealed before the Bombay High Court. However, the High Court upheld the decision of the ITAT based on facts. The above ruling contrasts with the decision of the Delhi High Court in the case of Centrica India Offshore Limited (‘CIOL’). In this case, the Delhi High Court observed that seconded employees made available their technical expertise and know-how to regular employees. Accordingly, the services the re-imbursement of salary cost to overseas employees amounted to fees for technical service under the India-UK Tax Treaty. Further, the Court also held that the presence of employees in India amounted to a service PE in India of CIOL. Formula One World Championship v CIT (Supreme Court) [Civil appeal No. 3849 of 2017] Issue for consideration: Whether Formula One World Championship Limited (‘FOWC’) had a PE in India in the form of a motor racing circuit; namely Buddh International Circuit in Noida where the motor racing tournaments took place. Ruling: • FOWC, a UK tax resident, along with two other companies entered into certain agreements in relation to exploitation of commercial rights arising out of Formula One (F1) events across the world. • In India, FOWC entered into a Race Promotion Contract with a company; namely Jaypee Sports International Ltd (Jaypee) under which the rights to host, stage and promote the Formula One Grand Prix of India event were granted for a consideration of USD 40m. Further, an Artworks License Agreement was also entered into between FOWC and Jaypee, permitting the use of certain marks and Intellectual Property belonging to FOWC for a consideration of USD 1m. • The SC held that the Buddh International Circuit (the Indian motor racing circuit in Greater Noida, Uttar Pradesh) is a “fixed place” where the commercial/economic activity of conducting F1 Championship was carried out. It observed that the Circuit was a virtual projection of FOWC on the Indian soil and that it satisfied all the characteristics of a PE, namely: (i) existence of an enterprise; (ii) carrying on its business; (iii) existence of a place of business, the nature of such place being ‘fixed’; and (iv) such place being at the disposal of FOWC. The SC also relied on several international commentaries and tax cases to conclude that FOWC has a PE in India as the basic characteristics of a PE were fulfilled in the case of FOWC. Ms Instrumentarium Corporation Limited, Finland v ADIT, Kolkata (Special Bench ITAT) [I.T.A. Nos 1548 and 1549/Kol/2009] Issue for consideration: Whether the Finnish Company was required to pay tax in India on interest computed on an arm’s-length basis, in respect of an interest-free loan granted by it to its wholly owned subsidiary (‘WOS’) in India. Ruling: • A three-member special bench of India’s ITAT dismissed the basic argument of the taxpayer that if the Indian WOS were charged arm’s-length interest, the same would result in the Finnish Company being subject to withholding tax at the rate of 10%,

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while the Indian subsidiary, which is subject to tax at the rate of 36.75%, would get the full deduction of this expense, with the net effect that the Indian tax base would be eroded by 26.75%. Section 92(3) of the Act provides that the arm’s length principle shall not apply where computation of income has the effect of the reducing the income chargeable to tax or increasing the loss, in respect of the previous year in which the international transaction was entered into. • The ITAT held that section 92(3) has to be seen on a stand-alone basis and not qua the transaction, i.e. on an overall basis considering the tax impact for all the parties to the transaction. Thus, it held that the arm’s-length price would have to be computed under section 92 of the Act in the hands of the non-resident enterprise which granted the loan. The significance of the above ruling is in the fact that it articulates the judicial view on the base erosion principle in the context of section 92 of the Act. Siemens Public Networks Ltd v CIT (Supreme Court) [Civil Appeal No. 1194 of 2016] Issue for consideration: Whether any voluntary contribution made by a parent company to its loss-making subsidiary is a payment to protect the capital investment of a subsidiary and therefore is not an income in the hands of the subsidiary. Ruling: • The Indian subsidiary of a foreign company had incurred huge losses over a period of time. It received subvention from its parent company (being its principal shareholder). The same was given with a view to augment the capital base and to improve the net worth of the subsidiary (Taxpayer). The Taxpayer claimed subvention as capital receipt not chargeable to tax. However, the tax authority assessed the same as revenue income. The matter travelled right up to the Supreme Court. • The Supreme Court held that voluntary payments made by the parent company to the loss-making subsidiary were in order to protect the capital investment of the subsidiary and, hence, it is not in the nature of revenue receipt. • The SC, earlier in the cases of Ponni Sugars and Sahney Steel, had laid down a principle that if grant-in-aid received from public funds through the Government is not utilised for acquisition of an asset, it may be in the nature of revenue receipt. However, this said principle applies to subsidies received in the nature of grant-in-aid from public funds and has no applicability to a case of voluntary contribution received from the parent company. • It may be noteworthy that in alignment with ICDS provisions, an amendment to the definition of income has been made by the Finance At 2015 under section 2(24) of the Act to include within its ambit any assistance in the form of subsidy, grant, etc. by the Government or its agencies (excluding the amount required to be reduced from cost of the depreciable capital asset). However, the said amendment is applicable only to aid received from the Government to its agencies and not to voluntary contributions of the nature dealt with by the Supreme Court in this ruling.

The year ahead GAAR GAAR provisions are in effect from 1 April 2017. The CBDT has not in clear terms stated that the GAAR provisions will not be invoked if the relevant conditions for non-invocation of the Limitation of Benefits (‘LOB’) clause under the applicable tax treaty (e.g. the India-Singapore tax treaty) are complied with. The

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CBDT has merely stated that if the avoidance is sufficiently addressed by the LOB, GAAR will not be invoked. A similar position has been stated in the context of Specific Anti- Avoidance Rules (‘SAAR’) vis-à-vis GAAR. This creates unwarranted uncertainty for foreign investors. While certain checks and balances in terms of the approval mechanism for invoking GAAR and de minimis thresholds have been put in place to ensure that these provisions are invoked in appropriate cases and not in all cases where there is a tax benefit, it needs to be seen how it plays out in practice. Though this will be known only couple of years down the line, once the GAAR provisions are invoked during audit of tax returns of financial year 2017–18, it is important that the corporates start reviewing the arrangements and structures that they may have put in place prior to 1 April 2017 in respect of which they may be receiving income and determine the risk of the same disregarded or recharacterised under GAAR. Authority for Advance Ruling (‘AAR’) The AAR has not been functioning for some time now because of non-appointment of a Chairman. The Finance Act 2017 amended section 245-O of the Act allowing the Vice- Chairman to act as a Chairman, in case the office of the Chairman is vacant. It is hoped that once the office of the Chairman gets filled by appropriate appointment, the AAR will function effectively and expeditiously clear the back-log of applications which were filed, as well as new applications that may be filed.

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Prakash Shah Tel: +91 22 6147 1045 / Email: [email protected] Mr. Prakash Shah is a chartered accountant and holds a degree in law. Prior to joining as a partner at VoxLaw, he was an associate partner at Dhruva Advisors. His earlier stints include 10 years at Ernst & Young. His has over 18 years of experience in corporate tax advisory, mergers and acquisitions, litigation and international tax matters. His specialisation includes advising on tax and regulatory matters to clients in the financial services, real estate and infrastructure sector. He has contributed to various articles in business magazines, newspapers, etc., and has spoken on topical issues at ICAI, Bombay Chartered Accountants Society and Bombay Stock Exchange. He has co-authored a book titled “Joint Ventures and Foreign Collaborations” published by the Chambers of Income-tax Consultants.

Dileep C. Choksi Tel: +91 22 6147 1060 / Email: [email protected] Mr. Dileep C. Choksi is a chartered accountant by profession and has been in practice for over 40 years. His areas of specialisation include business succession, tax advisory and litigation, structuring of collaborations & joint ventures, corporate restructuring, turnaround and change management strategies. He advises some of India’s large business houses on various strategic matters, including family succession and on wills and trusts. Mr. Choksi was the former Joint Managing Partner of Deloitte in India until 2008, before the setting up of C.C. Chokshi Advisors Pvt. Ltd. of which he is the Chief Mentor. Mr. Choksi is on the Board of well-known companies including as a member of their committees. Mr. Choksi has contributed to various papers and has spoken at various seminars organised by the RBI, the ICAI, etc. Mr. Choksi contributed to the preparation of Kanga and Palkhivala’s The Law and Practice of Income Tax (Eighth Edition) – the last edition written by the late Mr. N.A. Palkhivala and Mr. B.A. Palkhivala.

VoxLaw A-902, Marathon Futurex, N. M. Joshi Marg, Lower Parel (East), Mumbai 400013, India Tel: +91 22 6147 1000 / Fax: +91 22 6147 1001 / URL: www.voxlaw.in

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John Gulliver & Niamh Keogh Mason Hayes & Curran

Overview of corporate tax work M&A It was a mixed year for M&A activity in Ireland in 2016. Political developments in Europe and the US had a significant influence, with the Brexit referendum and the US elections in particular leading to uncertainty, which impacted on activity levels. However, despite the uncertainty, M&A figures were overall strong for the year, although down on the record- breaking 2015 figures. A strong first quarter performance was followed by a slowdown in advance of and following the UK’s Brexit referendum. However, activity picked up again in the final quarter. Notable transactions in 2016 included the USD $2.4bn acquisition of Irish-based Fleetmatics by Verizon and the acquisition of Irish-based Tyco International by Johnson Controls, which completed in September 2016. Avolon’s USD $10bn acquisition of CIT’s aircraft leasing business and the Japanese Sumitomo group’s €751m takeover of Irish company Fyffes were also announced in 2016. The UK’s decision to leave the EU led to the postponement of some proposed transactions involving Ireland and the UK. However, we expect to see some appetite to complete mergers under the Cross-Border Mergers Directive in advance of the UK’s exit. Loan sales and distressed debt While the volume of loan sales in 2016 was down on the 2015 figures, Ireland still remained a popular European location for distressed loan sales. A large sale by Ulster Bank and the ongoing wind-down of NAMA (the so-called “bad bank”) were factors in the continued significant level of activity. US private equity acquirers continued to feature prominently. The use of tax-exempt funds and securitisation vehicles to purchase distressed debt and other assets has permitted foreign buyers to realise returns in a tax-efficient manner. However, changes to the tax rules for regulated funds and “Section 110” vehicles negatively impacted foreign investors using these vehicles to invest in Irish real estate assets and loans secured on Irish real estate. The changes prompted some restructurings and future acquirers of such assets are likely to consider alternative structures. Aviation finance With over 50% of the world’s airline leasing business in Ireland, asset leasing groups headquartered out of Ireland continue to flourish. The global industry is forecast to double in size over the next 20 years. Continued growth seems assured and recent enhancements to our tax legislation should facilitate this growth.

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Debt and equity capital markets It was another strong year in 2016 for the Irish Stock Exchange (ISE). The ISE’s listings grew to over 35,000 in 2016. Bond listings grew 7% to reach over 29,000. The ISE ranks number two for bond listings worldwide according to the World Federation of Exchanges (WFE) and retained its number one position for investment funds with an additional 1,041 new fund classes admitted in 2016. New debt listings for sovereigns during the year included the Kingdom of Saudi Arabia (USD $17.5bn) and the Sultanate of Oman (USD $4bn). Banco de Sabadell listed a €500m debt security, Sparebanken listed a €500m covered note and Banco Santander-Chile listed several bonds under a USD $5bn Medium Term Note (MTN) programme. Ferrari also listed a €500m bond. Companies trading on the ISE raised €513m in equity funds from international investors during 2016 which was a reduction on the 2015 level. The number of equity trades rose by 6.3%. A welcome development in October 2016 was the Government’s announcement that it will conduct a review of stamp duty on Irish shares (currently 1%) in 2017 as part of its response to Brexit. The National Treasury Management Agency issued €10.35bn in Government securities, which included the first ever 100-year bond.

Key developments affecting tax law and practice Domestic changes Irish regulated funds and Section 110 companies real estate investments Foreign investors have typically used Irish regulated tax exempt funds and “Section 110” special purpose companies to invest in Irish real estate and loans secured on Irish real estate. Finance Act 2016 introduced tax at the rate of 20% on certain funds invested in Irish real estate and tax at the rate of 25% on certain profits made by “Section 110” companies on investments in distressed debt where the debt derives its value from Irish real estate. The measures are targeted at investments in Irish real estate and do not impact on the use of these vehicles for other types of investments. Prior to the introduction of Finance Act 2016, Irish regulated funds were exempt from Irish tax on all income and gains on Irish property. Distributions and redemption proceeds to non- Irish investors and certain exempt Irish investors were also not subject to any withholding/ exit tax. This remains the case for funds other than those which derive at least 25% of their value from Irish real estate and related assets or if it would be reasonable to assume that a main purpose of the fund was to acquire such assets. Under changes to the regulated funds regime in 2016, non-Irish investors and certain previously exempt Irish investors will now be subject to a 20% withholding tax on taxable events such as distributions or redemptions. An exemption from withholding tax may still be available in some cases to the extent the payment to the investor relates to a capital gain realised by the fund on a property held for at least five years. Payments to certain categories of investors, including pension funds and other Irish and EEA regulated funds will also continue to be exempt. Previously, Irish tax resident special purpose companies that met the conditions necessary to avail of the provisions of Section 110 of the Irish tax code could, broadly speaking, avail of a tax deduction for interest paid on certain profit-dependent loans and these companies were used to fund the acquisition of distressed debt portfolios. Changes were introduced to

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Mason Hayes & Curran Ireland target such companies holding and/or managing loans secured on Irish real estate or which derive their value, directly or indirectly, from real estate in Ireland. The profit-dependent return will no longer be deductible unless the recipient of the interest meets certain criteria. This will result in a 25% tax charge to the extent of the non-deductible profit dependent interest for affected Section 110 companies. Tax opinions/confirmations Irish Revenue introduced new rules in relation to the process and circumstances where taxpayers may obtain opinions/confirmation in relation to transactions. Such opinions now have a maximum validity period of five years. Taxpayers are reviewing existing opinions on which they have been relying to determine whether it is required or beneficial to seek a new ruling. Ireland is subject to both the EU and OECD rules on exchange of information on tax rulings. Review of corporate tax code An independent review of the Irish corporate tax code was announced in September 2016 and is currently under way and due to report at the end of June 2017. Its terms of reference include a focus on transparency, the implementation of BEPS and maintaining Ireland’s competitiveness. A public consultation took place as part of the review. A change to the 12.5% rate of tax is not under consideration. International developments BEPS The Irish Government is focused on complying with the recommendations arising from the OECD BEPS project. Ireland has indicated that it will sign up to the BEPS multilateral instrument which will lead to changes in many of its treaties, although it is not yet known what optional elements Ireland will agree to incorporate. Anti-Tax Avoidance Directive (ATAD) The ATAD will require significant changes to Irish law which currently has limited interest deductibility restrictions and no CFC regime. Ireland is working on legislation to introduce a CFC regime by the 2019 deadline. The Government is considering whether Ireland may be eligible for an extension to the deadline for introducing the interest limitation rules on the basis that it has already targeted interest deductibility rules which are equally effective to the ATAD measures under domestic law. This possible extension would be until the OECD’s introduction of BEPS Action 4 as a minimum standard or 1 January 2024 at the latest. The exit tax measures will also need to be implemented by 2020 and consideration will need to be given to the rate of such exit tax applies in Ireland. Other parts of ATAD will require less significant changes to Irish tax law, which already includes a GAAR and certain anti-hybrid rules. Other EU developments The Irish Government remains opposed to the proposed Common Consolidated Corporate Tax Base (CCCTB). It is not in agreement with either the idea of a common base or a consolidated base under the relaunched two-step proposal. Ireland and five other Member States have issued Reasoned Opinions to the Commission challenging the proposals. Double tax agreements Ireland has continued to expand its double tax treaty network throughout the last year. Ireland currently has 72 signed tax treaties, all of which are in effect. Negotiations are at various stages for new or replacement treaties, including with the Netherlands.

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Tax climate The Economic and Social Research Institution’s (ESRI) growth outlook for the Irish economy remains optimistic for 2017 and 2018 with growth forecasts of 3.8 and 3.6 per cent respectively. Growth is expected to be driven by consumption and investment. Last year, Ireland collected €47.86bn in tax, which was €639m more than expected. The publication of the European Commission’s decision in the State Aid case against Apple was a cause of concern. Both Ireland and Apple have appealed the decision and it is likely to be several years before the final outcome is known. The potential for comprehensive US tax reform is also a concern for the significant number of US multinationals with sizeable operations in Ireland. The election of Trump and the uncertainty in relation to US tax reform (in particular the potential for a Border Adjustment Tax) led to a slowdown in transactions involving US companies in Ireland. Clarity on the proposed US tax reform in 2017 should mean that US groups will progress plans that may have been put on hold.

Developments affecting attractions for ultimate and intermediate holding companies Ireland’s popularity as a holding company location is enhanced by its growing tax treaty network. Ireland’s treaty network now embraces key growth areas, such as the Middle East and Far East and negotiations are ongoing in relation to treaties in a number of emerging markets. This gives Irish holding companies unique access to capital markets while minimising withholding risk for the investors. Whilst Ireland continues to tax dividends, the wide-ranging credit relief provisions should largely negate any Irish tax payable. With the requirement to introduce CFC legislation under ATAD by 2019, we expect focus to turn to the possible introduction of an exemption for foreign dividends instead of the current credit regime. The competitiveness of the Irish regime relative to the UK’s is expected to improve post-Brexit if the UK loses the benefit of the Parent Subsidiary Directive and Interest and Royalties Directive to eliminate foreign withholding taxes on inbound payments.

Industry sector focus Foreign direct investment (FDI) Along with leading technology companies such as Google, LinkedIn, Twitter and Facebook who have their European headquarters in Dublin, nine of the top 10 global pharmaceuticals companies, nine of the top 10 information and communications technologies companies and over 50% of the world’s leading financial services firms have a presence in Ireland. Today, Ireland boasts very significant multinational companies who are located here and a key driving force behind this is Ireland’s consistent messaging as a low-tax EU location which provides a stable and certain platform for FDI. We expect to see increased interest in Ireland as the EU hub for international groups post-Brexit. Besides Ireland expanding its critical mass of companies involved in pharmaceuticals, FinTech, social media and the digital hub, we are continuing to see interest in Ireland as a finance and IP research and development centre. We are also seeing major multinational companies using Irish incorporated holding companies to facilitate tax-efficient cross- border M&A transactions.

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Our tax-exempt funds and SPV asset finance offering has also attracted many transactions that may have previously been done in offshore locations. Acquisition and disposal of distressed international debt Recent years have seen significant opportunities in acquiring distressed debt. Ireland’s tax regime provides several options for tax-efficient investment in distressed assets on a global scale. Ireland offers a variety of investment vehicles which have proven popular in international transactions due to the flexibility of the legal and regulatory regime and favourable tax environment. These include Section 110 companies and Irish regulated tax- exempt fund structures. Changes to the taxation of investors in debt connected with Irish real estate in 2016 do not impact on the attractiveness of these vehicles for other distressed debt investments. International financial transactions Ireland’s tax regime continues to be a significant factor in structuring cross-border financial transactions for both financial institutions and other groups with a treasury and tax management capacity. With some traditional offshore jurisdictions out of favour, Ireland’s favourable tax environment and treaty access is proving attractive. We have noticed a sustained and continual stream of work arising from a desire to restructure and originate deals through Ireland as a low-tax onshore EU and OECD compliant location. For example, funds are being redomiciled from offshore jurisdictions to Ireland. Asset finance continues to lease in and out through Ireland to obtain the benefit of its onshore treaty network and enterprises are shifting asset pools, including debt platforms, to Irish vehicles which issue profit participating bonds to investors resident in treaty partner countries and to tax-exempt funds. The Government’s publication “IFS2020: A Strategy For Ireland’s Financial Services Sector 2015–2020” sets out the Government’s commitment to the financial services sector and seeks to position Ireland as a leading global centre for FinTech investment, and we expect to see more activity in this space.

The year ahead A key focus in 2017 will be ensuring Ireland is in compliance with BEPS and EU developments. Ireland is expected to sign up to the multilateral instrument, although it is not yet known if it will commit to some of the optional aspects, e.g. on permanent establishments. The outcome of the independent review of the corporate tax code will also be important in informing future Government policy. While the full implications of Brexit are still not known, it is clear that it will pose difficulties for Ireland, given its dependence on the UK. However, we expect to see increased interest in Ireland’s offering as a holding company location and some movement of financial services activities to Ireland. Developments in US tax policy will also be carefully monitored in Ireland.

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John Gulliver Tel: +353 1 614 5007 / Email: [email protected] John is the head of tax at Mason Hayes & Curran, a tier one-rated international tax practice and part of one of Ireland’s premier law firms. He is also chair of Mason Hayes & Curran’s International Committee. For more than 20 years John has advised Fortune 500, FTSE 100 and other major multinational groups in respect of international tax. He regularly works with some of the world’s leading tax lawyers and advisers on M&A transactions and post-acquisition integration projects structured in and through Ireland. He also has extensive experience of cross-border mergers and the use of Ireland as a holding company location. John is a member of the tax section of the International Bar Association and has chaired and participated in various sessions around the world. John was educated at the University of London (LL.B. (Hons)), is an associate of the Institute of Chartered Accountants and the Irish Institute of Tax, and is a UK Chartered Tax Adviser.

Niamh Keogh Tel: +353 1 614 5848 / Email: [email protected] Niamh is a senior member of our Taxation Team. She is a qualified solicitor and Chartered Tax Adviser. Prior to joining the team, Niamh worked in two top-tier law firms’ tax practices. She advises domestic and international clients across all tax heads in a wide range of sectors. Her client base includes financial institutions and technology companies in particular. Niamh’s experience includes advising on inward investment into Ireland, real estate and debt acquisition structures, corporate restructurings, mergers and acquisitions, debt and equity listings and international tax structuring. Niamh has particular experience in advising on the use of Irish regulated fund structures and securitisation vehicles.

Mason Hayes & Curran South Bank House, Barrow Street, Dublin 4, Ireland Tel: +313 1 614 5000 / URL: www.mhc.ie

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Alessandro Dagnino Lexia Avvocati

Overview of corporate tax work over last year Types of corporate tax work During 2016 there has been a considerable intensification of M&A deals in Italy. The M&A market in Italy has been stimulated by both domestic and cross-border transactions. The Italian M&A market in the first six months of 2016 saw 298 deals worth a total of €25.3bn, up 47% from €17.2bn in the same period the year before. Data confirmed the interest of foreign investments in Italy: in the first six months of the year, there were 105 transactions worth a total of €6.7 billion. The biggest included the acquisitions of Italcementi by Heidelberg for €3.7bn and that of Rhiag by Lkq for €1bn. Over the last year, the Italian M&A market has also registered a substantial development in special purpose acquisition companies. The main factors impacting deal structures in 2016 have been costs, timing and tax changes. Corporate tax work focused primarily on the tax aspects of corporate acquisitions. Below is a short summary of last year’s relevant transactions where tax structuring has played a very important role. Transfer pricing: remains a remarkably important driver in all cross-border transactions. The tax provisions in Law Decree of April 24, 2017, No. 50 include a number of measures relating to transfer pricing, which generally are designed to align Italian regulation more closely with the standards set out by the Organisation for Economic Co-operation and Development (OECD). Real estate: the real estate market is undergoing a phase of improvement in Italy and there are indications of an increase in transactions in line with the average in the four other major European countries for the coming two years, according to the research institute Scenari Immobiliari. Looking at the sector breakdown, the residential segment saw an increase in sales to 510,000 deals in 2016, up 14.6% compared to the year before. Revenues in this segment totalled €85.1bn in 2016, an annual increase of 2.5%. Luxury and Fashion: with revenues of approximately €84bn, Italy has the most active fashion and luxury industry in the world, and without a doubt, represents one of the most economically influential sectors of the Italian economy. Entertainment/Gaming: Tax revenues collected by the Italian government from the online gambling industry have increased, reaching €247m, up 21% compared to 2015. In 2015, the Italian government collected €205m from online betting.

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Key developments affecting corporate tax law and practice During 2016 and 2017, many measures have significantly changed the Italian tax system. A Circular Letter (no. 6/E/2016) issued by the Italian tax authorities provided detailed guidelines on the tax ramifications of leveraged buy-out (LBO) acquisitions. The newly published guidelines provide important clarifications concerning the deductibility for corporate income tax purposes of the interest expenses borne in connection with acquisition loans and the appropriate tax treatment of certain items of income paid by target companies and their Special Purpose Vehicles (SPV). A summary of some key points addressed by the Inland Revenue Agency in the Circular is provided below. Deductibility of interest expenses: according to the new approach outlined by the Circular, the Italian acquisition vehicle may deduct interest expenses and, if at arm’s length, it does not have to be charged to the shareholder. Tax treatment of other selected items of income: the second part of the Circular addresses a number of different and selected tax issues potentially arising in LBO transactions, even though it should be observed that many of the clarifications provided by these administrative guidelines might also have an impact on transactions in other areas. The new guidelines indicate that the corporate income tax treatment of transaction fees and of similar fees charged by investment managers and other entities or advisors connected with the private equity firm should be duly scrutinised on a case-by-case basis, with respect to their deductibility under general tax principles. On 7 December 2016, the Italian Parliament approved the budget law for year 2017. Most relevant tax measures contained in the law relate to: Corporate tax rate provisions: with effect from fiscal year 2017, the budget law for 2016 has decreased the corporate tax rate of 3.5% and provided a 3.5% surcharge for banks and financial entities for which, thus, the overall corporate tax rate will remain unchanged. Group VAT: the law introduces the option for European Group VAT, starting from 1 January 2018 (as provided by Art. 11 of EU Directive 2006/112/CE in the Italian VAT law). Group VAT allows the treatment of Italian-based companies as a single VAT taxpayer, provided that at least from 1 July of the previous year, the following requirements are met: • Direct or indirect control relationships between entities must be controlled directly or indirectly by the same entity in that group, provided that it is resident in Italy or in a State having exchange of information with Italy. • The entities must all perform a business activity of the same nature or, alternatively, a complementary activity or an activity that supports one or more entities of the group. • There must be coordination, in accordance with the Italian Civil Code, between the management bodies of the same entities, even if carried out by a third entity. Extension of extra-amortisation of certain tangible and intangible assets: the law extends the 40% extra-amortisation rate introduced by the budget law for 2016 in relation to the purchase of tangible assets for which the amortisation rate for tax purposes exceeds 6.5%. The Italian budget law also introduced an “anti-avoidance” rule under paragraph 6-bis, Art. 1 of the Italian Law Decree 201/2011. Also important is the below summary of the most important changes introduced by Law Decree 22 October 2016, no. 193, converted into Law 1 December 2016, no. 225 (published in the Official Gazette on 2 December 2016, no. 282).

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Integrative tax return “in favour” of taxpayers The possibility to file an integrative tax return in favour of taxpayers within the deadlines for tax assessment has been introduced. Option for special tax regimes From FY 2017 onwards, automatic renewal for the special regimes provided by the Italian tax rules of: fiscal transparency; domestic tax consolidation; and worldwide tax consolidation, are applicable. Settlement of tax bills The possibility to settle tax bills issued for financial years 2000–2016 has been granted by the tax collection agents without reimbursement of the relevant penalties and interests for late payment. In the current year, the Italian Government adopted Law Decree 24 April 2017, no. 50 which introduces several tax measures aimed at boosting economic development and stabilising State revenues. Law Decree no. 50 of 24 April 2017(1) was converted into law on 15 June 2017. The most important measures in this law relate to: • a measure replacing the concept of fair market value with an arm’s length concept for transfer pricing purposes; and • a tax ruling procedure whereby multinational entities can apply to the Italian Tax Agency in order to obtain a decision about whether their business activity constitutes a permanent establishment in Italy.

Tax climate in Italy In 2016, Italy launched a particularly ambitious project for the renovation of its tax administration in terms of organisation and function. Italy has the world’s most complex tax system, according to the first annual Financial Complexity Index compiled by TMF Group in a ranking of 94 jurisdictions worldwide. The Italian Revenue Agency has taken steps in the last few years to simplify the tax system, introducing a cooperative compliance program that helps companies obtain opinions on their tax treatment ahead of making investments. One of the principal problems that still affects the Italian tax system is that taxation is levied at national, regional and municipal levels, and taxpayers have to pay a high number of taxes.

Developments affecting attractiveness of Italy for holding companies The Italian economy has made a strong step forward during the last year, as many companies have increased their output. External demand has also risen, which is one of the main reasons that Italy has started to attract more foreign investors. Most of such investors decide to set up holding companies in Italy, as it is one of the most advantageous ways of running a business in the country. The participation exemption provides for a 95% tax exemption for dividends paid by the Italian subsidiary to its foreign shareholders, such as the holding company. In Italy there is no minimum period for qualifying for the participation exemption.

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Industry sector focus Banking In spite of the lengthy recession, the Italian banking system is solid and has demonstrated a good capacity for resilience; it has managed to resist difficulties and adapt to changes. Despite the solidity of the banking sector as a whole, there still remain some of the historical limits to the Italian banking sector, such as the excessive fragmentation of supply, the limited availability of types of financing diverse from bank credit, and the disproportionately long times for recovering NPLs. Corporate real estate A new window has been opened for Italian companies to benefit from a tax-simplified method of transferring certain assets (real estate and registered movable property) to their shareholders/partners in the case of a contribution or disposal or transformation into a simple partnership, which is open until 30 September 2017. The tax regime will be available for both “dormant” and “non-dormant” companies; an 8% substitute tax (10.5% in the case of dormant companies) will be applied to the difference between the cost recognised for tax purposes and the fair market value of the assets. Any deferred tax reserve eliminated as a result of the relevant transactions will be subject to a 13% substitute tax. Registration tax, if due on the specific transaction, will be applied at 50% of the normal rates, while mortgage and cadastral taxes will be applied on a lump-sum basis.

The year ahead During the year ahead, corporate tax reform will continue to be at the centre of attention. The Italian tax system is undergoing substantial reforms towards harmonisation with the European system. Further developments in the area of corporate taxation with a focus on transfer pricing are expected. Moreover, capacity building of the tax authority remains one of the crucial success factors of the modernisation of the Italian tax system. A large number of M&A operations as well as an expected increase in transactions involving NPLs will continue to characterise 2017. BEPS and tax avoidance will continue to gain the attention of both the tax administration and tax advisors, also considering the parallel developments at the EU level, including legislative measures on transparency and exchange of information, as well as covering financial information and APAs.

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Alessandro Dagnino Tel: +39 091 309 062 / Email: [email protected] Alessandro Dagnino, lawyer and Professor of Tax Law at the University of L’Aquila, is one of the founding partners of Lexia Avvocati. He advises small, medium and large enterprises, banks, professionals and private clients. Alessandro is an adjunct Professor of Tax Law at the University of L’Aquila. He graduated in law summa cum laude with honours from the University of Palermo. His final dissertation, entitled “The income taxation of non-resident companies and entities”, was awarded the “C. Manzoni” prize from Bocconi University of Milan. He obtained a distinction for his Ph.D. in Tax Law from the University of Catania and holds a Master’s degree in Comparative and European Law from the University of Palermo. He taught International Taxation at the Master’s Course on International and European Taxation of the University of Palermo. He also taught Taxation and Public Finance at the Faculty of Economics of the University of Palermo. He has been appointed as a member of the board of contributors of “Diritto e pratica tributaria internazionale”, the most important Italian review specialising in international taxation. His publications include several articles on national and international taxation topics and a book, “Potestà normativa ed agevolazioni fiscali”, published in 2008. He has been appointed as an advisor for taxation matters to the President of the Sicilian Parliament and to the Councillor for Finance of the Sicilian Region. He is an active member of the Aspen Institute Italia. He is the Vice President of ANTI (Associazione Nazionale Tributaristi Italiani) – Western Sicily chapter. Alessandro is also the President of IRFIS-FinSicilia s.p.a., a financial institution regulated by the Bank of Italy.

Lexia Avvocati Via dell’Annunciata, 23/4 – Milan 20121, Italy – Tel: +39 236 638 610 Piazza del Popolo, 3 – Rome 00187, Italy – Tel: +39 632 650 892 Via Quintino Sella, 77 – Palermo 90139, Italy – Tel: +39 913 090 62 URL: www.lexia.it

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Koji Fujita Anderson Mori & Tomotsune

Introduction Along with OECD’s effort to finalise the BEPS Action Plans, the Japanese government has implemented several legislative actions to accommodate the requirements under the BEPS Action Plans. Those legislative actions include: • Indirect affiliate transactions made subject to the transfer price taxation (2014). • Double non-taxation prevented with respect to dividends paid from foreign subsidiaries (2015). • Exit tax introduced (2015). • Consumption tax made applicable to digital contents services provided from foreign countries via the Internet (2015). • Documentation requirement in transfer price taxation strengthened (2016). • Inheritance taxation on overseas assets strengthened (2017). • CFC taxation strengthened (2017). This article will summarise the latest two legislative actions in 2017, namely the inheritance taxation on overseas assets and the new CFC taxation, and thereafter, introduce interesting judicial precedents that broadened the tax base and the tax authority’s reaction.

Inheritance taxation on overseas assets (Tax Reform 2017) As the inheritance tax burden is peculiarly high in Japan, wealthy people have tried to escape the inheritance tax by moving out of Japan and transferring assets out of Japan before the event of reception of inheritance or a gift. Accordingly, the Japanese government has implemented numerous counter-measures in the past. The exit tax introduced in 2015 is one of such attempts, and the reform of the inheritance tax in 2017 is another. The tax reform in 2017 broadened the scope of application of the inheritance tax so that if the heir is a Japanese national, the heir is subject to the Japanese inheritance tax with respect to inherited assets outside of Japan, if one or both of the deceased and the heir had a residential address in Japan at any point in time during the last 10 years before the reception of inheritance or a gift. This also applies to an heir who is not a Japanese national, if the exemption mentioned in the next paragraph does not apply. At the same time, the Japanese government implemented certain exemptions available to temporary foreign workers, in order to induce them to come to work in Japan. Under this rule, if both of the deceased and the heir are foreign nationals entering Japan with a valid visa and only temporarily staying in Japan (meaning that the period of stay in Japan in the

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan last 15-year period is not longer than 10 years), then assets outside of Japan are not subject to the Japanese inheritance tax or gift tax. This change has already been enacted and is applicable from April 2017.

New CFC taxation Through Tax Reform 2017, numerous changes were made to CFC taxation, including the following major changes. The shareholding test to define the subject subsidiaries has been simplified. Previously, if a Japanese company indirectly holds a foreign subsidiary through a chain of shareholding, the shareholding ratio at each level must be multiplied to determine if the product is over 50%. Under the new rule, the test is whether the shareholding ratio at every level of the chain is more than 50% and the sum of the shareholding ratio at the end of the chain is more than 50%. This change will eliminate the necessity to count the shareholding ratio of Japanese investors in a foreign public company, a fraction of whose shares are held by Japanese investors. Numerous modifications have been made to the substantial economic activities tests. A foreign subsidiary in a low-tax jurisdiction is exempted from the company-wide CFC taxation, if it meets all the substantial economic activities tests, including the active business test, business location or non-related party test, the substantive facility test, and the business administration test. Each of these tests is modified to address numerous problems that have been raised before. If the tax rate applicable to a foreign subsidiary is less than 20%, even if it meets all the substantial economic activities tests mentioned above and is exempted from the company- wide CFC taxation, it is still subject to the income-base CFC taxation with respect to certain designated categories of income (passive income). Through Tax Reform 2017, the scope of the passive income subject to the income-base CFC taxation has been broadened. The newly added categories include income from securities lending, derivatives transactions and foreign exchange transactions. In addition, income at an unusually high rate in light of the amount of assets, depreciation and labour cost is included in the passive income, subject to the income-base CFC taxation. The other major change is that a foreign subsidiary that falls in a defined category of a paper company, a cash box company or a company organised in a black-listed jurisdiction, is subject to company-wide CFC taxation if the applicable tax rate is less than 30%. These reforms of CFC taxation shall apply from April 2018.

Exclusion from permanent establishment, narrowly interpreted This section introduces a recent important judicial decision by the Tokyo High Court (January 28, 2016), which was appealed to the Supreme Court, such appeal being rejected (April 14, 2017). This Tokyo High Court decision narrowed down the exclusion of warehouses from the definition of permanent establishment (PE) and thereby broadened the tax base of income of foreign enterprises (particularly for enterprises conducting Internet commerce business) under the US-Japan DTC and other OECD Model-type DTCs. Facts In this case, the plaintiff is an individual who was a resident in the United States for the purpose of the US-Japan DTC. He operated a business of importing specialty auto-parts

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Anderson Mori & Tomotsune Japan from the United States to Japan and selling the products to consumers in Japan via Internet commerce sites. The plaintiff usually handled the business from his office in the United States. The activities conducted by the plaintiff in the United States included making and maintenance of the website, communication with suppliers, including ordering of supply of the products, monitoring the status of inventory, taking purchase orders and answering questions from customers in Japan, and giving instructions to the employees working at the warehouse for shipping of the products to customers. The plaintiff maintained a leased apartment and a warehouse in Japan in relation to the business. The apartment was usually empty and not physically used for the business, but the address of the apartment was shown on the Internet commerce site as the place of business. The products were shipped directly from the US suppliers to the warehouse in Japan and stored there before being shipped to customers. Several employees were hired to work in the warehouse. They sorted the inventory, picked up products, packed the products with shipping documents and user manuals in a box, and delivered the boxes to shipping service companies, all in accordance with the instructions sent from the plaintiff in the US office to the warehouse over the Internet. Decision In the court proceeding, the plaintiff argued that the apartment and warehouse did not constitute his permanent establishment in Japan because there were no physical activities in the apartment and the warehouse was used only for storage and delivery of goods and so they fall into the exception under Article 5, paragraph 4(a).1 The government (defendant) argued that in order to be excluded from permanent establishment status pursuant to Article 5, paragraph 4(a), activities conducted in the place must be not only limited to those activities provided in Article 5, paragraph 4(a), but also such activities must be of a preparatory or auxiliary character. The judges of the Tokyo High Court adopted the government’s argument and determined that the plaintiff’s apartment and warehouse constituted his permanent establishment because those facilities were important and vital elements of the business and the activities conducted there are not of a preparatory or auxiliary character, even though they are limited to those activities mentioned in 4(a). Implications The plaintiff appealed to the Supreme Court and the Supreme Court rejected the appeal. Accordingly, this interpretation of Article 5, paragraph 4(a) may be applied to other US companies having warehouses in Japan. Further, the text of the US-Japan DTC Article 5, paragraph 4(a) is identical to the OECD Model Tax Convention’s Article 5, paragraph 4(a) as well as most double tax conventions that Japan has entered into (except for information exchange treaties). Accordingly, the same interpretation may apply and affect taxation of companies in those treaty partner countries if they have warehouses but no other permanent establishment in Japan. Relation to BEPS Action Plan OECD published the final report on BEPS Actions in 2015. The final report on Action 7 discusses avoidance of permanent establishment, including commissionaire arrangement, specific exemption, and fragmentation, and suggests several changes to the applicable double tax conventions to address those issues.

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One of such issues is the narrowing of the specific exemption set forth in Article 5, paragraph 4 so that the exemption set forth in Article 5, paragraph 4 applies only where activities conducted at the particular site are limited to those of preparatory or auxiliary character. In connection with this, we should note that a multinational tax treaty2 has been recently signed by participating countries, including Japan. Such multinational treaty is intended to implement various modifications to the double tax conventions entered into between the participating countries, without negotiations between the parties to each of the double tax conventions (though the multinational treaty would not affect the US-Japan DTC, because the United States is not a party to the multinational treaty). Among other issues, such modifications by the multinational treaty address the commissionaire arrangement and fragmentation issues related to the permanent establishment mentioned in the Action 7 final report. However, the multinational treaty does not address the specific exemption provision set forth in Article 5, paragraph 4. Accordingly, narrowing of the scope of the specific exemption provision set forth in Article 5, paragraph 4 is still left for amendment in the bilateral double tax conventions between the parties. In other words, the above judicial precedent will have the effect of achieving the result proposed by the final report of Action 7 without actually amending the double tax conventions. In this sense, this judicial precedent will keep its important position until Japan modifies all its bilateral double tax conventions in line with the final report of Action 7.

Fiscal transparency of limited partnerships In contrast, there is a Supreme Court decision in which the tax authority’s argument was adopted but the tax authority tried to deny the effect of which later on. The Supreme Court issued an important decision on July 17, 2015 related to fiscal transparency of a Delaware limited partnership. In this case, Japanese investors invested in properties in the United States through a Delaware limited partnership and deducted the expenses incurred by the limited partnership including depreciation of the assets invested through the limited partnership. The Japanese Tax Authority argued that the Delaware LP should not be treated as a fiscally transparent entity but as a corporation and denied the deduction by the investors. This case was disputed until the Supreme Court finally determined that the Delaware limited partnership shall not be treated as fiscally transparent for Japanese tax purposes. Ironically, before the Supreme Court decision was issued, the relevant tax laws were amended to restrict deduction of losses incurred in connection with investment through limited partnerships and other fiscally transparent associations. Accordingly, the decision by the Supreme Court was no longer useful for the Tax Authority in order to close the tax loophole. On the other hand, the Supreme Court decision posed significant uncertainty to foreign investors investing through Delaware or other limited partnerships as to whether and how they can benefit from applicable double tax conventions. In light of this situation, the Japanese National Tax Authority recently issued an informal statement3 to the effect that the National Tax Authority would no longer pursue any challenge to the fiscally transparent nature of US limited partnerships. This statement appears to be intended to clear the uncertainty posed by the Supreme Court decision. However, unfortunately, such statement is only an unnamed, unsigned and informal statement; hence it is not legally binding and cannot wipe out the uncertainty posed by the Supreme Court decision. In this sense, the Supreme Court decision still retains significant implications.

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Endnotes 1. Article 5, paragraph 4(a) of the US-Japan DTC provides as follows: “4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;…” 2. Multinational Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (June 7, 2017). 3. https://www.nta.go.jp/foreign_language/tax_information.pdf. This statement was disclosed on the National Tax Authority’s English website on February 9, 2017. To date, no Japanese statement has been published.

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Koji Fujita Tel: +81 3 6888 1041 / Email: [email protected] Koji Fujita is a partner at Anderson Mori & Tomotsune, and specialises in tax and tax-related matters on cross-border transactions. Education • Tokyo University (LL.B., 1984). • University of Michigan (LL.M., 1990). • Trained at law firms in the United States and Germany. Professional Admissions • Japan (1986). • New York (1991). Professional and Academic Associations • Dai-ni Tokyo Bar Association. • JFBA Taxation Committee. • METI International Taxation Committee (2009). • METI International Taxation Committee (2013). Languages • Japanese (first language). • English.

Anderson Mori & Tomotsune Akasaka K-Tower, 2-7, Motoakasaka 1-chome, Minato-ku, Tokyo 107-0051, Japan Tel: +81 3 6888 1000 / URL: www.amt-law.com/en

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Afrore Rudi & Ruzhdi Zenelaj Deloitte Kosova sh.p.k.

Overview of corporate tax work over last year As of July 2015, the Assembly of Kosovo has approved a new fiscal package in the form of new tax laws on Value Added Tax (VAT), Personal Income Tax and Corporate Income Tax (CIT). The new fiscal package became effective in September 2015, with most significant changes noted in the new VAT law and some certain changes in the CIT law, too. Following the implementation of the new fiscal package, throughout 2016 the tax administration of Kosovo has issued several administrative instructions (i.e. No. 06/2016) and public rulings in establishing procedures and guidance on the proper interpretation of certain tax articles, such as the application of the reverse charge mechanism in the area of construction, treatment of donations, etc. Additionally, with the purpose of increasing the collection rate of public liabilities, a new law on public debt amnesty was introduced, which became effective in September 2015 and will be in force until 1st September 2017. It is also worth mentioning that there is still a significant increase in demand for tax review services, due to the incentive for taxpayers to utilise the right of amnesty of certain unpaid liabilities towards the tax administration if certain conditions are met, and part of the liabilities are duly paid. The majority of clients continue to be subsidiaries or PEs with a fixed domicile in Kosovo, as well as local companies operating within the domestic market. Very few local companies are parent companies with ownership or control over foreign capital, hence international tax planning services are not as much in demand as tax review services. Nevertheless, the firm anticipates that changes in the preceding year will be essential in both legislative and corporate tax work, mostly due to the expected introduction of the Administrative Instruction on Transfer Pricing in late 2017 or early 2018. A draft version has already been published. Accordingly, documentation requirements are as per OECD Transfer Pricing Guidelines on OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (2010), and documentation prepared as per “EU Resolution 2006/c176/01 on the code of conduct on TP Documentation” is considered to fulfil local legislation requirements. Additionally, an administrative instruction on implementation procedures for double taxation agreements is expected to be published this year as well. Currently there are no procedures in place, and a request for an individual ruling from the Tax Administration is required prior to implementing any of the provisions of a double taxation agreement. Finally, it is worth mentioning that in 2015, the Republic of Kosovo signed the Association and Stabilisation Agreement with the European Union and the implementation of the agreement is already taking place quite effectively. Currently there are reduced customs

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Deloitte Kosova sh.p.k. Kosovo rates applicable for all goods that are considered of EU origin. Kosovo will also be aiming to enhance the exchange of information with EU Member States to facilitate the enforcement of measures preventing tax fraud, evasion and avoidance. Accordingly, Kosovo shall also complete the network of bilateral agreements with EU Member States along the lines of the latest update of the OECD Model.1

Types of corporate tax work Tax review and services for tax compliance with the domestic tax legislation have been the main services provided for the firm’s clients. The firm’s services are in fact the most demanded tax services in the local market. Nevertheless, as noted above, an increased sensitivity from taxpayers concerning implementing provisions of double taxation agreements and compliance with the foreseen documentation requirements for transfer pricing purposes is notable. Additionally, the firm has assisted numerous clients in restructuring processes and assisting in utilising the most tax-efficient option. Most notably, in the last couple of years the firm has assisted the unbundling process of the formerly state-owned Electricity Distribution Operator from the Public Electricity Supply Operator. The unbundling process in this case has been a statutory requirement due to the transposition of EU energy legislation into the local framework. A number of additional restructuring works have been performed by the firm, again mostly by assisting the demerger of an existing corporation into two distinct entities. For utilising the most tax-efficient reorganisation option, an approval from the Tax Administration of the reorganisation plan is required. There were no landmark cases in cross-border transactions that were treated by a more complex scheme. The general lack of more complex restructurings and cross-border transaction schemes is certainly not due to a restrictive local tax regime. On the contrary, the Kosovar taxation environment is transparent and dynamic in complying with the European Union and international practices in both direct and indirect taxation.

Key developments affecting corporate tax law and practice As already stated earlier in this chapter, a new fiscal package was introduced st on1 September 2015, which was ratified by the Kosovo Assembly. The new CIT Law provides a number of changes from the previous one. The main changes in the new CIT Law affecting tax treatment are summarised as below and there have been no changes in 2017 to these provisions: • A safe harbour for bad debts of a value lower than €500. For such bad debts, no initiation of legal procedures is required. • Income exempt from CIT now includes income earned from grants, subsidies and donations, in compliance with relevant regulations and conditions. • Tax loss carry forwards are reduced from seven to six years. • Tax losses from transactions between related persons cannot be deducted, except when the transaction complies with the market value. The previous CIT law strictly disallowed the recognition of losses from related-party transactions. • Training expenses inside and outside Kosovo paid by an employer for an employee related to his or her work will be allowable without limitations in the year in which such training expenses occur. The previous CIT Law limited training expenses to an amount of €1,000 per tax period per employee.

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• Contributions in the form of donations are allowed as a deduction up to a maximum of 10% of taxable income calculated before such contributions are deducted. In addition to this deduction, taxpayers that contribute to certain areas as prescribed by special laws can have an additional allowance of 10%. The previous CIT Law only provided for a deduction of charitable contributions at a maximum rate of 5% of taxable income before this deduction. • The difference in expenses and deductions for marketing and representation expenses has also been elaborated upon further. The treatment of these expenses has often been the subject of dispute between the Tax Administration and taxpayers. • A special allowance of 10% for the purchase of new or existing assets has been put into use in Kosovo for the first time. • In attempts to combat the informal economy, a withholding tax of 3% will be applied on certain payments made to non-business persons. Additionally, it is worth mentioning that the new Law on VAT, which includes several significant changes from the previous one, affected the type of tax work performed by the firm more significantly than CIT Law. Most notably, the standard VAT rate increased from 16% to 18%, certain goods and services are now subject to a reduced VAT rate of 8% and the VAT registration threshold has decreased from €50,000 to €30,000. Administrative Instruction 3/2015 on implementing the provisions of the new VAT Law became effective on 1st September, 2015 and several public rulings were issued throughout 2016 in order to better clarify the interpretation of certain articles (i.e. reverse charge in construction area, donations, etc.). Compared to the previous Administrative Instruction 10/2010, the current one provides a comprehensive interpretation of the respective provisions of the VAT Law. VAT application procedures are elaborated in more detail, and therefore the VAT treatment of transactions that have been subject to dispute between taxpayers and the Tax Administration of Kosovo have now been resolved. Additionally, the new Administrative Instruction provides a list of goods subject to the reduced VAT rate of 8%. It is worth mentioning that, although not directly affecting corporate tax, the increase in the standard VAT rate has nonetheless increased costs for taxpayers dealing with VAT-exempt supplies without the right of crediting input VAT. This has mostly affected the financial and construction sector. The construction sector has been particularly affected by the new fiscal package, since the new Administrative Instruction has also foreseen reverse charge procedures to be applied to all service providers within the construction area and the Public Explanatory Decision 05/2016 has further clarified its application following several areas of confusion onits interpretation by the taxpayers. Similar to the standard reverse charge mechanism, the obligation to pay VAT is transferred to the taxable person registered for VAT in Kosovo, to whom the supplies are delivered. The term supplies shall include construction services or construction services and materials supplied. If the supplies are only construction materials, the transaction is not subject to the reverse charge mechanism.

Domestic – cases and legislation Although the main activities performed by the firm include tax compliance, tax review and ad hoc tax advisory services, the firm has observed a moderate increase in uncommon tax work. For legislative context, it should be noted that, although the general rule provides that losses may not be carried forward if there is an ownership change of over 50%, despite the change

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Deloitte Kosova sh.p.k. Kosovo in ownership, the Tax Administration may allow losses to be carried forward in certain approved restructurings through M&A, demerger, insolvency, and exchange of shares. A number of companies have utilised this right in the last couple of years. The firm has observed a moderate increase in restructurings through demerger procedures, especially in relation to the division of real estate from actual business activities. This is due to the real estate industry being one of the most profitable sectors in recent years. Restructuring assistance has also been performed in conjunction with progressivity in taxation, in some cases effected from the neighbouring jurisdictions,2 which posed uncertainty in regards to the neutrality principle. As mentioned earlier in this chapter, the firm has assisted in the unbundling process of the formerly state-owned Electricity Distribution Operator from the Public Electricity Supply Operator. The unbundling process in this case has been a statutory requirement due to the transposition of EU energy legislation into the local framework.

Cross-border considerations Transfer pricing Kosovar tax legislation law denotes the OECD MC as a source of supplementary law. Consequently, Kosovo also indirectly recognises its derivative documents, including the OECD Transfer Pricing Guidelines on Multinational Enterprises and Tax Administration (2010), and thus BEPS as well. With the introduction of the Draft Administrative Instructions on transfer pricing, which is expected to enter in force during 2016, many of the multinational enterprises (MNEs) present in Kosovo have already started being attentive in complying with the foreseen transfer pricing documentation requirements. If the draft passes as such, a taxpayer involved in potentially controlled transactions exceeding €50,000 within a fiscal year is required to notify the Tax Administration. The Tax Administration may scrutinise such transactions in harmony with the transfer pricing guidelines. The tax administration may demand the taxpayer to provide documentation for transfer pricing purposes within 30 days from the date of the request. In fact, the draft specifically refers to its compliance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (2010) and states that documentation prepared as per the “EU Resolution 2006/c176/01 on the code of conduct on TP Documentation” is considered to fulfil local legislation requirements. Energy The current energy legislation in Kosovo is in the process of transposing the requirements of Package III of the EU legislation for energy. Most notably, it is worth mentioning that the draft law on electrical energy includes an anti-discriminatory clause for cross-border wholesale energy trading. In this respect, the draft law, in line with the EU Secretariat of the Energy Community, has inferred a provision where licences issued for wholesale electric energy trading within the Energy Community shall be recognised in Kosovo. Hence, suppliers licensed in another contracting state will have the right to trade electric energy without the need for a local licence. As per current law, wholesale electricity trading companies are required to be established in Kosovo in order to obtain a wholesale trading licence. Should the draft law enter into force,

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Deloitte Kosova sh.p.k. Kosovo such wholesale electricity trading companies will not be required to have any corporate presence in Kosovo.

Tax climate in Kosovo Bilateral treaties for avoiding double taxation Kosovo has concluded, in total, 10 bilateral treaties for avoiding double taxation with the following countries: Albania; Belgium; Finland; Germany; Hungary; Macedonia; Slovenia; the Netherlands; and Turkey. Four of these are inherited from the Yugoslavian Federation3 which makes them non- compliant with all the disputes arising in today’s market. Nevertheless, an important double tax treaty with Turkey became effective on 1st January, 2016, which will mean more cross- border corporate tax work in harmony with the treaty due to the capital that Turkish resident entities own in Kosovo. According to the provisions4 on interest, dividends and royalties, such income may be taxed in either jurisdiction; this leaves room for discretion to the respective Tax Administration. Additionally, this DTT’s protocol foresees that a PE in the event of construction works will be established after a period of 12 months. The establishment of PE regarding construction works is prolonged for an additional six months if another BIT is concluded within the same period of time (18 months) with another state. These two scenarios are already provided for, while in the first scenario the outcome is established on a case-by-case basis. The outcome of the second scenario remains to be seen once Kosovo has signed new DTTs. On the other hand, as stated above, domestic tax legislation has a reference to the OECD Model Convention, whereby the OECD Model Convention is recognised as a source of law only in circumstances when cross-border taxation is not regulated by domestic law, and there are no DTTs in force with the other state.

Developments affecting attractiveness of Kosovo for holding companies The CIT Law exempts dividends independent of their source which arguably favours such structures as holding entities, whose structuring may be adapted to the ownership in diverse industries. According to the CIT Law, a Kosovar resident may credit against any income derived from and taxed in a foreign jurisdiction.5 It is important to highlight that there are still no CFC or Thin Capitalisation Rules, and the tendency to enforce such obstacles have remained at the discussion level. Moreover, Kosovo has signed only a few double tax treaties, and though practice and legislation is oriented towards unilateral recognition of the OECD Model Convention, the primary source of law for avoiding double taxation remains to be domestic legislation. The legal infrastructure is adapted towards favouring non-resident companies in establishing themselves in Kosovo. CIT is flat and at a rate of 10% for entities with a revenue of over €50,000 per year. This places Kosovo among the most tax-competitive jurisdictions, though neighbouring jurisdictions share similar rates and conditions, which makes its impact on company migrations still not a distinguished aspect of the system.

The year ahead Kosovo continues to enhance its tax competitiveness by maintaining a 10% flat corporate income tax rate. Dividends received by resident and non-resident persons will continue to be exempt.

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A noteworthy change will occur with the introduction of the Administrative Instruction on transfer pricing (TP), which is expected to require companies to prepare transfer pricing documentation. The transaction threshold to be scrutinised by the Tax Administration in harmony with TP rules is quite low – for transactions exceeding €50,000 – and it is predicted that the volume of services required for TP and the market in general will be vast, which will make experience in the sector scarce. Developments in cross-border taxation will intensify, as Kosovo is expected to conclude other DTTs, and the possibility of reconsidering tax liabilities and the taxation nexus, in conformity with such DTTs, will broaden. Other Certain tax breaks and incentives for new businesses are expected to be introduced in a sub-legal act (AU-00/2016) which is already obtainable in draft format. This draft allows businesses investing a certain amount and hiring a certain number of employees to benefit from two to six years of tax breaks regarding CIT. To benefit from such tax breaks, an entity must: • invest over €10m within three years with at least 120 hired employees for a six-year tax break; • invest over €5m within three years with at least 80 hired employees for a four-year tax break; • invest over €2m within two years with at least 50 hired employees for a three-year tax break; or • invest over €500,000 within three years with at least 30 hired employees for a one-year tax break.

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Endnotes 1. Association and Stabilisation Agreement between the European Union and Republic of Kosovo. 2. Albania, a neighbouring jurisdiction, imposes progressivity in excise tax based on the production capacity of the supplier. 3. 8th September, 1988, Article 11 states that dividends paid by a company which is a resident of the Federal Republic of Germany to a resident of Yugoslavia may be taxed in the Federal Republic of Germany…, while the opposite possibility was not foreseen at all. 4. In Article 11. 5. E.g. withholding tax.

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Afrore Rudi Tel: +386 49 590807 / Email: [email protected] Afrore is a Director in the Tax & Legal Department at Deloitte Kosova. She holds a B.A. (Hons) in Accounting and Taxation from London Guildhall University (England) and is a member of the Society of Certified Accountants and Auditors in Kosovo (SCAAK). Prior to joining Deloitte in 2007, Afrore started her career with Simmons Gainsford LLP, a London-based company. She is a highly recommended tax advisor in the Kosovo market. The main focus of her work is advising foreign investors operating in the market. Her experience includes, but is not limited to, tax advisory services, tax due diligence and tax litigation in a wide range of clients and industries, mostly focusing on the energy, transportation, construction and banking sectors. She was a member of the Independent Review Board of Appeals from November 2010 to January 2012 and is a member of the British Chamber of Commerce. Currently, she is a member of the AmCham Tax Committee. Afrore is fluent in the Albanian and English languages.

Ruzhdi Zenelaj Tel: +386 49 283105 / Email: [email protected] Ruzhdi Zenelaj is a Tax Manager at Deloitte Kosova. Ruzhdi is a graduate of the Faculty of Economics from the Pristina University. Also, he holds a Master’s degree in Public Service School from the American University of Kosovo. He brings 10 years of experience in the tax field from his previous work in the Kosovo Tax Administration. In the administration, he worked as a tax inspector, a professional standards officer and a VAT adviser. He has also worked with PricewaterhouseCoopers as an assistant manager in the tax and legal department. Ruzhdi is fluent in Albanian and English, and has basic knowledge of German and Serbian.

Deloitte Kosova sh.p.k. Str. Lidhja e Pejës, no. 177, 10000 Prishtina, Kosovo Tel: +381 38 760 300 / Fax: +381 38 760 350 / URL: www.deloitte.com/al

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Gaëlle Felly & Patrick Andersson Bonn & Schmitt

Overview of corporate tax work over last year Types of corporate tax work Debt/securities issuances, refinancing schemes, corporate restructurings, joint ventures and IPOs remain the core corporate tax work in Luxembourg, with a focus on eliminating or reducing double taxation issues. The steady flow of transfer pricing work has continued to increase over the year and is a key element together with local functional substance. The importance of transfer pricing has in particular been outlined by the new article 56bis of the Luxembourg income tax law (“LITL”), as introduced by the law of 23 December 2016, and detailed by the Circular L.I.R. no 56/1–56bis/1 issued on 27 December 2016 by the Luxembourg direct tax authorities. Aside from matters related to the exchange of information upon request or set out by double tax treaties signed by Luxembourg or in the application of the modified EU Directive 2016/16 on the administrative cooperation in the field of taxation (the “EOI Directive”), queries regarding exchange of information, mainly related to (i) FATCA regulation, with respect to compliance and status queries since the ratification of the Luxembourg IGA (Model 1) by a law dated 1 July 2015, (ii) Common Reporting Standards (“CRS”) issues regarding the compliance and status of Luxembourg entities since the transposition of Directive 2014/107/EU by the law of 18 December 2015, and (iii) country-by-country reporting queries which arose from the transposition by the law of 23 December 2016 of the EOI Directive, continue to arise on a regular basis. Similarly to previous years, a growth in ultra-high-net-worth individuals (>€100m) private client work is occurring, with the consolidation of Luxembourg-based family office structures that replace former offshore or even onshore (e.g. France) vehicles. New investments and restructurings in real estate (through AIF, regulated structure or the newly introduced Reserved Alternative Investment Fund) have continued to grow ever since the introduction in certain double tax treaties concluded by Luxembourg of the “real estate rich” concept (e.g. applicable as of 1 January 2017 for the double tax treaty concluded with France). Finally, tax disputes (including international tax arbitrations and mutual agreement procedures under double tax treaties) have continued to steadily increase both in volume and importance of the taxes challenged, which is representative of the increase of mutual agreement procedures between OECD member countries as noticed by the OECD committee. Significant deals and themes • Tax advice to one of our existing clients, one of the biggest Chinese state-owned investment companies, in the framework of different investment projects including, but not restricted to, (i) the incorporation of a Luxembourg joint venture structure together

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with another state-owned Chinese company (being one of the world’s largest energy companies) for the purpose of holding equity stakes in leading green energy companies in Poland and Italy, (ii) financing structuring related to the acquisition of one of the biggest US investment funds for wind park farms located in Germany, and (iii) debt restructuring of a Brazilian subsidiary in the amount of ca. €1.2 billion. • Advice on the Luxembourg tax implications of the merger of the world’s leading optical companies and the setting up of a joint venture structure as well as listing of the shares. • Advice on the setting up of a joint venture company followed by the restructuring of the entire group in relation to the acquisition of real estate property located in Germany. • Ongoing advice to a Middle East client both from an direct and indirect tax perspective as per the structuring of their investment and management of assets located in continental Europe through Luxembourg. • Tax advice on the restructuring of an investment in a portfolio of EU- and non-EU- based entities though a Luxembourg “société d'investissement en capital à risqué” (“SICAR”), which was at that time in the process of being authorised by the CSSF. • Advice in relation to a financing restructuring of an existing Luxembourg collective investment fund investing in Italian real estate through the holding of units in an Italian renewable energy investment fund (“REIF”). • Advice to one of our insurance clients on (i) the structuring of a life insurance and capitalisation bonds product with a Luxembourg legal entity as a policyholder, and (ii) asset management, intermediary and life insurance agreements (notably from a VAT, insurance tax and FATCA point of view). • Ongoing advice on the transfer of the registered office of a French top holding company with real estate investments valued at approx. €100m to Luxembourg. • Ongoing advice to a Swedish private equity firm in structuring investments to lower middle market unlisted companies in the Nordic region for an investment target of ca. €350m through a Luxembourg master feeder fund. • Tax assistance with regard to a conflict of tax residence involving a Luxembourg captive reinsurance company that implies various discussions with the Luxembourg tax authorities. • Successfully represented as tax counsel a local bank in light of a tax residency challenge by foreign tax authorities including liaising with local counsels and the Luxembourg tax authorities, as well as close coordination with the Luxembourg tax authorities regarding the initiation of a mutual agreement procedure to solve the issue. • Initiation of a VAT litigation procedure dealing with the recovery of input VAT related to the acquisition costs incurred by a Luxembourg holding company actively involved in the management of its subsidiary, in light of the CJUE Larentia + Minerva case, the application of which has been denied by the Luxembourg VAT authorities. • Launching of VAT proceedings in relation to the deduction rights of Luxembourg good agricultural and environmental conditions (“GAECs”), the VAT status of which has been denied by the Luxembourg VAT authorities on the ground of an abuse of law.

Key developments affecting corporate tax law and practice Domestic – cases and legislation New tax measures in 2017 A long-overdue tax reform has been adopted by the law dated 23 December 2016 modifying, notably, the LITL, the Luxembourg municipal business tax law (“MBTL”) and the Luxembourg net wealth tax law, which is applicable as from 1 January 2017:

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• With a view to strengthen Luxembourg’s competitiveness, the corporate income tax (“CIT”) rate has been reduced from 21% to 19% for tax year 2017 and 18% as from tax year 2018, in to which should be factored the contribution to the unemployment fund (7%) and the municipal business tax (“MBT”) (6.75% for companies located in Luxembourg city). The overall tax rate for tax years 2017 and 2018 should therefore amount to respectively 27.08% and 26.01% (in Luxembourg City). In addition (i) the taxable profits not exceeding €25,000 are now subject to CIT at the rate of 15% (20% previously), and (ii) an intermediate bracket has been introduced for taxable profits between €25,000 and €30,000, taxed at €3,750 plus 39% (in 2017) or 33% (as from 2018) of the taxable income exceeding €25,000. • The fixed minimum net wealth tax introduced at the end of 2016 to replace the minimum CIT, applicable to “société de participations financières” (“Soparfis”), securitisation and SICAR vehicles (whose sum of financial fixed assets, intercompany loans, transferable securities and cash at bank exceeds both 90% of their total gross assets and €350,000), has been increased to €4,815. The progressive minimum net wealth tax rate for all other companies scaling from €535 up to €32,100 remains unchanged. • A 17-year limitation period is introduced to carry forward tax losses realised as from 1 January 2017. For tax losses realised before 1 January 2017, no time limits apply. • The non-business-friendly ad valorem registration duty of 0.24% due when a claim was mentioned in a notarial deed or enforced through a judicial proceeding has been waived as from 1 January 2017. • The investment tax credit has been increased in order to stimulate companies’ investment policies. As such, the tax credit on additional investment has been increased from 12% to 13%, the tax credit for global investment from 7% to 8% (the rate remaining at 2% for investments exceeding €150,000) and the tax credit on investment in assets eligible for special depreciation from 8% to 9% (the rate remaining at 4% for investments exceeding €150,000). In addition, the scope of eligible investments has been extended to include investments made anywhere within the European Economic Area. • The temporary tax relief on foreign exchange capital gains based on article 54bis of the LITL is extended to any company as from the fiscal year 2016. • With the aim to ensure the sustainability of family businesses transferred to family heirs or third parties (notably an employee of the company), a tax deferral is granted (under conditions) on capital gains on immovable properties (land and/or buildings) used in the exploitation of the business. • In order to fight tax evasion, tax penalties have been increased and three types of tax frauds are now distinguished: simple tax fraud; aggravated tax fraud; and tax swindle. The latter two are now considered criminal offences and thus as predicate offences to money laundering. • CIT, MBT and net wealth tax returns will have to be filed solely through electronic means as from 2018 concerning 2017 tax returns. • With a view to achieving a social equitable treatment of Luxembourg individual taxpayers, the 2017 Luxembourg tax reform amended the global income tax schedule by introducing new tax brackets (41% for annual income from €150,000 and 42% for annual income from €200,004 (thresholds doubles for taxpayers taxed collectively) so that the marginal income tax rate is 45.78% (including the employment fund contribution)). In addition, the 0.5% temporary balancing tax has been abolished. Furthermore, tax advantages such as, e.g., child support, home savings and lunch vouchers have been increased.

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BEPS Luxembourg through the year 2017 has continued to implement tax measures foreseen by the OECD’s BEPS action plan. In line with BEPS Action No 5 on Countering Harmful Tax Practices More Effectively, taking into Account Transparency and Substance, the law of 23 July 2016 transposed Directive 2015/2376, which aims to implement provisions regarding the automatic communication of advance cross-border rulings (“ATA”) and advance pricing agreements (“APA”) to other EU Member States’ tax authorities as well as the European Commission (“DAC 3”). Nevertheless, purely domestic tax rulings and tax rulings issued to natural persons are beyond its scope. In order to avoid divergent interpretations of what constitutes a tax ruling, the European Commission has included a clear and very wide definition. In practice, every three months, the Luxembourg tax authorities have to send to all other Member States a pre-defined set of reasonably detailed information following a standard format on all ATAs and APAs. This covers (i) the name of the taxpayer (and group, where this applies), (ii) a description of the issues addressed in the tax ruling, (iii) in case of an APA, a description of the criteria used to determine the said APA, (iv) identification of the Member State(s) most likely to be affected, and (v) identification of any other taxpayer likely to be affected (apart from natural persons). Other Member States are then able to ask for more detailed information on a particular ATA or APA, where relevant. In addition, Member States have to provide annual statistics to the European Commission on the volume of information exchanged on APAs and ATAs. Ultimately, the exchange covers all ATAs and APAs arrangements that Member States have issued, amended or renewed after 31 December 2016 regardless of whether they were/ are in force or not. A more limited communication is also granted to ATAs and APAs, issued, amended, or renewed since (i) January 2012 to the extent that the ATA or APA is still applicable on 1 January 2014, and (ii) 1 January 2014 regardless of whether the ATA or APA is still applicable. In addition, BEPS Action 13 on the implementation of transfer pricing documentation and country-by-country reporting has also been implemented at the European Union level through Directive 2016/881/EU (the “CbC Directive” or “DAC 4”). Under Luxembourg domestic law, according to the law of 23 December 2016, which transposes into Luxembourg domestic law the CbC Directive, all Luxembourg tax resident corporate entities which (i) qualify as an ultimate parent entity (“UPE”) of a multinational group which are required to prepare consolidated financial statements or be required to do so if equity interest in any enterprises of the group were listed, and (ii) with consolidated group revenue of at least €750 million in the preceding fiscal year, should submit a country-by-country report to the Luxembourg tax authorities on an annual basis. The Luxembourg entity (if not the UPE) must notify the Luxembourg tax authorities if it is the entity identified to do the reporting for the entire group (“Surrogate Parent Entity”). In case the Surrogate Parent Entity is located in another Member State or in a State which applies rules under the CbC Directive, the Luxembourg entity (if not the UPE) should not be subject to any reporting obligations in Luxembourg as another entity of the group should fulfil the reporting obligations. If the Luxembourg entity is subject to a reporting obligation, it should file the country-by- country report with the Luxembourg tax authorities within 12 months of the last day of the reporting fiscal year. The first CbC report will apply for the 2016 tax year and will be due in 2017.

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BEPS Actions 8–10 in relation to the methodology used to determine the arm’s-length remuneration which needs to be realised between related parties was introduced domestically through article 56bis of the LITL, which was introduced by the law of 23 December 2016. Finally, it is likely that through the course of 2017, Luxembourg will implement BEPS Action 15, which aims to renew international tax standards with a new set of tax rules through an international comprehensive and coordinated approach.

Tax climate in Luxembourg At a domestic level, 2016 has been marked on one side by lengthy discussions on the 2017 Luxembourg tax reform bill, the details of which are explained in further detail above, which has been drafted in order to enhance the attractiveness of Luxembourg. This implied, among other things, a decrease of the CIT in line with the willingness of the Luxembourg government to maintain healthy public finance. Luxembourg also continued on its path to align its domestic rules with international and European standards. The same approach should be followed for the year 2017 ahead with the implementation of the Anti-Tax Avoidance Directive (“ATAD”), introducing interest limitation rules, exit taxation rules, general anti-abuse rules, CFC and hybrid mismatches rules. No bill of law has been released at the moment. It is worthwhile to note that major changes in Luxembourg domestic rules are thus foreseen since no CFC or general limitation of interest rules are currently set out under Luxembourg tax laws (with the exception of an administrative practice related to thin capitalisation rules applicable upon the financing equity stakes’ acquisition). As per the automatic exchange of information, the year 2016 has been of importance to Luxembourg due to the transposition into its domestic tax legislation of (i) DAC 3 dealing with the automatic exchange of information of cross-border ATAs and APAs, and (ii) DAC 4 dealing with country-by-country reporting, which aims to give a global view of the group structure and flows to tax revenues where generated. The implementation of these rules in Luxembourg domestic law is the best proof of Luxembourg’s willingness to perfectly fit in the EU and international tax environment. With the aim of complying with international transfer pricing rules, Luxembourg domestic provisions on transfer pricing rules have been amended by introducing article 56bis LITL, which provides for the application of the comparability analysis in order to determine the arm’s-length remuneration to be realised between related parties. Furthermore, intra-group financing activities performed by Luxembourg companies are subject to new rules issued by Circular L.I.R. no 56/1–56bis/1 on 27 December 2016 (the “TP Circular”). The TP Circular replaces and supersedes the old intra-group financing circulars as from 1 January 2017 with no grandfathering clause. While the old transfer-pricing circular contained a de minimis provision regarding the equity at risk necessary to carry out intra-group financing activities, the TP Circular provides for (i) a functional analysis and a risk analysis to be performed in order to determine the appropriate equity at risk of the financing company, and (ii) a series of criteria which must be fulfilled in order to ensure that the company has enough substance to bear the risks in relation thereto. In addition, as from the codification of the ATA/APA procedure at the end of 2014 (effective as from 1 January 2015), the ruling procedure has been clarified in order to fully comply with international standards and ATAs/APAs are now examined by a dedicated commission. This procedure, subject to an administrative fee ranging from €3,000 to €10,000, is in practice quite slow and cumbersome for the taxpayer, therefore the significate decrease in ruling requests for 2016 should be highlighted.

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Developments affecting attractiveness of Luxembourg for holding companies Legislative changes affecting holding companies in particular Minimum flat tax As from 1 January 2016, all fully resident corporate taxpayers (including securitisation companies and undertakings for collective venture capital investments) holding financing assets representing at least 90% of their total assets and €350,000, are subject to a flat minimum net wealth tax. This minimum net wealth tax has been increased to €4,815 (€3,210 previously). All other taxpayers are liable to a minimum net wealth tax that is progressive and linked to their total balance sheet, in the range of €535 to €32,100. Limitation of tax losses carried forward The 2017 tax reform has introduced into Luxembourg domestic tax law a time limitation of 17 years for tax losses realised as from 1 January 2017. No limitation period applies to tax losses realised before this date. Introduction of a horizontal tax unity In order to comply with ECJ case law (C-39/13 SCA Holding of 12 June 2014), the tax unity regime has been extended by a law of 18 December 2015 effective as from 1 January 2016 to allow a horizontal tax unity between Luxembourg sister companies. Furthermore, the vertical tax unity has been extended to permit a Luxembourg permanent establishment of a corporate entity (resident in another European Economic Area country and liable to comparable Luxembourg income tax) to act as head of the tax unity. Extension of Luxembourg exit tax deferral As from 1 January 2016, exit tax deferral is granted upon any migration of Luxembourg resident corporate taxpayers when the host country has entered into a double tax treaty with Luxembourg that provides for an exchange of information (article 26§5 of the OECD model convention). Suppression of the 0.24% ad valorem registration duty As from 1 January 2017, the ad valorem registration duty of 0.24% applicable to the registration of debt claim in public deeds (notary, judicial proceedings) has been abolished. VAT applicable to director’s fees In 2017, the Luxembourg tax administration issued a circular confirming that VAT should be levied on fees paid to independent directors. The circular also confirmed that no VAT should be applicable to remuneration paid to directors in charge of day-to-day management, as in such case the remuneration should be characterised as employment income.

Industry sector focus IP sector The Luxembourg IP Box Regime (as previously contained in article 50bis of the LITL and §60bis of the Luxembourg Evaluation Law or “Bewertungsgesetz”) has been abolished as from 1 July 2016 for corporate income tax purposes and as from 1 January 2017 for net wealth tax purposes. While a five-year grandfathering period starting from 1 July 2016 and ending on 30 June 2021 has been granted and should apply to (i) existing Luxembourg IP Box Regimes, and (ii) IP rights acquired, constituted, or modified/improved before 1 July 2016 (under certain conditions), its

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bonn & Schmitt Luxembourg benefits have been restricted by anti-abuse rules (limitation of the grandfathering period for IP acquired between 31 December 2015 and 1 July 2016) and is subject to increased transparency vis-à-vis foreign tax authorities. As a result, a spontaneous exchange of information concerning existing IP Box Regimes in connection with IP rights acquired or created after 6 February 2015 is currently performed by the Luxembourg tax authorities.

The year ahead IP A new Luxembourg IP Box Regime, compliant with the OECD guidance on BEPS and the Nexus approach, which was expected launch during 2016, should now be introduced within the coming months (hopefully in 2017). Transposition of the ATAD The year 2017 should be the year of the transposition of the ATAD into Luxembourg domestic law and many changes are hence expected. At this stage, it is important to note that the ATAD only sets out minimum standards and we therefore have no view on how Luxembourg will implement it. The ATAD bill is highly anticipated by the Luxembourg financial sector. The exchange of information procedure on request Pursuant to the law of 25 November 2014 on the exchange of information procedure applicable in the case of the exchange of information upon request from a foreign tax authority, the Luxembourg tax authorities may request the Luxembourg taxpayer to disclose the required information under penalties. The control exercised by the Luxembourg tax authorities is nevertheless restricted to the analysis of the request from a pure formal perspective (mainly to avoid fishing expeditions) without any analysis on the relevance of the reasons why the tax request is performed. The taxpayer has no right to appeal such request before national courts. Such denial of the right of appeal has recently been challenged by a Luxembourg taxpayer and the Administrative Court of Appeal has introduced an interlocutory question before the European Court of the European Union regarding the compatibility of the procedure with the respect of the right of defence as set out in the law of 25 November 2014 with the European Charter of Fundamental Rights. On 10 January 2017, the European Court of Justice’s Advocate General issued his opinion in the Berlioz Investment Fund case (C- 682/15) and confirmed that the taxpayer should have the right to challenge the exchange of information request issued by Luxembourg and thus that the Luxembourg regulation violates the right to an effective remedy. The decision of the court is highly anticipated. General overview As predicted last year, Luxembourg swiftly adopted different measures to be fully in line with international standards, praising the importance of transparency and tax fairness and as such avoiding criticism which may have been made in the past. The 2017 Luxembourg tax reform made in this international context, highly criticised by Luxembourg tax professionals, attempts to balance international and EUR expectations/ requirements with sustaining the attractiveness of Luxembourg. Furthermore, it will have to be considered what status past ECJ decisions (like the Larentia + Minerva court cases) should have going forward in areas such as VAT. Separately, corporate taxpayers who have secured their intra-group financing transactions by performing transfer pricing analysis in the past will have to revisit such structures to fit

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bonn & Schmitt Luxembourg the new transfer pricing rules, applicable as from 1 January 2017 without a grandfathering clause. Such new transfer pricing rules also clearly underline that, in 2017, mailbox- type entities and lack of knowledgeable directors have lost any meaningful usefulness to corporate taxpayers in their operations with EU Member States.

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Gaëlle Felly Tel: +352 27 855 / Email: [email protected] Gaëlle heads the tax practice of Bonn & Schmitt, which encompasses all of Luxembourg’s tax laws, including VAT and registration duties and exchange of information, in both advisory and litigation. Prior to joining the firm, she worked in major law firms for many years. Over the last 12 years she gained experience in the alternative investment fund/venture capital industry, advising leading private equity players, and has been involved in real estate project financing, asset protection, disposal of assets, cross-border restructuring and financial recovery operations, private wealth planning, and intellectual property structuring. She has authored various articles on Luxembourg tax developments such as double taxation issues and collective investment vehicles.

Patrick Andersson Tel: +352 27 855 / Email: [email protected] Patrick has prior experience in one of the “Big Four” accounting firms and has been part of Bonn & Schmitt’s tax team for over four years, assisting in all direct and indirect tax matters, including general tax advice, tax planning, tax compliance work and tax litigation. He has gained comprehensive experience in cross-border transactions, mergers & acquisitions, funds (including alternative investment funds), real estate and private wealth management. He has also assisted in drafting numerous articles on topical Luxembourg taxation issues, such as exchange of information and transfer pricing.

Bonn & Schmitt 148, Avenue de la Faïencerie, L-1511, Luxembourg Tel: +352 27 855 / Fax: +352 27 855 855 / URL: www.bonnschmitt.net

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Dragan Dameski & Ana Pavlovska Debarliev, Dameski and Kelesoska, Attorneys at Law

Overview of corporate tax work over last year Types of corporate tax work With regards to the aspirations of the Republic of Macedonia (“RМ”) to become a member of the EU family, tax regulation is subject to continuous improvement, in relation to which the main priority of corporate income tax reforms in the Republic of Macedonia is to provide a tax model that will enable relatively simple and easy administration while at the same time providing a comparatively low corporate tax burden. Also, the other priorities of the Republic of Macedonia are to create a more stable and much safer investment environment as well as make further improvement to the transparency of the tax system. Considering the assistance of the EU through the Instrument for Pre-accession Assistance (IPA II) for the period 2014–2020, the Republic of Macedonia has implemented tax changes in the tax legislation, effected through new tax laws and rulebooks and major amendments to existing ones in 2014 and 2015. The new law on capital income tax (CIT Law) became effective as of January 2015, along with which new bylaws were also enacted. Notwithstanding the above, 2016 was not that appealing of a year regarding changes in tax regulation as result of the political crisis and the current situation in the Republic of Macedonia. According to the 2016 Report of the EU Commission on the progress of the Republic of Macedonia towards EU membership, Macedonia has been rated as moderately prepared in the area of taxation. Some progress, although limited, was made towards harmonisation of the legal framework during the reporting period. As regards operational capacity and computerisation, the reorganisation of the Public Revenue Office has also been an ongoing process in 2015 and 2016. The aimsofthe reorganisation are to improve performance efficiency, align business processes with ISO 9001/2008 and implement compliance risk management. Internal audit activities are also developing. The Public Revenue Office monitors cash payments of taxpayers through fiscal cash registers and e-tax services have been expanded. The Public Revenue Office continued to participate in inspections to combat the informal economy, to detect unpaid tax liabilities and unregistered taxpayers and to stimulate voluntary compliance. In this chapter we look at some topics involving corporate tax regulation in the Republic of Macedonia that might be useful and interesting. Transfer pricing rules The new CIT Law adds a significant contribution to the definition of related entities by defining all non-resident legal entities registered in low-tax jurisdictions as related,

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Debarliev, Dameski and Kelesoska, Attorneys at Law Macedonia regardless of whether these entities have control or are of significant influence to the taxpayer. Under the general rules of the CIT Law, the tax authorities may adjust the taxable income of taxpayers derived from transactions with related companies, if they deem the prices paid or charged to related companies for various types of items to be excessive. In such circumstances, the difference between prices stated in financial statements and “arm’s- length prices” is subject to tax. According to the “arm’s-length prices” principle, only the transfer prices that are comparable to the competitive domestic and foreign market prices are recognised for the purpose of taxation. Any difference between transfer prices and the competitive market prices must be included within the tax base. Considering this, broadening of the definition of related parties will most definitely lead to additional income for the budget of Macedonia, but it remains unclear how it would actually be implemented and what the direct benefit would be. Misdemeanour fines The amendments to the CIT Law enacted in July 2015 present a new method for calculation of fines for tax misdemeanours that may be imposed on taxpayers upon breach ofthe provisions of the CIT Law and their tax payment obligations. While the previous rules defined the fines upfront, the new rules that regulate the misdemeanour fines prescribe that the fines shall now be calculated on a number of points. The new method of calculation takes into consideration three main points in the process of determining the amount of the fine as follows: • revenues; • the number of employees; and • the previous behaviour of the offender. Also, the CIT Law provides that an authorised person as a taxpayer shall be subject to a fine in the amount of 30% of the fine ofa legal entity as a taxpayer. Significant deals and themes Below we present two cases where we found interesting implementation of the positive tax provisions by the authorities as well as typical mistakes that legal entities make in their operation which burden them with additional taxes. Double taxation on uncollected claims According to the Rulebook on Accounting, all amounts set in the invoices issued by the legal entity, i.e. the taxpayer, are considered income. Regarding this rule, even if an invoice issued in that year by the taxpayer was not paid by the debtor (uncollected claim), the claim shall still be considered income of the taxpayer and that income will constitute part of the base subject to corporate income tax. According to article 363 of the Law on obligations, the claims of contracting parties that arise from concluded agreements in the trade of goods and services shall become obsolete after three years. Regarding this rule, there is established practice by the Public Revenue Office that any claim that is not collected in the period of three year has to be written off. Referring to this, article 9 of the CIT Law clearly stipulates that the permanent write-off of uncollected claims shall be considered unrecognised expenditure for tax purposes, except for uncollected claims based on contributions to the mandatory social insurance and the broadcasting fee. The law prescribes the same rule in article 10 of the CIT Law, with

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Debarliev, Dameski and Kelesoska, Attorneys at Law Macedonia an exception that uncollected claims shall be recognised as expenditure, provided that a legally valid court decision is adopted, and, regarding the claims of entities in bankruptcy or liquidation, provided that they are reported and confirmed by the bankruptcy administrator. This exception allows the possibility to avoid double taxation of uncollected claims upon expiry of the statutory time limit, i.e. three years from delivery of the service or goods and issuance of the invoice, which many legal entities do not use. As a conclusion to this, it is very important for every legal entity as taxpayers to collect their claims within the three-year period or to initiate a court procedure to obtain a valid court decision where the uncollected claim is declared, in order for the amount of the uncollected claim not to be considered for corporate income tax purposes again. In the opposite situation, the amount of the uncollected claim shall be part of the corporate income tax base as income (in the year of delivery of the service or goods and issuance of the invoice) and also as unrecognised expenditure (in the year of write-off). Application of the preferential VAT tax rate for trade of real estate The amendment to the VAT Law extends the usage of the preferential tax rate of 5%, which applies in trades with residential premises effectuated within a period of five years after construction, to December 2018. Article 30, paragraph 1, point 14 of the VAT Law clearly prescribes that the preferential tax rate of 5% applies only when there is trade with residential buildings and apartments, and not when there is trade with business premises. The Construction Law and its by-laws regulate the usage purpose of the premises, i.e. residential or business. The same is set out basically in the Detail Urban Plan (DUP) and Construction Permit and finally registered in the Public Cadastral Books of Real Estate. A significant tax case is ongoing in relation to the above. During the process of construction of a building, the same was registered in the public cadastral books as a residential building in a preliminary property deed. Based on this, the construction company had to sell the flats with the preferential VAT rate. At the end of the construction, due to the difference in the DUP and Construction Permit, the building was finally registered in the Public Cadastral Books as a business building in an official property deed. Based on the official property deed, the Public Revenue Officedecided that the regular VAT rate of 18% had to be applied on the trade of the building. On this basis, the construction company was forced to additionally pay for the difference between the VAT tax rate from 5% up to 18% for the whole building. Since the construction company involved did not have sufficient funds to cover the difference in the VAT rate, the related sister company was burdened, too, as a consolidated taxpayer. The case is still ongoing and in order for the Public Revenue Office not to effectuate an executive decision, an interim measure through the debtor’s security on the total claimed amount has been issued. As a conclusion to this, it is important to note that the Public Revenue Office has taken the opinion that the official property sheet issued from the Public Cadastral Book shall be considered as valid evidence for the usage purposes of the real estate for application of the VAT rate. Therefore, when trading with real estate, the applicable VAT rate should be considered only according to the official property deed for that real estate.

Key developments affecting corporate tax law and practice The tax legislation of the Republic of Macedonia is continuously improving and adjusting, depending on the needs of the economy as well as the need for synchronisation with EU

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Debarliev, Dameski and Kelesoska, Attorneys at Law Macedonia legislation. Regarding developments in corporate tax legislation, there have been some changes and improvements that should be mentioned. New CIT Law The new CIT Law, which was enacted on July 23, 2014 and came into force on January 1, 2015, provides several amendments to the taxation of generated profit in Macedonia. The most important developments focus on the following points below. The return of the old method for calculation of the tax base The CIT Law brings back the old method for calculation of the tax base, which in the process of determining the tax base is the profit exposed in a company’s Balance Sheet. Namely, the tax base shall be stated as the difference between the total revenue and the total expenditure, the amount of which is determined in accordance with accounting regulations and accounting standards (accounting profit/loss or financial results of operations in the business year). This amount shall be increased by the amount of unrecognised expenditures for tax purposes. Further, it shall be decreased by the amount of charged claims that in the previous period was not collected and the amount of the dividend income that is gained by participation with capital in other taxpayer (under the condition that the same dividend is taxed by that other taxpayer that pays the dividend). Extension of unrecognised expenditures The new statutory solution that was part of the amendments to the previous CIT Law, as an extension of the profit tax base, was also included in the new CIT Law, in which the uncollected claims deriving from transfers of monetary funds that are loans according to their economic nature, provided that they are not returned in the same year in which the loan transfer is made, shall also be considered unrecognised expenditures for tax purposes. As an exception, this rule shall not apply to loans provided by associations and foundations (organisations) that are established in accordance with the Law on Associations and Foundations whose main activity is placement of loans determined in accordance with their statute and programme. This new rule raises a few questions, which remain open. Namely, does it mean that if the loan is given in a certain year it should also be returned in the same year or within a period of one year after the loan was given? Furthermore, with this rule and without further explanation to it, it appears that any loan made between two entities has to be returned in one year or it shall be considered unrecognised expenditure, which is totally unacceptable if there is a loan agreement between two entities that want the period for returning the loan to last longer than one year. Also, the set rule is not clear on whether within the certain amount of the loan, the rate of lending is also included. Cutting the time limit for losses that are carried forward The CIT Law also stipulates cutting the time limits of the statutory solution regarding the profit tax base, in which the profit tax base may be also decreased if the taxpayer incurs a loss that is shown in the profit and loss statement. That loss, decreased by the unrecognised expenditures shown in the tax balance sheet, may be allocated against the profit in the following accounting periods up to three years at the most from the year in which the loss is declared. In comparison to the previous CIT Law, the loss could have been allocated against the profit in the following accounting periods forup to five years from the declaration.

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The taxpayer which shows loss shall have to submit request to the Public Revenue Office until 31 March in the year following the year in which the loss is shown, in order to obtain approval to exercise this right. This reduction is conditioned and it shall be made only if the loss is previously covered in accordance with the Law on Trade Companies. Also, there is a limitation of usage of this right of reduction, in which the reduction on the basis of the loss cannot be used in the case of a change of the status of the taxpayer based on acquisition, merger, division, change of ownership and similar. Tax exemptions for reinvested profit The new CIT Law re-introduces reinvested profit as a statutory solution for decreasing a company’s profit tax base. Reinvested profit shall comprise investments made from profit for development purposes, those being investments in material assets (immovable property, plant and equipment) and in non-material assets (computer software and patents) for the purpose of expanding the activity of the taxpayer, with the exception of investments in passenger vehicles, furniture, carpets, audio-visual devices, white goods, pieces of fine and applied art, and other investments that serve administrative purposes. The material and non-material assets acquired under the tax relief may not be sold or otherwise disposed of within a five-year period beginning in the year in which the investment is made. If this condition is not satisfied, the taxpayer must pay the tax saved. Tax exemption for donations Due to the amendments of the Law on Profit Tax in 2016, a new tax reduction was added which refers to taxpayers who have donated funds to sports federations, the Macedonian Olympic Committee, basketball clubs and handball clubs paid to a special dedicated account in which the calculated tax shall be reduced by the amount of the given donation, with an upper limit of 40%. When a donation is given to football clubs, the calculated tax shall be reduced by the amount of the given donation up to 50% at the most. For all other sports clubs, the tax reduction is limited to 35% of the calculated tax. This reduction is on the condition that the abovementioned donations have to be made to clubs that compete in a national competition system in an organised league and need to also have a registered active junior school; the taxpayer should also possess a certificate from the Agency for Youth and Sports that the entities that are beneficiaries of the donations meet the requirements for using the right of tax reduction in accordance with the Law on Sports. This tax reduction excludes the right to tax incentives regarding profit tax in accordance with the Law on Donations and Sponsorship of Public Activities. Nevertheless, if the donated funds are returned to the taxpayer or to a legal entity which is related to the taxpayer by capital or management, or is owned or managed by a relative of all lines up to the second degree of a person in the taxpayer for sports federations, the Macedonian Olympic Committee and sports clubs, directly or through procurement of goods and services from the taxpayer, it shall owe the tax which it would pay if it had not used this tax reduction. Amendments to the VAT Law Referring to the new amendments to the regulation of VAT, significant changes were enacted in 2015, in which the application of the reduced rate of 5% on the first purchase of residential buildings and apartments which are used for residential purposes and which purchase has to be made within five years after their construction, was prolonged until December 31, 2018.

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These amendments give a strong contribution to the revival of the entire construction sector in Macedonia and continue to create conditions for lower prices of apartments and the possibility of greater access to end customers. Furthermore, with the amendments in 2015 to the VAT Law (Official Gazette of RM no. 129/2015), now imports of goods from free zones in the country shall not be treated as imports of goods. Namely, the turnover of goods with compensation that have the status of domestic goods under the Customs Act and are transported or shipped from free zones in Macedonia will considered as trade made within the country, as with any other trade carried out in the country. Also, with the purpose of encouraging and administrative facilitation of trade cooperation in the trade of goods that occurs between companies in Macedonia and the beneficiaries of the free zone, the amendments to the VAT Law prescribe that the trade of goods (between companies from Macedonia and the beneficiaries of the free zones) cannot be exempted from VAT if the total amount of the compensation for the conducted trade of goods without VAT is equal to or less than 60,000 denars.

Tax climate and developments affecting attractiveness of Macedonia for holding companies As has been the case in the past few years, one of the priorities of the Macedonian government is to establish an investor-friendly environment with favourable opportunities and conditions for doing business, and to promote the Republic of Macedonia as the “new tax haven in Europe”. For those purposes, the government has established the Agency for Foreign Investments and Export Promotion, as well as the Directorate for Technological Industrial Development Zones (DTIDZ). There are several Technological Industrial Development Zones (TIDZs) established in the territory of Macedonia: two in Skopje; one in Tetovo; one in Stip; and seven others in other cities in Macedonia. The incentives that the Republic of Macedonia provides for foreign investors in the TIDZs are the following: 10-year tax holiday • Investors in TIDZs are entitled to a 10-year profit tax exemption and to a 100% reduction of personal income tax for a period of 10 years. Therefore, the effective rate of personal income tax shall amount to 0%. Also, investors are exempt from payment of VAT and customs duties for goods, raw materials, equipment and machines. • The land in the TIDZs in Macedonia is available under a long-term lease for a period of up to 99 years at concessionary prices. Investors are exempt from paying utility taxes to the local municipality and fees for land-building permits, and receive free connection to natural gas, water and the sewage network. The government of the Republic of Macedonia may assist with construction costs of the user in the TIDZ up to €500,000, depending on the number of new employees and the user’s investment amount. Green customs channel for goods • In contrast with the rates applied outside the zones, TIDZs can be recognised as a real tax haven for the first 10 years after commencing business within the zone. Namely: customs duties applied outside the zones for raw materials are 0–15% and for equipment 5–10%, in comparison with the 0% applied within the zones; the VAT rate applied outside the zones is 18%, in comparison with the 0% applied within the zones; and corporate and personal income tax rates applied outside the zone are 10%, in comparison with the 0% applied within the zones.

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For those entities that are not beneficiaries of TIDZs, the corporate tax rate applied is 10%. The rate of 10% is implemented uniformly in the whole territory of Macedonia. With the implementation of the flat tax rate, Macedonia has become a country with one of the most attractive tax packages in Europe. The flat tax rate introduces a simple tax system that stimulates successful companies to further improve operations and increase profitability. Withholding tax at a rate of 10% is applied over the payment of revenues made to foreign entities. Revenues that are subject to withholding tax are: dividends; interest; royalties and revenues from entertainment and sport activities; insurance premiums; telecommunication services; and rent. In order to avoid double taxation, Macedonia has signed international treaties for the avoidance of double taxation with many countries all over the world, and is continuously enlarging this list. The Republic of Macedonia has signed agreements for the avoidance of double taxation with 42 countries, including Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, the People’s Republic of China, Croatia, the Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Hungary, Iran, Ireland, Italy, Kazakhstan, Kosovo, Kuwait, Latvia, Lithuania, Luxembourg, Moldova, Morocco, the Netherlands, Norway, Poland, Qatar, Romania, the Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Taiwan (Republic of China), Turkey, Ukraine and the United Kingdom.

The year ahead The Macedonian tax system is implementing crucial reforms due to harmonisation with the EU acquis. The CIT Law was a part of these reforms. Since Macedonia has already signed an agreement to join the EU Fiscalis 2020 Programme in 2014, as a country it constantly aims to improve the operations of its tax system with the financial support provided by this programme. Nevertheless, Macedonia is alsoa beneficiary of the TAIEX EU Instrument administrated by the Directorate General for Enlargement, through which Macedonia is learning how to familiarise itself with, apply and enforce the EU acquis; thus the instrument itself enables approximation to EU standards through the sharing of experiences and knowledge by the Member States. Referring to this, as part of the EU integration process, the Public Revenue Office shall carry out preparation and monthly reporting to the State Inspectorate for Environment (SEI) and the EU Delegation in Macedonia on: the level of implementation of the National Programme for Adoption of the Acquis Communautaire (NPAA Program) and preparation or subcommittees within the Committee for Association and Stabilization; implementation of the IPA Programme (programming, tendering and monitoring); the Fiscalis Programme; and communication and coordination of activities to the Directorate General for the Taxation and Customs Union. Moreover, in the years to come, another aim is to increase the opportunities for sharing international experience and knowledge and reducing tax frauds on an international level. Therefore, cooperation with tax administrations of EU Member States and other countries is aimed at exchanging experience and knowledge and will be conducted through bilateral cooperation and exchange of information between Balkan tax administrations as an early prevention against the new trends in tax evasion. Regarding the abovementioned and the changes in the political area, it is expected in the years to come that the new coalition government, which is largely seen as pro-EU and pro- reformist, will strengthen the country’s economy and speed up the EU integration process in general.

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In reference to corporate taxation, according to its programme, the new government of the Republic of Macedonia is planning to undertake certain measures to improve the business climate and increase the competitiveness of the Macedonian economy. One of the planned measures is tax relief for all ICT companies exporting software and services and reduced corporate income tax of informatics and information technologies up to 5%. This will provide new jobs, increase foreign exchange earnings and help build new IT companies. Furthermore, according to the programme of the new government, there are aims to propose tax incentives for investments in the Republic of Macedonia made by Macedonian citizens that have left to work abroad. It is also worth mentioning that the government will initiate reforms in the high school education system in cooperation with the private sector. With these reforms, companies will be able to participate in programming and financially. At the same time, the government shall promote mechanisms and instruments that will encourage companies to cooperate, invest and participate in education and training activities. In this regard, there will be a 30% tax relief on profits for investments made for the development of education.

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Sources • Directorate for Technological Industrial Development Zones (TIDZs) of R. Macedonia, http://www.fez.gov.mk/. • Agency for Foreign Investment and Export Promotion of R. Macedonia, http://www. investinmacedonia.com/. • Ministry of Finance of Republic of Macedonia, http://www.finance.gov.mk/. • Government of the Republic of Macedonia, www.vlada.mk. • Program of the Government of RM 2017–2020 http://sdsm.org.mk/Gis/Upload/PDF/ Predlog%20Programa%20za%20rabota%20na%20Vladata%202017-2020.pdf. • Ms. Temjanovski, Riste, Ms. Marjanova, Tamara Jovanov, , Ms. Sofijanova, Elenica, Mr. Davcev, Ljupco Technological Industrial Development Zone – (DTIDZ) and International Business Hub: Macedonian Experience http://eprints.ugd.edu.mk/17094/1/ TECHNOLOGICAL%20INDUSTRIAL%20DEVELOPMENT%20ZONE.pdf. • Ernst & Young, Worldwide Corporate Tax Guide, Republic of Macedonia, 2016, http:// www.ey.com/gl/en/services/tax/worldwide-corporate-tax-guide---xmlqs?preview& XmlUrl=/ec1mages/taxguides/WCTG-2016/WCTG-MK.xml. • Law on Profit Tax published in the Official Gazette of RM Nos 112/14, 129/15, 23/16 and 190/16. • Law on VAT published in Official Gazette of RM Nos 44/1999, 59/1999, 86/1999, 11/2000, 93/2000, 8/2001, 21/2003, 17/2004, 1920/04, 33/2006, 45/06, 101/2006, 114/2007, 103/2008, 11420/09, 133/2009, 95/2010, 102/2010, 2420/11, 135/2011, 155/2012, 12/2014, 112/14, 130/14, 15/15, 129/15, 225/15, 23/16 and 189/2016. • Law on Technological Industrial Development Zones (Official Gazette of RM Nos 14/2007, 103/2008, 130/2008, 156/10, 127/12, 41/14, 160/14, 72/15, 129/15, 173/15, 192/15, 217/15 and 30/2016). • European Commission, Commission staff working document, The Republic of Macedonia report, 2016 https://ec.europa.eu/neighbourhood-enlargement/sites/near/ files/pdf/key_documents/2016/20161109_report_the_former_yugoslav_republic_of_ macedonia.pdf.

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Dragan Dameski Tel: +389 2 3136 530; +389 2 3215 471 / Email: [email protected] Dragan Dameski is one of the founders of Debarliev Dameski & Kelesoska Attorneys at Law. He is the head of the corporate department of the company. Dragan Dameski graduated from Iustinianus Primus Faculty of Law in Skopje, Republic of Macedonia in 1999. He continued his postgraduate studies in business law at the Law Faculty in Skopje as well as economics and business administration Master’s studies at Sheffield University in Thessaloniki, Greece. In 2003, Dragan Dameski was admitted to the Macedonian Bar Association, and since 2005 he has been a member of the Management Board of the Association of Mediators of Macedonia. He is also a member of the International Advocates Union (UIA) and the International Bar Association (IBA). Mr. Dameski has advised businesses entering the Macedonian market for a significant number of foreign financial companies (banks, insurance and leasing companies) well-recognised in the CEE financial market, including several of the most important cross-border financings of real estate projects in Macedonia. He has been the leading lawyer in various bankruptcy proceedings including international bankruptcy.

Ana Pavlovska Tel: +389 2 3136 530; +389 2 3215 471 / Email: [email protected] Ana Pavlovska graduated in 2013 from the Iustinianus Primus Faculty of Law, in Skopje, Republic of Macedonia and completed her LL.M. in Civil Law at the said faculty. Considering her employment history, she has two years of professional legal experience working as an associate in the Energy Legal Department at Cukic & Markov Law Firm – Skopje in 2014–2015 and conducted an apprenticeship in the legal department of the insurance company SAVA Osiguruvanje AD – Skopje in 2011. In 2017, Ana Pavlovska became a member of the Macedonian Bar Association. Ana Pavlovska joined DDK in November 2015 as an associate and is currently holding the position of lawyer. Her experience is mainly based in the field of civil law, corporate, and energy law as well as taxation – particularly corporate income tax, VAT, and international taxation (tax rates from international agreements avoiding double taxation). She is fluent in English, both spoken and written, and also has basic knowledge of German.

Debarliev, Dameski and Kelesoska, Attorneys at Law Mirce Acev no. 2 / 3rd Floor, Center-Skopje, Macedonia Tel: +389 2 3136 530; +389 2 3215 471 / Fax: + 389 2 3215 470 / URL: www.ddklaw.com.mk

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Paulus Merks & Sebastian Frankenberg DLA Piper

Overview of corporate tax work over last year Types of corporate tax work Multinational companies are actively restructuring their operations following various OECD and EU anti-BEPS initiatives. The introduction of new domestic anti-avoidance rules (for example in Australia, Germany and the UK) is forcing companies to reconsider their corporate structure. Moreover, the US tax proposals prompted by President Trump burden clients with uncertainty. In addition, the BEPS report on action 13 (Country-by-Country Reporting) is dominating the current transfer pricing landscape for multinational enterprises (MNEs), demanding MNEs to comply with the three-tiered documentation approach set by the OECD, providing for a country-by-country report, master file and local file. As a Member State in both the OECD and the EU, the Netherlands is committed to implementing many of the anti-BEPS proposals and transparency measures. On the other hand, efforts have been made to maintain and enhance the Netherlands as a business- friendly location. Significant deals and themes Early signs in the market confirm the Netherlands as a popular location from a commercial perspective. Some significant M&A deals and IPOs (2016–2017): • Intel agreed to buy Israeli autonomous vehicle technology firm Mobileye for $15.3bn in a deal that could thrust the U.S. chipmaker into direct competition with rivals Nvidia and Qualcomm to develop driverless systems for global automakers. The acquisition of Mobileye could propel the chipmaker into the front ranks of automotive suppliers at a time when Intel has been reaching for a market beyond its core computer semiconductor business. • VEON Ltd., a leading global provider of telecommunications and digital services headquartered in Amsterdam and serving over 235 million customers, announces the listing and trading of shares of VEON on Euronext Amsterdam to start 4 April 2017. • Thermo Fisher Scientific, the world leader in serving science, and Patheon N.V.,a leading global provider of high-quality drug development and delivery solutions to the pharmaceutical and biopharma sectors, announced that their boards of directors have approved Thermo Fisher’s acquisition of Patheon. Thermo Fisher will commence a tender offer to acquire all of the issued and outstanding shares of Patheon for $35.00 per share in cash. The transaction represents a purchase price of approximately $7.2bn, which includes the assumption of approximately $2.0bn of net debt. • Sealed Air Corporation announced it has entered into a definitive agreement to sell its Diversey Care division and the food hygiene and cleaning business within its Food

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Care division to Bain Capital Private Equity, a leading global private investment firm, for approximately $3.2bn. • EQT VI Limited has entered into an agreement to sell Bureau van Dijk to Moody’s Corporation for a purchase price of approximately €3bn. Bureau van Dijk, based in Amsterdam, captures and treats private company information in a database including over 220 million companies and covers all countries worldwide. • Qualcomm Incorporated and NXP Semiconductors N.V. announced a definitive agreement, unanimously approved by the boards of directors of both companies, under which Qualcomm will acquire NXP. Pursuant to the agreement, a subsidiary of Qualcomm will commence a tender offer to acquire all of the issued and outstanding common shares of NXP for $110.00 per share in cash, representing a total enterprise value of approximately $47bn. • Aegon acquired Defined Contribution administration business from Blackrock UK. Aegon acquired approximately £12bn (approximately €15bn) of assets and 350,000 customers, creating a £30bn (approximately €38bn) platform-based workplace savings business. BlackRock will deepen its relationship with Aegon, providing its customers investment management solutions.

Key developments affecting corporate tax law and practice Domestic – cases and legislation Dutch legislative changes include the implementation of amendments to the Parent- Subsidiary Directive (PSD), an introduction of a step-up for dividend withholding tax purposes for cross-border legal mergers and demergers and the implementation of the OECD’s Country-by-Country Reporting and common reporting standard into Dutch law. These legislative changes all took effect as from 1 January 2016. Pursuant to the revised transfer pricing documentation rules, a Dutch-resident ultimate parent entity of a multinational enterprise group should file a ‘country-by-country report’ if the consolidated turnover of the MNE group is at least €750m in the preceding year. In addition, Dutch legislation provides for so-called ‘surrogate parent filing’ under certain circumstances. These rules are in line with the Country-by-Country Reporting Implementation Package and additional guidance released by the OECD. Moreover, Dutch taxpayers that are part of a multinational enterprise group with a consolidated turnover of at least €50 million in the preceding year should prepare an OECD-style ‘master file’ and a ‘local file’ for transfer pricing and branch allocation documentation purposes. These rules apply to book years starting on or after 1 January 2016. In addition, the Netherlands incorporated changes to the Dutch fiscal unity regime from 1 January 2017. Following the judgment of the European Court of Justice (ECJ) in SCA Group Holding,1 the Dutch court of appeal ruled on 16 December 2014 that by disallowing a fiscal Netherlands unity between a Dutch parent company and an indirect Dutch subsidiary held through an EU or EEA intermediate subsidiary, or a fiscal unity between two Dutch ‘sister’ companies held through a joint EU or EEA parent company, the Dutch fiscal unity regime conflicts with the European principle of freedom of establishment. In accordance with this decision, the Dutch Ministry of Finance issued a decree providing for an extra statutory consent for such European cross-border fiscal unities. Moreover, a legislative proposal codifying these changes to the fiscal unity regime into the Dutch Corporate Income Tax Act entered into force from 1 January 2017.

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European – CJEU cases and EU law developments EU State Aid cases: Starbucks The General Court of the EU is currently handling an appeal lodged by the Netherlands regarding the decision of the European Commission in the Starbucks case.2 On 27 June 2016, the EC published the non-confidential version of its decision in which it held that an APA between the state and Starbucks Manufacturing BV (SMBV) constituted illegal state aid. Consequently, the Netherlands was ordered to reclaim the illegal state aid. Although the Netherlands imposed a tax assessment on Starbucks to claim back these funds in accordance with the EC’s decision, it nonetheless lodged an appeal with the ECJ. Its argument was that the ruling issued by the Dutch tax authorities was compliant with internationally accepted transfer pricing methods, and that the EC had applied an interpretation of the OECD transfer pricing guidelines that did not match the general internationally accepted view. The EC disputed various aspects of this ruling, which was concluded in 2008 and was based on a transfer pricing report that applied the transactional net margin method. According to the EC, the comparable uncontrolled pricing method should have been the most appropriate method and, moreover, SMBV should not have been considered the ‘least complex enterprise’ for the relevant transactions. Moreover, the APA confirmed a mark-up of 9 to 12 per cent of SMBV’s operating expense to determine SMBV’s arm’s-length remuneration. Excess profits were transferred to Alki LP, an associated UK limited partnership, as a royalty deductible for Dutch tax purposes. The EC argued that the licence for using the Starbucks IP should have been valued at zero given that SMBV did not derive any benefit from it. By approving the incorrect methodology in the pricing agreement, the Netherlands granted a selective advantage to SMBV that should be considered illegal state aid according to the EC. EU Anti-tax avoidance directive (ATAD) On 21 February 2017, the Council of the European Union (ECOFIN) reached political consensus on a directive (ATAD 2) amending the EU Anti-Tax Avoidance Directive as adopted on 17 July 2016 (ATAD 1). ATAD 1 provided for rules to neutralise hybrid mismatch arrangement, but only between two EU Member States. The present and final ATAD 2 endorsed by the ECOFIN tackles hybrid mismatch structures that involve non-EU countries and a wider variety of mismatches. The new rules must be implemented by EU Member States, including the Netherlands, from 1 January 2020. Implementation of the reverse hybrid rules can be delayed further by two years, until 1 January 2022. BEPS BEPS Action 5 As per 1 January 2017, the Dutch innovation box regime became aligned with the OECD’s base erosion and profit shifting (BEPS) Action 5 (countering harmful tax practices more effectively, taking into account transparency and substance). Pursuant to Action 5, states are required to modify their IP regimes in terms of accessibility and their economic substance. Consequently, the Netherlands incorporated the ‘modified nexus’ approach into the Dutch tax code, pursuant to which only intangible assets developed by the taxpayer itself will qualify for the application of the amended innovation box regime. A nexus formula will determine what portion of the R&D income will qualify for the innovation box regime.

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BEPS Action 13 As outlined above, the Netherlands introduced revised transfer pricing documentation rules. These rules correspond with OECD BEPS Action 13 (i.e., applying the three-tiered documentation approach using a country-by-country report, master file and local file).

Tax climate in the Netherlands For many years, the Netherlands has been considered the gateway to Europe for non- European companies and investors. The certainty provided by advance tax rulings (ATRs) and advance pricing agreements (APAs), the country’s extensive participation exemption regime, the excellent Dutch network of tax treaties and bilateral investment treaties, flexible corporate law and the country’s business-friendly infrastructure are all key elements in this respect. Some of these important considerations will remain relevant and in some cases become even more important for multinationals in the years ahead: • The Netherlands has one of the most extensive treaty networks in the world (currently standing at more than 100 bilateral tax treaties), providing for, inter alia, beneficial allocation of the taxing rights on capital gains and reduced withholding tax rates. • The Netherlands is well known for the cooperative and constructive attitude of the tax authorities, and the possibility to discuss the tax treatment of particular operations or transactions in advance (upfront certainty) in an ATR or APA. An ATR provides the taxpayer with certainty regarding the tax treatment of international structures (e.g., the applicability of the Dutch participation exemption). An APA provides upfront certainty in respect of the transfer prices for intragroup transactions. • The Mutual Agreement Procedure (MAP) has become more effective and important in the post-BEPS world. The Netherlands offers a strong position in this regard. Recent evidence suggests a strengthening of recourses and commitment in this area. In this respect, mandatory arbitration under the Multilateral Instrument (MLI) also helps to ensure the effectiveness of MAP procedures. • Under the Dutch participation exemption regime, all benefits (i.e., dividends and capital gains) derived by a Dutch company from a qualifying participation in another entity are exempt from Dutch CIT. • The Netherlands offers a favourable tax regime for profits from qualifying IP developed by a Dutch taxpayer. Under this ‘innovation box’ regime, profits from the research and development (R&D) of qualifying assets are taxed at a lower CIT rate of 5 per cent (instead of 25 per cent) to the extent that the R&D profits exceed a threshold equal to the sum of the costs incurred to develop the IP.

Developments affecting attractiveness of the Netherlands for holding companies Scope of participation exemption As a consequence of the implementation of the PSD amendments, the Dutch participation exemption now no longer applies to payments, or other forms of remuneration, received from a subsidiary to the extent that these payments are, legally or de facto, directly or indirectly, deductible for CIT purposes at the level of the subsidiary (hybrid mismatches). Proposed changes to dividend withholding tax regime The Dutch parliament has proposed a full exemption for withholding tax on dividends paid to non-resident shareholders in treaty countries, provided certain conditions are met. As part of the proposed changes, the existing Dutch anti-abuse rule would also be revised to align it with the proposed changes.

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According to these proposed anti-abuse rules, the dividend withholding tax exemption will not apply if (i) the interest in the Dutch company is held with the principal purpose – or one of the principal purposes – of avoiding dividend withholding tax from being levied, and (ii) the interest is part of an artificial structure or transaction or series of transactions, which will be the case if there are no valid business reasons. The anti-abuse provision is in line with the general anti-abuse provision in the EU PSD. The proposed rules further clarify that there are valid business reasons in the situation where the non-resident shareholder carries out a business to which the interest can be attributed. There are also valid business reasons if the non-resident shareholder functions as an intermediate holding company (for an indirect shareholder that carries out a business) that meets the relevant substance requirements set out in the Dutch rules in the country of establishment. The current substance requirements, which have already taken effect from 1 January 2016, will be expanded with two further requirements. Under the amended rules, non-resident shareholders that function as intermediate holding companies must, among other things, have (i) a payroll expense of at least €100,000 related to the intermediate holding activities, and (ii) premises at their disposal (for a period of at least 24 months) in the country of establishment from which they actually carry out their intermediate holding activities. Although the proposed changes are still in the (public) consultation phase and subject to final approval by the Upper and Lower House, it is expected that these changes will enter into effect from 1 January 2018.

The year ahead We expect that companies will continue the restructuring of their operations following ongoing OECD and EU anti-BEPS initiatives. Also the introduction of the Multilateral agreement (the “MLI”) and additional domestic anti-avoidance rules (for example in France and Germany) is forcing companies to reconsider their corporate structure. Moreover, we expect that the final US tax proposals may have a significant impact on the market. Additional legislative proposals that may have a significant market impact in the year ahead include an EU black list for tax havens (expected at the end of 2017) and new transparency rules for intermediaries – such as tax advisors, accountants, banks and lawyers – who design and promote tax planning scenarios for their clients.

* * *

Endnotes 1. European Court of Justice, 12 June 2014, Case-39/13 (CSA Group Holding). 2. General Court of the EU, 23 December 2015, Case T-760/15 (Starbucks).

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Paulus Merks Tel: +31 20 541 98 13 / Email: [email protected] Paulus Merks is an international tax partner in DLA Piper’s Amsterdam office. Paulus focuses primarily on cross-border tax law and transfer pricing, advising on M&A, public offerings, reorganisations, financial products and finance transactions. Before joining DLA, Paulus worked for EY in Amsterdam, New York, Paris, Chicago and San Jose (California). In addition, Paulus lectures at the International Bureau of Fiscal Documentation (IBFD) and at the Licent Academy. Moreover, Paulus is a lecturer at the advanced LL.M. Programme in International Tax Law at Leiden University. He has been recommended for many years by Chambers Global, Chambers Europe, The Legal 500 and the International Tax Review.

Sebastian Frankenberg Tel: +31 20 541 93 53 / Email: [email protected] Sebastian Frankenberg is an associate at DLA Piper Netherlands. Sebastian focuses on domestic and international transfer pricing and taxation aspects, with particular emphasis on transfer pricing issues, international corporate tax planning, M&A and private equity transactions, corporate reorganisations and investment fund transactions. He assists clients with economic and financial analyses, as well as preparation of transfer pricing documentation. Sebastian has experience with a range of different transactions across numerous industries, with a specific focus on intragroup financing transactions for MNEs around the world. Sebastian has authored and co-authored several articles on transfer pricing and international tax aspects.

DLA Piper Amstelveenseweg 638, 1081 JJ, Amsterdam, Netherlands Tel: +31 20 541 98 88 / Fax: +31 20 541 99 99 / URL: www.dlapiper.com

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Toralv Follestad Brækhus Advokatfirm DA

Overview of corporate tax work over last year General The growth of Norwegian GDP in 2016 was at its lowest level since 2009, but the growth of the Norwegian economy is now slowly picking up. Together with interest rates continuing to be low, it has resulted in a fairly good start for the transaction market in 2017. Oil and gas The significant fall in the crude oil price, starting in summer 2014, resulted in considerable transaction work related to restructuring of debt/equity and sale of assets throughout 2016 and into 2017 within the oil & gas and shipping industries. Real estate The real estate market has had a fairly good start in 2017. Prime yield is some 3.75 percent, but the yield is in general threatened by an increase in long-term interest and the lending margins of banks. However, this is expected by some analysts to be compensated by rental price growth prospects, especially in Oslo (source Newsec). Transactions and tax The very beneficial Norwegian participation exemption regulations are perhaps the most important feature of Norwegian tax law affecting transactions. It has resulted in the majority of deals being conducted in the form of share deals rather than asset sales (provided that the seller triggers a gain). Transfer pricing continue to be very much in focus in cross-border transactions, together with the Government having presented a proposal on 4 May 2017 to further limit the deduction of interest costs, based on Action 4 of the OECD BEPS, which may further limit the possibility of Norwegian entities being able to deduct interest costs (see below).

Key developments affecting corporate tax law and practice Domestic cases and legislation The reduction in the general corporate tax rate, which for decades was 28 percent, continued downwards to 25 percent in 2016 and 24 percent in 2017. The current government has proposed to reduce it further to 22 percent over the next few years in order to compete with the general tax level in other Scandinavian countries. The special petroleum tax is proposed to be maintained at 78 percent as it is currently. Limitation of interest deduction In 2014, regulations on limiting the deductibility of related party loans were introduced, applying to entities with 50 percent or more direct or indirect ownership with net interest

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Brækhus Advokatfirm DA Norway costs of more than NOK 5m (€530,000). If the regulations apply, only interest costs within 25 percent of the company’s tax EBITDA are deductible. The proposal introduced on 4 May 2017 is aimed at group entities and affects at the outset all interest costs – not only related interest costs. The proposal will not affect entities subject to the petroleum tax law. If introduced, the new legislation will be effective from 2018 and affect taxpayers included in a consolidated financial statement or entities which may be included according to the IFRS. The limit for the regulations to apply is interest costs of more than NOK 10m (€1m). Important exemptions have been proposed related to the equity ratio of the Norwegian entity compared to that of the ultimate group entity. Withholding tax on dividends, interests, royalties and lease payments Withholding tax on dividends is as a main rule exempted for corporate shareholders, provided the beneficial owner is a tax resident of an EU/EEA country. Otherwise, the withholding tax rate is 25 percent, but normally reduced to 15 percent through a tax treaty. The Government is still considering introducing withholding tax on interests and royalties, but no proposal has been launched yet. The issue is complex, taking into consideration EU/ EEA legislation. BEPS The Government is expected to continue work on implementing most of the BEPS recommendations, with various adaptions to the Norwegian tax system. In addition to the above-mentioned limitation of interest deduction, the Government in March 2017 also proposed a change in the regulations for corporate tax residency for companies incorporated in Norway. Currently, a company is tax resident where it is managed at board level. According to the proposed change, a company incorporated in Norway will be considered tax resident in Norway according to the internal tax law, irrespective of where it is managed. This is related to Action 2 and 6 of the BEPS project. In 2016, regulations on country-by-country reporting were introduced in Norway, applicable to groups with a Norwegian parent company with an annual consolidated group revenue of NOK 6.5bn. Norwegian group companies with a foreign parent company also have certain requirements to report. The first reporting period is 2016 and must be submitted by year end 2017.

Tax climate in Norway The Norwegian tax authorities have continued to focus on transfer pricing, especially in trade and transactions with a cross-border element. In addition to implementing BEPS, the Government is also considering changing regulations affecting client-lawyer privilege related to tax advice.

Developments affecting attractiveness of Norway for holding companies Norway has a quite favourable regime for holding companies in the participation exemption regulations. Income from shares (dividends and gain) within the EU/EEA is at the outset exempted, irrespective of the shareholding and holding period. Loss is accordingly not deductible. Three percent of dividends for Norwegian companies not in a tax group is taxed, but costs related to the shareholding are deductible. For share income outside the EU/EEA, there is a requirement of 10 percent shareholding for at least two years. For income from companies in a low tax jurisdiction within the EU/EEA, there is an additional requirement that the distributing company is in fact established and has real activity in an EU/EEA

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Member State (i.e. not wholly artificial). The regulations do not apply to investments in low tax jurisdictions outside the EU/EEA. There are no expected changes to the participation exemption regulations.

The year ahead There is a new parliamentary election in September 2017. The Labour party, the main opposition party, has announced that they will increase taxes, but mainly for individuals with a high salary income. The reduction of the corporate income tax rate and implementation of BEPS is expected to continue, irrespective of the eventual change in the Government following the election.

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Toralv Follestad Tel: +47 23 23 90 90 / Email: [email protected] Toralv Follestad works mainly with tax law, corporate law and real estate. He assists clients with legal and strategic advice on tax and tax disputes. He also give general tax and corporate law advice when drafting contracts on, e.g., business transfers, mergers and acquisitions. He litigates regularly before Norwegian courts, mainly in tax disputes. He also gives advice to several non-Norwegian entities doing business in Norway. Experience • 2010 – Partner at Brækhus Dege Advokatfirma. • 2005 – Lawyer/associate lawyer at Brækhus Dege Advokatfirma. • 2003 – Tax lawyer, Flora likningskontor (Norwegian local tax office). • 2002 – Executive officer at the Foreign Ministry. Honorary • NPCC (Norwegian Polish Chamber of Commerce) – board member. • Trøgstad Sparebank (local Norwegian bank) – deputy board member.

Brækhus Advokatfirm DA P.O Box 1369 Vika, Norway Tel: +47 23 23 90 90 / Fax: + 47 22 83 60 60 / URL: www.braekhus.no

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Revaz Chitaya Sameta

Major amendments to Russian tax law – June 2016 to June 2017 The last year is characterised by the toughening of jurisprudence and some positive and negative trends regarding changes to tax legislation. In this period, the Supreme Court of Russian Federation proceeded to compile legal practice for the most complicated and controversial issues in tax law. “Google” tax Since 1 January 2017, foreign companies which sell electronic content and services in Russia are considered liable to pay Russian VAT. Sale over the internet of user licences of computers programs, including video games and databases, providing internet PR services, placement of internet advertising, e-program support and entitlements of rights to use e-books, music, videos, etc. made over the internet are considered electronic services. Foreign companies providing such services have to communicate electronically with Russian tax authorities. To receive VAT-payer status, such foreign companies can use the special internet service on the website of the Russian Federal Tax Service (called FNS). Creating a personal account (“lichnii cabinet nalogoplatelshika”) is a useful mechanism for taxpayers to declare VAT, and to submit documents and letters. Assessed tax is calculated at a rate of 15.25%, and cannot be deducted. These companies are under no obligation to issue VAT invoices, keep purchase ledgers, sales ledgers and log books containing issued and received VAT invoices concerning any electronic (internet) services provided. Concept of beneficial owner The development of the concept of a beneficial owner (actual recipient of income) continued in the second half of 2016 and the first half of 2017. Russian courts are employing an approach that the favourable tax rates provided by most treaties on the avoidance of double taxation (“DTA”) on percent or dividend income can be applied only in the case of the correct determination of the actual recipient of income. For example, in the case of ZAO “Credit Evropa Bank” (case № А40-442/15), courts of all instances refused the tax agent (ZAO “Credit Evropa Bank”) the ability to apply a reduced rate of tax on percent income stipulated by DTA Russia-Swiss, when the percent income was paid to the head bank, a Swiss resident. The ruling is motivated by the affirmation that the actual recipient of income was not the Swiss head bank, but his clients transferred him money.

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Another significant controversy is the case of PAO “Severstal” (case № A40-113217/16), wherein courts refused the tax agent (PAO “Severstal”) the ability to apply a reduced rate of tax on dividend income stipulated by the Russia-Cyprus DTA in the case of dividend distribution to Cyprus shareholders. The tax service affirmed and courts recognised shareholders as conduit companies wherefore the application of a reduced tax rate was denied. Thus, jurisprudence formulated an approach that tax authorities and courts are not obligated to find an actual recipient of income, and it is to be presumed that it is sufficient for the actual recipient of income to be declared by the tax agent (payer of income).

Analysis of similar jurisprudence shows that courts’ evaluation of reasonability of the application of a reduced tax rate is formed in consideration of the following factors: • Does the declared recipient of income transfer this income to another affiliated person – e.g. a resident of another foreign jurisdiction – and which tax effects could be obtained in a case of transfer of income from Russia? • How much time has passed from obtaining the income from Russia to transferring the income to another jurisdiction? • Does the declared recipient of income have agent or commissioner status? • Does the declared recipient of income have the obligation to transfer the income to a third party in terms of a shareholder agreement (or another contract)? • Does the declared recipient of income use the income for covering his own needs and is this person capitalised by affiliated persons? • Does the declared recipient of income have a sufficient substance (office, employees) in a country of residency to exercise declared activity?

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• How many activities does the declared recipient of income exercise, and does he bear a risk for such activities? • Is the administration of the declared recipient of income independent in the process of profit distribution? • Does the declared recipient of income declare in tax accounting the income provided from Russia and what is the effective tax rate? • Is the declared recipient of income tax resident in the registered country? • Does the declared recipient of income have other income or income-generating activities? Thin capitalisation Definition of leasing company In terms of the Russian Tax Code, a leasing company is a company with a 90% leasing gain. In this case, such company can use a favourable proportion rate (12.5%) for controlled debts and equity capital for avoidance of the calculation of a thin capitalisation. Previous regulation was stricter and considered leasing companies only as companies with a 100% leasing gain. Controlled transactions Article 269 of the Russian Tax Code was supplemented by clauses, which excluded from thin capitalisation some transactions, such as loans made by independent (not affiliated) banks, and by Russian companies out of intra-group foreign debts. Transfer pricing The Russian Tax Code contains a summary of criteria of controlled transactions. Taxpayers are obligated to dispose documentation approving the market price of such transactions. The tax service has a right to research such documentation. In the last year, the Russian Tax Code was amended by clauses, which exclude from controlled transactions the following: • warranties between Russian non-banking organisations (subparagraph 6 clause 4 article 105.14 RTC); and • interest free loans between interdependent persons registered or resident in Russia (sub paragraph 7 clause 4 article 105.14 RTC). Execution of tax charges by third parties Spontaneous execution The amendments to clause 1 of article 45 of the Russian Tax Code reversed a principle of self-execution of tax charges. Nowadays any person can execute a tax charge on a third party. It should be noted that in the case of such payment effectuated by a physical person for the interest of another physical person, the latter does not receive taxable income (as a tax paid sum). But in case such payment is effectuated by a legal entity, the Russian Tax Code does not explicate taxability or non-taxability. Enforcement The Russian Tax Code contains a mechanism for enforcement for the tax charge of one person by another, in cases where the latter transfers money or activities to the former for tax avoidance purposes. For the application of this mechanism, the recipient of income has to be affiliated or an interdependent person. Meanwhile, paragraph 8, subclause 2, clause 2 of article 45 of the Russian Tax Code provides for admitting establishment of another dependence by a court decision. The definition of the expression “another dependence” has not been explicated in jurisprudence or in the Russian Tax Code.

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The last year is significant in relation to the legal view regarding the definition given by the Supreme Court of the Russian Federation in the case OOO “Interos” (judgment of VS RF in case № А40-77894/2015 16/09/2016). The Supreme Court promulgated that the expression ‘another dependency’ “has a particular sense and must be interpreted considering the provision’s matter – concerning tax avoidance in case of making accorded actions conducing the impossibility of tax charges’ execution, including actions between non-interdependent persons in the sense of article 105.1 of the Russian Tax Code”. The most demonstrable case regarding recognising interdependency and enforcement of the tax charge of one person by another, from our point of view, is the case of OOO “Avtoritet- avto” (also called the case of PAO “SKB “Primsotsbank”). The facts of the case are the following: 1. The tax service proved the fact of non-payment of the tax charge by OOO “Avtoritet- avto” (hereinafter – “company AA”). 2. In the tax investigation period of company AA, OOO “Avtoritet-avto+” (hereinafter – “company AA+”) was created, which started to exercise the activity of company AA, work with company AA’s contractors, and all the employees of company AA passed to company AA+. 3. In the tax investigation period of company AA, the real estate object was transferred to PAO “SKB “Primsotsbank” (hereinafter – “Bank”). 4. Company AA stood with the decision of the tax service determining tax non-payment (case № А51-32297/2014). 5. Company AA was subject to bankruptcy proceedings (case № A51-4801/2014). The interdependency of companies AA, AA+ and the bank was proved using the following information:

Analysis of all cases (including recognising interdependency and enforcement of the tax charge by the third party, standing with the decision of the tax service determining tax non-payment and bankruptcy proceedings) resulted in the tax service making a complaint recognising interdependency and enforcement of the tax charge by the third party before resolving two other cases. After establishing the facts of the active transfer from company AA to the bank and their interdependency, the court satisfied the claim of the tax service. Such jurisprudence seems very dangerous to banks, which receive from debtors property pledged as security in case of credit default. Of course the transfer of property is not a sufficient factor to justify collecting the tax debt of a client from the bank, but in the case of proving “another dependency”, such collection is possible.

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Obviously, in such controversies, banks have to prove an absence of influence on the client’s activity, and calculate the client’s proportion of the debt and the owned assets. Market price Since the introduction in 2012 of new rules on transfer pricing, it has been assumed that the tax authorities (the Central Office of the Federal Tax Service of Russia) will only check the price of controlled transactions. (See Letters of the Ministry of Finance dated 18/10/2012 № 03-01-18/8-145 and dated 26/10/2012 № 03-01-18/8-149, Letter of the FTS of Russia dated 02/11/2012 № ЕД-4-3/18615, etc.) In 2016, the Supreme Court of the Russian Federation expressed its legal position regarding the admissibility of the price check for uncontrolled transactions. In this way, in the case of “Office Realty” (Decision of the SC of the RF № A40-71974/2015 dated 08/08/2016), the Supreme Court of the Russian Federation stated that if there is there is a significant deviation from the market price level in the transaction that shows signs of obtaining unreasonable tax benefits, local tax authorities are entitled to control the price level. A separate issue is the market pricing mechanism used by tax authorities in case of tax audits. Usually, the tax authorities use evaluator reports and expert opinions as evidence of overstating (or understating) the price. Similar circumstances were realised, for example, in the case of “Vnukovo-9” (Decision of the SC of the RF dated 05/09/2016 in case № А40-97922/2015). At the same time, the tax authorities have at times ignored the requirements of tax law and special sectoral regulation of evaluation activities. In the case of “Aquapark” (Decision of the SC of the RF dated 01/12/2016 in case № A32-2277/2015), the Supreme Court of the Russian Federation reminded the tax authorities of the relevant requirements of the law, stating the following: • Deviation of the price level in an uncontrolled transaction is not an independent ground for bringing a taxpayer to tax justice. • Experts who check the price can only be members of a professional appraisal practice (members of a self-regulatory organisation which has insured its liability). • During the evaluation, the expert should compare the prices in comparable transactions with similar or identical goods, but not the prices of similar products. • Judicial review is not aimed at the correction of errors and violations committed by the tax authorities during tax audits. The general conclusion of the Supreme Court’s current position is that local tax authorities have the right to check the level of prices in uncontrolled transactions if there are other signs indicating the receipt of an unreasonable tax benefit from such transaction. In order to establish market prices, the tax authorities should involve qualified appraisers who should be guided by sectoral regulation and tax law during their research. Compensation of employees The period under review was marked by the victory of taxpayers in a dispute over the legality of accounting, for the purposes of income tax, the cost of termination benefits upon termination of employment contracts by agreement of the parties. The favourable but exceptional conclusion expressed by the Moscow Arbitration Court in the case of “Fortum” (Decision dated 12/11/2015 in case № A40-106807/2015) was not supported by other courts.

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The main arguments of the tax authorities and courts were statements regarding: 1. the impossibility of a dismissed employee to make a contribution to the organisation’s activities, and, consequently, the costs are not geared toward making profit; 2. inappropriate documentary evidence of the costs in the final determination of the payments by an additional agreement to the employment contract; and 3. a large amount of severance pay, which were essentially golden parachutes and were not taken into account for the purposes of tax accounting. However, the organisations considering the tax authorities’ position as unreasonable continued to challenge the relevant assessment. On 23/09/2016, the Supreme Court of the Russian Federation in “Parliament Production” (case № A40-94960/2015) stated: 1. payments should be made in the framework of labour and related relations; 2. payments should not be similar to costs named in clause 25 of article 270 of the Tax Code of the Russian Federation; 3. the legal nature of such payments should indicate that these payments are made in connection with the termination of labour contracts for reasons forced on the employees, and therefore should be compensatory; 4. payments of the employee’s dismissal by agreement of parties should be compensatory or stimulating; and 5. if there is a significant amount of considering payments and they are obviously incomparable with regular severance payments which, in accordance with article 178 of the Labour Code of the Russian Federation, the dismissed employee has the right to expect (i.e., only in this case) the payments must be economically justified. The Decision of the Supreme Court seemingly had put an end to negative judicial acts on the subject of cost accounting in the form of severance payments; however, the courts continued to make negative decisions. In March 2017, the Supreme Court of the Russian Federation made three more positive decisions on similar cases in the cases of “Azot” (case № A40-7941/2015), “Mineral and Chemical Company “EuroChem”” (case № A40-213762/2014), and “Russian Regional Development Bank”, JSC (case № A40-186959/2015), and approved the vector of development of judicial practice in such disputes. This position was applied by the courts, for example, in the case of “SK “RUSVIETPETRO””, (case № 193009/16). Tax investigations The amendments to clause 5 of article 138 of the Russian Tax Code (which came into effect on 2/6/2016) allows taxpayers not to execute a decision of the tax service when they submit a special declaration temporarily ceasing the decision’s execution regarding a bank guarantee. The guarantee musts absorb a sum equal to or bigger than the calculated back tax and lasts no fewer than six months from the date of lodging such declaration. In the case of favourable settlement towards the taxpayer in such dispute, the tax services inform the bank of the removal of the guarantee. Limits of the Simplified Taxation System (STS) From 01/01/2017, the legislator increased the profit limits for STS taxpayers:

Before 2017 After 2017 For transfer to the STS RUB45m for the first nine months RUB112.5m for the first nine of the calendar year. months of the calendar year. For retention by the STS RUB60m for the tax period. RUB150m for the tax period.

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Reduction of the Russian Criminal Code in terms of tax crimes The legislator doubled the threshold for non-payment of tax leading to criminal sanctions:

After 03/07/2016 (17/04/2017 Before 03/07/2016 amendment) • more than RUB2m for the • more than RUB5m for the three preceding tax periods three preceding tax periods and contains more than and contains more than Large amount 10% of the corresponding 25% of the corresponding sum of tax; or sum of tax; or • more than RUB6m. • more than RUB15m. • more than RUB10m for the • more than RUB15m for the three preceding tax periods three preceding tax periods and contains more than and contains more than Especially large amount 20% of the corresponding 50% of the corresponding sum of tax; or sum of tax; or • more than RUB30m. • more than RUB45m.

Carry-forward of losses The right of the taxpayer to reduce the income tax base by the entire amount of the loss made by them in the 10 previous years was recently modified. For the period 2017–2021, the taxpayer will be able to reduce only 50% of the tax base by the loss of previous periods. This amendment is motivated by the public budget deficit. Corporate property tax (movable estate exemption) Since 2018, the federal imposition’s exemption of movable estate accounted not earlier than 1/1/2013 become regional. This amendment means that the preservation of this exemption demands an adoption of special regional law. Tax due diligence in relationships with bad-faith contractors The jurisprudence of recent years is extremely negative regarding taxpayers. Simply put, taxpayers can bring tax responsibility in cases where the contractor did not fulfil its tax charge regarding the transaction with the taxpayer. Tax authorities can fix expenses for illusory services or refuse to reduce VAT in the case of a contractor’s non-payment. Notwithstanding the foregoing, sometimes courts adjudicate favourably toward taxpayers. In the last year, the Supreme Court of the Russian Federation formed the important legal view that “unjustified tax benefit” can be received not only by the purchaser of services (works) but also by the seller. Cash pooling Russian business has begun, relatively recently, to use the mechanism of cash pooling, allowing the quick disposal of funds in the bank accounts of group companies. At the same time, as practice has shown, this mechanism is associated with certain tax risks. The first trial, in which the tax authorities attempted to assess additional taxes as a result of such transactions, was the case of “Gazpromneft-Chelyabinsk” (Decision of the Eighteenth Arbitration Appeal Court dated 04/07/2016 in case № A76-15351/2015). According to the trial, the company unreasonably issued short-term loans to the parent company at a lower interest rate than the rates at which it itself paid interest on loans borrowed from the parent company in the same period. In addition, the loans from “Gazprom Neft” and the costs of paying interest on them were also found to be unsubstantiated, and as a result there was a decision of the authority to reduce the losses calculated by the taxpayer according to the income tax.

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Disagreeing with this position, the company appealed these findings, pointing out that within the disputed loan agreements there was movement of two different cash flows, which predetermines both different terms of using borrowed funds and interest rates. The court also took the side of the taxpayer, making the following conclusions: • the system of revolving loans existing in the agreements on cash pooling between “Gazprom Neft”, its subsidiaries and credit institutions is economically justified; • “Gazprom Neft-Chelyabins” attracted borrowed funds from the parent organisation on the basis of long-term financing aimed at achieving investment goals, namely the acquisition of a network of filling stations and oil depots by “Gazprom Neft- Chelyabinsk”, which led to an increase in core production and financial indicators of the company and, as a consequence, the amount of taxes paid; • loans provided by “Gazprom Neft-Chelyabinsk” within the cash-pooling system, and loans granted to “Gazprom Neft-Chelyabinsk” for investment purposes, differ in the objectives of their provision (targeted financing of the long-term investment programme and short-term placement of free funds) and the terms of their return, which makes impossible a direct comparison of the interest rates on these categories of loans; and • cash-pooling, in fact, allows to effectively control the cash flows within the group and minimise credit risks associated with bank loans.

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Revaz Chitaya Tel.: +7 495 937 54 85 / Email: [email protected] Revaz specialises in representing clients in the pretrial and litigation phases of tax disputes, advising clients on the application of CFC law, double taxation treaties, and other aspects of Russian tax law. Revaz has successfully advised companies in the gold refining, computer and finance industries. Recent successful projects in which Revaz was involved include: • defending an oil industry company in a tax dispute; • advising clients on various aspects of CFC law; and • tax audits of various companies, including a Russian pharmaceutical holding, Russian media holding, and others. Revaz has experience hosting client seminars, speaking at scholarly conferences, and teaching at the Financial University of the RF Government and the Higher School of Economics. Revaz speaks English and French. Education: Revaz graduated from the Law Faculty of the Financial University of the RF Government, and also studied international law at Jean Moulin Lyon 3 Law School.

Sameta 4/3 Strastnoy Boulevard, Building 3, Office 102, Moscow 125009, Russia Tel: +7 495 937 54 85 / Fax: +7 495 933 53 16 / URL: www.sameta.ru

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Tan Kay Kheng & Tan Shao Tong WongPartnership LLP

Overview of corporate tax work over last year The tax practice in WongPartnership LLP is one of the leading tax practices in Singapore. We collaborate with the firm’s other practices to holistically provide advice to clients through the entire spectrum of tax-related issues, including tax planning and advice, corporate and international tax, stamp duties, goods and services tax and property tax. We also advise on tax issues arising in debt financing, restructuring, swaps, funds, securitisations and real estate deals. Quite often, these transactions involve novel structures and issues. Over the past year, our tax practice has been involved in multiple award-winning deals including acting for CMA CGM S.A. in its acquisition of all the issued and paid-up ordinary shares in the capital of Neptune Orient Lines Limited. This acquisition was awarded the “M&A Deal of the Year (Premium)” at ALB SE Asia Law Awards 2017. We also advised Broadcom Corporation in relation to Singapore tax aspects in its US$37 billion acquisition by Avago Technologies Limited. This acquisition was awarded the “M&A Deal of the Year (Premium)” and “Deal of the Year” at ALB SE Asia Law Awards 2016. We also acted for Tata Communications in the sale of a 74% stake in Tata Communications’ data centre business in India and Singapore worth approximately US$640 million to ST Telemedia. The deal was awarded “M&A Deal of the Year” by Indian Business Law Journal 2016. On the litigation front, we also acted for a leading shipbuilding company in a tax appeal before the Income Tax Board of Review in relation to the deductibility of facility fees incurred for obtaining banking facilities.

Key developments affecting corporate tax law and practice Domestic – cases and legislation AXY and ors v. CIT [2017] SGHC 42 The case of AXY is a recent Singapore High Court decision which discusses the obligations of the Singapore Comptroller of Income Tax (“Comptroller”) under Singapore’s exchange of information (“EOI”) regime in dealing with requests by foreign tax authorities for protected information from financial institutions. In particular,AXY involved an application to commence judicial review of the Comptroller’s decision to issue notices to various banks seeking protected information after receiving such a request from a foreign tax authority. In AXY, the Singapore High Court had to consider whether the applicants could establish an arguable case of reasonable suspicion that the Comptroller’s decision was either illegal or irrational. Prior to amendments to the Singapore Income Tax Act (“SITA”) in 2013, the Comptroller had to apply to the High Court for an order to issue such notices seeking protected

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© Published and reproduced with kind permission by Global Legal Group Ltd, London WongPartnership LLP Singapore information. The High Court had to be satisfied that certain requirements were met before the application would be granted. However, in 2013, this requirement for a court order was removed, thus vesting significant control over such matters in the Comptroller. The High Court in AXY was of the view that these legislative amendments merely changed the identity of the authority assessing the EOI requests from the judiciary to the Comptroller, while the legal requirements for exchange of information did not change. As a result, the Comptroller would be the authority extending the same safeguards over taxpayers’ interest in confidentiality when dealing with such requests. Under section 105D of the SITA, the Comptroller would have to be satisfied that the foreign tax authority’s request for information, firstly, complies with the requirements set out in the Eighth Schedule of the SITA and, secondly, concerns information foreseeably relevant to the administration or enforcement of the relevant double taxation treaty or the requesting state’s tax laws. The applicants in AXY argued that the Comptroller had acted illegally in issuing the notices to the banks as he failed to make sufficient prior inquiry into the compliance of the foreign tax authority’s request with the requirements under section 105D. However, the High Court held that in determining whether the section 105D requirements were met, the Comptroller was entitled to take the statements and information provided by the foreign tax authority at face value and did not have to second-guess their veracity. Based on the court’s decision in AXY, it appears that the Comptroller only has to cross a low threshold in order to fulfil his obligations in response to a request for information by a foreign tax authority. The court’s role in this process is limited as well – the court would only examine the Comptroller’s decision-making process and not the substantive decision itself, and would refrain from substituting the Comptroller’s decision with its own view of how best to exercise discretion when a request for protected information is received. GBG v. The Comptroller of Income Tax [2016] SGITBR 2 This case involved the issue of whether certain payments made by the taxpayer GBG to financial institutions were deductible under Singapore’s general deduction formula under section 14(1) of the SITA. The general deduction formula allows the deduction of “all outgoings and expenses wholly and exclusively incurred … in the production of income”. However, this is subject to certain restrictions. One of the restrictions, which is provided for under section 15(1)(c) of the SITA, states that the outgoings or expenses must not be capital in nature. The payments made by GBG were for three facility agreements which were entered into with various financial institutions. The first was a term loan facility agreement to fund capital expenditure and general working capital requirements. The second was a term loan facility agreement for general corporate funding and the third was a revolving facility agreement to serve as standby funds to finance any funding shortfall for GBG’s expansion project. GBG argued that the payments were made for the purposes of its business looked at as a whole set of operations directed toward producing income, with the object of conducting its business on a profitable basis, and were wholly and exclusively incurred in the production of income. There were in the event no drawdowns under these facility agreements, and GBG argued that the payments were made for the short-term benefit of having access to the loan facility during a contractual period of three years or shorter. Additionally, GBG argued that the payments were not capital in nature. To determine whether the payments were deductible, the Singapore Income Tax Board of Review (“SITBR”) first considered whether they were capital in nature, and thus prohibited

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© Published and reproduced with kind permission by Global Legal Group Ltd, London WongPartnership LLP Singapore from deduction. The SITBR applied the approach taken in the Singapore Court of Appeal decision of Comptroller of Income Tax v. IA [2006] 4 SLR(R) 161 to distinguish between revenue and capital expenses. In IA, the Court of Appeal stated the approach to be as follows: (a) One should first ascertain the purpose of the taxpayer in entering into the loan, i.e. whether it was for the purposes of revenue or for the purposes of capital. In order to ascertain such a purpose, a reasoned approach would include the relevant steps in (b) to (d) below. (b) One ought to ascertain, first, whether a sufficient linkage or relationship exists between the loan and the main transaction or project for which the loan was taken. (c) If, in (b) above, no, or an insufficient linkage is established, the purpose of the loan must, ex hypothesi, be merely to add to the capital structure of the taxpayer and is therefore capital in nature. (d) On the other hand, if in (b) above, a sufficient linkage is established, one must then (and secondly) proceed to ascertain whether the main transaction is of a capital or of a revenue nature. If it is of a capital nature, then (given the linkage to the loan) the loan is also of a capital nature. If on the other hand, the main transaction is of a revenue nature, then (once again, given the linkage to the loan) the loan is also of a revenue nature. In the nature of things, the process outlined here necessarily involves a consideration of the purpose of the main transaction and is also factual in nature. The SITBR concluded that the payments were capital in nature and there was no evidence pointing otherwise. The STIBR also held that the payments were incurred to augment the taxpayer’s funding and capital structure and therefore were not revenue in nature. The taxpayer’s appeal was therefore dismissed. GBK v. The Comptroller of Income Tax [2016] SGITBR 3 and BML v. Comptroller of Income Tax [2017] SGHC 118 These two cases, the former at the SITBR and the latter on appeal to the Singapore High Court, considered the issue of deductibility of interest expenses incurred by the taxpayer GBK on certain fixed rate subordinated bonds. The SITBR considered the interplay between the prohibition of deduction of capital expenses under section 15(1)(c) of the Singapore Income Tax Act, and the specific deduction provision under section 14(1)(a) allowing deductions for interest payable on capital employed in acquiring income. Section 14(1)(a), specifically, provides that “any sum payable by way of interest upon any money borrowed by that person where the Comptroller is satisfied that the interest was payable on capital employed in acquiring the income”, is deductible. The SITBR held that even though capital expenditure is not a deductible expense pursuant to section 15(1)(c), it will be deductible so long as section 14(1)(a) is satisfied. However, to avail itself of section 14(1)(a), GBK had to show that there is a direct link between the proceeds from the issuance of the bonds and the acquiring of GBK’s income. The SITBR found that GBK’s income was derived independent of the issuance of the bonds. The issuance of the bonds was found to have been undertaken voluntarily, and partially for GBK’s shareholders to obtain a return in the form of interest rather than dividends. As there was no “direct link” to constitute an exception to the prohibition under section 15(1)(c) of the SITA, the taxpayer’s appeal was dismissed. On appeal (the same taxpayer GBK was renamed BML for the purposes of the case report), the Singapore High Court upheld the SITBR’s judgment. The High Court agreed with the SITBR that to avail oneself of section 14(1)(a), the taxpayer has to establish a direct link

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© Published and reproduced with kind permission by Global Legal Group Ltd, London WongPartnership LLP Singapore between the money borrowed and the income produced. Moreover, there has to be a close relationship between these two items, and the money borrowed has to be instrumental in acquiring the specific income against which the deduction is sought. The High Court went on to state that the direct link “has to be real, tangible, precise, and factual, and this requires the consideration of a number of factors, which includes but is not limited to whether the original source of income … can be said to be the same source as the income against which a deduction is now sought”. For completeness, the High Court also held that section 14(1)(a) gives the Comptroller discretion in deciding whether or not a direct link exists between the money borrowed and the income produced, and how much deduction should be allowed to the taxpayer. BEPS Standard for Automatic Exchange of Financial Account Information in tax matters In connection with Singapore’s implementation of the common reporting standard (“CRS”), Singapore ratified the Convention of Mutual Administrative Assistance in Tax Matters (“MAATM”) on 20 January 2016. Doing so expanded Singapore’s network of partners for the exchange of information and prescribed the methods through which such exchanges can be performed. These methods include the exchange of information on request, automatic or simultaneous exchange of information, simultaneous tax examinations and tax examinations abroad. Singapore enacted legislation implementing the CRS on 1 January 2017. The CRS, being an internationally agreed standard for the automatic exchange of financial account information, includes provisions on the documentation, due diligence and reporting standards which financial institutions in adopting countries are required to implement. As at 12 June 2017, Singapore has concluded 23 bilateral competent authority agreements (“CAAs”). The CAA is an agreement which countries intending to adopt the CRS are required to sign. It specifies the type of information to be exchanged between two jurisdictions, the time and manner of exchange, and the confidentiality and data safeguards to be respected. Singapore-based financial institutions have to provide the IRAS with the financial account information of an account held by a tax resident of the jurisdiction with which Singapore has concluded a CAA. Country-by-country reporting Acting on Singapore’s commitment to implement some of the measures under the OECD’s Base Erosion and Profit Shifting (“BEPS”) Action 13 Report, the Singapore Parliament has amended the Singapore Income Tax Act to confirm the implementation of country-by- country reporting. Under the new requirements, the ultimate parent entity of a Singapore multinational enterprise will be required to file a country-by-country report for all entities in the group. This report should be submitted to the Singapore tax authorities within 12 months from the end of the ultimate parent entity’s financial year. The multinational enterprise group is required to file a country-by-country report if the following conditions are met: 1. the ultimate parent entity is a Singapore tax resident; 2. the consolidated group revenue in the preceding financial year is at least S$1,125m; and 3. the group has subsidiaries or operations in at least one foreign jurisdiction. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“the Multilateral Instrument”) Joining more than 100 countries, Singapore signed the Multilateral Instrument on 7 June 2017. The Multilateral Instrument seeks to facilitate the implementation of measures to counter BEPS by allowing the efficient updating of DTAs between countries which are

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© Published and reproduced with kind permission by Global Legal Group Ltd, London WongPartnership LLP Singapore signatories to the Multilateral Instrument. This approach avoids the need to re-negotiate each DTA. These measures include BEPS minimum standards on preventing treaty abuse and enhancing dispute resolution. Developments affecting attractiveness of Singapore for holding companies The Mergers & Acquisitions Scheme The Mergers & Acquisitions scheme (“M & A Scheme”) was first introduced in 2010 to encourage companies to consider mergers and acquisitions as a strategy for growth and internationalisation. The M & A Scheme was extended and refined in 2015, providing for the following: • An income tax deduction based on 25% of the value of the qualifying acquisition, subject to a cap of S$20m on the value of qualifying acquisitions per year of assessment. This allowance is written down over five years. • Stamp duty relief on the transfer of unlisted shares, capped at S$20m of qualifying merger and acquisition deals. • 200% income tax deduction on transaction costs (which includes due diligence costs, legal and valuation fees) incurred on the qualifying merger and acquisition deal, subject to an expenditure cap of S$100,000 per year of assessment, which is written down in one year. To be a qualifying acquisition, the M & A Scheme requires acquiring companies to acquire ordinary shares in a target company, whether directly or indirectly, that results in the acquiring company holding: (a) at least 20% ordinary shareholding in the target company (if the acquiring company’s original shareholding in the target company was less than 20%); or (b) more than 50% ordinary shareholding in the target company (if the acquiring company’s original shareholding in the target company was 50% or less). The M & A Scheme was enhanced following the 2016 Singapore Budget Statement. In particular, the following changes were made: • The cap on the value of qualifying acquisitions for the M & A Allowance per year of assessment for the 25% income tax deduction was revised from S$20m to S$40m. • Stamp duty relief on the transfer of unlisted shares was correspondingly capped at S$40m on the value of qualifying merger and acquisition deals. Extension of the income tax exemption on companies’ gains on disposal of equity instruments Under section 13Z of the SITA, the gains derived from a company from the disposal of ordinary shares it legally and beneficially owns in another company are exempt from income tax if the following conditions are met immediately prior to the date of share disposal: • the divesting company holds at least 20% shareholding in the company whose shares are being disposed of; and • the divesting company maintained at least 20% shareholding in the company whose shares are being disposed of for a continuous minimum period of 24 months prior to the disposal. Prior to the Singapore Budget Statement 2016, the section 13Z exemption applied to such disposals occurring between 1 June 2012 and 31 May 2017, both dates inclusive. Following the Singapore Budget Statement 2016, this tax exemption has been extended to include disposals occurring up to 31 May 2022. Refining the Finance and Treasury Centre Scheme The Finance and Treasury Centre Scheme (“FTC Scheme”) grants a concessionary tax rate of 8% for qualifying income derived by an approved Finance and Treasury Centre (“FTC”)

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© Published and reproduced with kind permission by Global Legal Group Ltd, London WongPartnership LLP Singapore from qualifying activities carried out on its own account and services provided in Singapore to its approved offices and associated companies. Additionally, an approved FTC can avail itself of withholding tax exemptions on interest payments on certain loans if the funds are used for the approved qualifying activities or services. To qualify for the FTC Scheme, a company must establish substantive activities in Singapore and perform strategic functions. These activities include, but are not limited to, the following: • control over the management of cash and liquidity position; • provision of corporate finance advisory services; • management of interest rate, foreign exchange, liquidity and credit risks; and • overall business planning, investment research and analysis. A company will also be assessed on various quantitative and qualitative aspects of the proposed FTC operations, such as the employment created, total business expenditure and the scale of the FTC operations. Following the Singapore Budget Statement 2017, the qualifying counterparties for certain transactions of approved FTCs will be streamlined to ease the compliance burden of approved FTCs. The change will apply to new or renewal awards of the FTC status approved on or after 21 February 2017.

The year ahead There is increasing focus on BEPS and transfer pricing by the Singapore tax authorities. In their latest transfer pricing guidelines issued in January 2017, the Singapore tax authorities have explicitly reiterated their position that “profits should be taxed where the real economic activities generating the profits are performed and where value is created”. The implementation of country-by-country reporting is also consistent with Singapore’s intent to comply with the BEPS Action 13 Report. This is hardly surprising in light of the global movement to combat BEPS issues. By signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Singapore also signals its strong support for the principle that profits should be attributable to the jurisdiction where there are substantive economic activities. This Multilateral Instrument allows Singapore to quickly update its treaties to internationally agreed standards without the need for re-negotiating each tax treaty separately.

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Tan Kay Kheng Tel: +65 6416 8102 / Email: [email protected] Tan Kay Kheng heads the firm’s Tax Practice and is also a Partner in the Litigation & Dispute Resolution Group. In the field of revenue law, Kay Kheng’s areas of practice encompass both contentious and advisory/ transactional work relating to income tax, stamp duty, property tax and goods & services tax. He also practises in the field of general litigation and arbitration, such as disputes relating to commercial/corporate law, accountants’ work and real property (land acquisitions). He has been admitted as a Fellow of CPA Australia and the Singapore Institute of Arbitrators. He is a Chartered Tax Adviser with The Tax Institute, an Accredited Tax Adviser (Income Tax) with the Singapore Institute of Accredited Tax Professionals (SIATP) and also a member of the International Fiscal Association. Kay Kheng’s professional service includes being a divisional councillor of CPA Australia and a board member of the Tax Academy of Singapore and the SIATP. He has taught as Adjunct Faculty at the School of Law, Singapore Management University, and serves on the Inquiry Panel and the Disciplinary Tribunal Panel for the legal profession. At the Law Society of Singapore, he serves as Vice-Chairman of its Compensation Fund Committee and as a member of its AML Committee.

Tan Shao Tong Tel: +65 6416 8186 / Email: [email protected] Tan Shao Tong is a Partner in the Tax Practice. His main practice areas are income tax, goods & services tax, stamp duty and property tax. Shao Tong graduated from the National University of Singapore and is admitted to the Singapore Bar. He is an Accredited Tax Practitioner (Income Tax) with the Singapore Institute of Accredited Tax Professionals and is a member of the ACCA. He is also a contributing editor for Singapore Civil Procedure 2016 and Goods and Services Tax Law & Practice (2nd Edition).

WongPartnership LLP 12 Marina Boulevard Level 28, MBFC Tower 3, Singapore 018982 Tel: +65 6416 8000 / Fax: +65 6532 5711 / 5722 / URL: www.wongpartnership.com

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Ernesto Lacambra & Bruno Cámara Cases & Lacambra

Key developments affecting tax law and practice Domestic law During the most difficult years of the Spanish economic crisis, there was a significant decrease in the income collected through Corporate Income Tax since the majority of Spanish-based companies were experiencing a significant reduction in profit, and some of them serious losses, which generated tax credits against the Spanish Treasury. In addition, the former tax system encouraged Spanish companies to borrow money to benefit from a flexible tax regime on the deductibility of interest payments with no limitation. Consequently, to revert the situation, Spanish Corporate Income Tax was profoundly amended, following these principles: (i) simplifying the provisions set out in the law in order to reduce tax litigation by including recent judicial and administrative resolutions; (ii) providing the tax system with legal certainty; (iii) reducing tax rates and abolishing tax allowances; and (iv) introducing legal measures oriented toward cash-repatriation (participation exemption) and measures to strengthen the equity of companies. In our opinion, the most relevant developments of Corporate Income Tax in Spain, to be further analysed, are the following: (i) New participation exemption regime on dividends and capital gains. (ii) Success of the Spanish SOCIMI (Spanish real estate investment funds). (iii) Amendments to the rollover regime on company restructurings. (iv) Special measures focused on reducing the public deficit. (v) Introduction of the capitalisation reserve and other tax credits. New participation exemption regime on dividends and capital gains The new participation exemption regime was introduced in Spain with effect from 1 January 2015 and amended on 3 December 2016, following a resolution from the European Commission which focused on two main issues: (i) to give an equivalent treatment to dividends and capital gains arising from qualified resident and non-resident companies; and (ii) to set an exemption method to avoid double taxation in order to increase competitiveness and internationalisation of European companies. Following the European Commission’s resolution, Spain passed a participation exemption method for dividends and capital gains arising from qualified resident and non-resident companies. This participation exemption regime has eliminated the former imputation method to internal source dividends and capital gains, which will only now apply for internationally sourced dividends and capital gains.

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Therefore, Spanish companies will be entitled to benefit from the participation exemption regime on qualifying resident and non-resident companies on the distribution of dividends and capital gains. In addition, Spanish companies with non-resident subsidiaries may choose to apply for the participation exemption regime or the imputation method deducting withholding tax in accordance with the applicable tax treaty provisions. In order to qualify for the participation exemption regime, the following requirements should be met: (i) the shareholding in the subsidiary must be of at least 5% or, alternatively, it must have a minimum value of at least €20 million (participation requirement); and (ii) it has to be held uninterruptedly for at least one year (holding requirement). In this sense, the holding requirement might be met at the company group level. In addition, if more than 70% of the subsidiary’s income consists of dividends or capital gains deriving from other subsidiaries, it would be required that the holding meets the abovementioned participation and holding requirements in the indirectly controlled subsidiary. Nevertheless, the precedent rule would not be applicable if dividends have been included in the tax base of the directly or indirectly owned entity in entities not allowed to apply for an exemption scheme or a double taxation tax credit scheme. This exemption also applies to foreign-source dividends and capital gains if the abovementioned participation and holding requirements are met and the subsidiary has been subject to (and not exempt from) a tax equivalent to Spanish Corporate Income Tax at a nominal rate of at least 10%. In this regard, the “equivalent tax” requirement will be met when the subsidiary is resident in a jurisdiction that has concluded a tax treaty with Spain which includes an exchange of information provision. Besides, the indirect shareholding requirement would also apply to foreign-source dividends and capital gains. Lastly, the exemption does not apply to dividends or capital gains deriving from the transfer of shares in entities with tax residence in a tax haven jurisdiction in accordance with the Spanish legislation. Success of the Spanish SOCIMI SOCIMIs were introduced in Spain on 26 October 2009. However, the earlier regime was not attractive for foreign investments and it was not until the latest amendments which took place in 2012 when the SOCIMIs started to be attractive for foreign investors. SOCIMIs (also known as Spanish REITs) are Spanish listed companies whose main purpose is the acquisition and development of real estate of an urban nature for the purpose of renting or the holding of shares in other SOCIMIs or foreign REITs. In 2012, the Spanish government introduced several amendments to the legal and tax regime of SOCIMIs in order to attract foreign investment in Spain through this vehicle. The main feature of this regime is the SOCIMI 0% Corporate Income Tax rate if certain requirements are met, competing with other REITs in different jurisdictions. This preferential tax regime for SOCIMIs partly relies on the shift of taxation from the SOCIMI to the investors, whose final taxation will depend on its legal form and its tax residence. Nevertheless, SOCIMIs will be taxed at 0% provided the shareholders owning at least 5% of its capital are taxed on the dividends received at a minimum nominal tax rate of 10% (“minimum taxation test”). If the shareholders are entitled to apply for an exemption, or subject to a nominal tax rate of less than 10%, SOCIMIs will be taxed at a 19% tax rate on the dividends distributed to those qualified shareholders. It is important to clarify that this 19% tax rate will be paid by the SOCIMI and it will not be considered as a withholding tax on the dividends distributed.

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As per the corporate requirements to apply for the special tax regime, the Spanish legislation requires SOCIMIs to have a minimum share capital of €5m, which must be fully paid-up and meet important investment requirements. At least 80% of the value of the SOCIMI’s assets must be invested in qualifying assets or shares and at least 80% of its income must derive from the rental income or dividends distributed by companies devoted to the rental of real estate. However, there is no requirement with regards to the number of properties or shareholdings in companies, which in practice means a SOCIMI could apply for the special tax regime holding on property as long as it is held for a minimum period of three years. Nevertheless, the Spanish National Securities Market Commission establishes certain control over the launching of SOCIMIs with minor shareholders. SOCIMIS are required to distribute at least 80% of their profits arising from real rental income and complementary activities, 50% of profits from the disposal of assets or shares and 100% of profits arising from qualifying shares. Amendment to the rollover regime on company restructurings The Spanish tax system foresees a special tax regime which allows the deference of both direct and indirect taxation arising from a restructuring transaction which responds to valid economic reasons. In line with the recommendations of the European Union, the aim of this regime is to eliminate tax barriers arising from mergers, spin offs, contributions of assets, swap of securities and other restructuring transactions. With effect from 1 January 2015, this regime is expressly configured as the general regime to be applied to restructuring transactions. Previously, the Spanish rollover regime was applied only if the taxpayer decided on such. Although the rollover regime is currently applied by default, there is a general obligation to notify the Spanish Tax Authorities of the existence of a restructuring transaction which must respond to valid economic reasons to defer direct and indirect taxation derived from the disposal of assets. The applicability of the rollover regime requires valid economic reasons for its application. If the taxpayer fails to prove valid economic reasons when applying this regime, the restructuring transaction would not qualify to apply for such regime. In this regard, one of the main amendments passed in 2015 was the reformulation of the legal consequences enforceable when the valid economic reason requirement was not met. The former regime foresaw that if the restructuring transaction did not qualify for the regime due to a lack of valid economic reasons, it triggered taxation for all capital gains arising from the transaction. Under the current regime, if the valid economic reason is not met, the legal consequence would be only to lose any tax advantage gained with the restructuring. Special measures focused on reducing the public deficit On 3 December 2016, Spain passed an urgent Royal Decree to introduce an important number of measures directed at reducing the public deficit and adjusting imbalances in the Spanish economy. Measures contained in the Royal Decree have been designed to increase revenues by (i) eliminating the deduction of losses on investments in other companies and bringing forward the reversal of provisions recorded at an earlier date, and (ii) by placing limits on, and deferring, the use of net operation losses and double taxation credits. The main tax measures are summarised below: • Limits on the use of tax loss carry forwards. New limits to offset operating losses have been established depending on the net revenue of the taxpayer. In that sense, for large

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companies with net revenues equal to or above €20m in the first 12 months before the beginning of the taxable period, the following limits are laid down: (i) up to 50%, wherein the 12 months before the beginning date of the taxable period, the company’s net revenues are equal to or above €20m but below €60m; and (ii) up to 25%, wherein the same 12-month period the company’s net revenues are equal or to above €60m. For other companies, no amendments have been made. Consequently, the 70% limit remains for them. • Limit on the use of domestic and international double taxation credits. For companies having net revenues equal to or above €20m in the 12 months before the beginning date of the taxable period, a limit has been placed on their use of domestic and international double taxation credits, whereby the aggregate amount of both types of credits that they use cannot exceed 50% of the gross payable for the year. • The change in control rules for entities with a net operating loss was modified. The use of net operating losses of an acquired entity will be disallowed under certain circumstances, including (among others) where the acquired entity has been dormant in the past three months (currently, six months) or where, within the two years after the acquisition, the acquired entity carries out different (or additional) activities from the activities it carried out before the acquisition that generate turnover that exceeds more than 50% of its average turnover for the two years prior to the acquisition. Capitalisation reserve and other tax credits Several tax credits have been abolished (including the environmental investment credit, the reinvestment credit and the profit investment credit) and will be replaced by a capitalisation reserve. The capitalisation reserve aims to strengthen Spanish entities’ net equity by keeping retained earnings undistributed in line with the principles inspiring the amendments to the Corporate Income Tax. The capitalisation reserve will allow a tax deduction for 10% of the increase in net equity in a particular tax year, provided the company maintains the net equity increase during the following five years (except in the case of accounting losses) and must book a non- distributable reserve for the same amount. The deduction may not exceed 10% of the taxable base before the deduction, adjustments for deferred tax assets and the use of net operating losses. The excess may be carried forward for the following two years, subject to the applicable limit for each year. Spain has never allowed the carry back of tax losses and this principle remains unchanged. However, with effect from 1 January 2015, Spain has created a new tax allowance consisting of a tax levelling reserve. Thus, small and medium-sized companies (companies with a turnover in the previous tax year of below €10m) are allowed to deduct 10% of their taxable profits and allocate them to that special reserve. This reserve must be used to offset the losses incurred by the company within the five-year period following its creation. When this reserve is released, the tax deduction must be recaptured, diminishing, or even cancelling, the tax losses of that year. If during the five-year period the company does not incur any tax losses, the reserve must be released – and the tax deduction recaptured – at the end of the period. The deduction is limited to an annual limit of €1m. BEPS Spain has played an active role in the discussions on the BEPS Action Plan. In particular, the Spanish Tax Authorities have participated in several negotiations in international forums

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Cases & Lacambra Spain regarding the content and implementation of the BEPS programme, resulting in a package of 15 measures to be implemented in both European and domestic legislation. As a result, and despite the fact that the BEPS Actions can be considered soft law – the OECD final reports on each action are legal recommendations to States – Spain has intended to transmute most of the BEPS Actions into domestic legislation. In general terms, the majority of actions taken by Spain were reflected in the last reform of Corporate Income Tax in 2015, applicable with effect from 1 January 2015. In this sense, the most important amendments to the Spanish domestic legislation are the following: • Tax planning disclosure. Spain has not passed any specific regulation with regards to disclosure of tax planning strategies. However, Spanish-based companies are progressively winding down tax planning structures through low-tax jurisdictions mainly because of the negative publicity. • List of tax havens. The Spanish tax system foresees an important number of anti- avoidance rules in relation to the use of “tax havens”. The concept of “tax haven” is solely Spanish and it does not necessarily compare with other EU jurisdictions. • Tax treaty abuse. Spain’s current tax treaty policy is to negotiate the inclusion of limitation on benefits clauses. • CFC rules. Before the implementation of the BEPS Actions, Spain already had important provisions in this regard. However, following the OECD recommendations, Spain has strengthened its CFC rules by making them more restrictive. • Interest deductibility. Spain has already introduced a limitation on interest deductibility linked to the EBITDA with the company. • Permanent establishments (PEs). Spain has not passed or amended any current law in this regard. However, the Spanish tax authorities have been applying a more economic approach to the PE definition.

Tax climate In 2014, the Spanish economy started a period of continued growth, leaving behind numerous years of austerity. In 2016, Spain has finally consolidated the economic recovery, shown by approximately 3% of GDP growth. After the Corporate Income Tax rate was decreased from 30% to 25% in 2015, the Tax Authorities have been recently reluctant to approve further Corporate Income Tax incentives other than the capitalisation reserves and other minor incentives analysed above. In parallel to reinforcing the commitment to the BEPS project, Spain has remained active at an international level, negotiating or renegotiating Double Tax Agreements with Mexico, Morocco, Estonia, Finland, Andorra, Qatar and Canada. During 2016, the Tax Authorities toughened their campaign to increase control over fraud and the submerged economy. For fiscal year 2016, tax inspectors focused on economic substance requirements for companies applying for tax benefits and transfer pricing and the taxation of technological multinationals. In addition, the Tax Authorities widened the control over taxpayers who voluntarily disclosed assets located abroad.

Developments affecting the attractiveness of Spain for holding companies Holding companies Spain offers a very attractive tax regime for holding companies with non-resident subsidiaries. In particular, this structure has been commonly set up to benefit from the

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Cases & Lacambra Spain important network of tax treaties between Spain and Latin American jurisdictions and its participation exemption regime. Any Spanish entity may opt to apply for the ETVE regime (“Entidad de Tenencia de Valores Extranjeros” or “Foreign Securities Holding Company”) as long as certain requirements are met. Under this regime, ETVE companies will be entitled to apply for a full exemption on dividends and capital gains from foreign subsidiaries and no withholding tax would apply on the distribution from the ETVE company to its shareholders. In particular, the main benefits of this regime are: (a) Full exemption applicable to dividends and capital gains obtained by the ETVE from its shareholding in non-resident subsidiaries. (b) The non-Spanish taxation applicable to ETVE non-resident shareholders. The main requirements to apply for this regime are as follows: • The company’s corporate purpose shall include the management and administration of foreign shareholdings through the appropriate human and material resources. However, the corporate purpose may also include other activities in Spain or overseas. • The Spanish entity must hold a minimum participation of at least 5% either directly or indirectly in the foreign subsidiaries. This requirement may be replaced by an acquisition cost of the subsidiary’s shares equal to or greater than €20m. In case of holding shares in a subsidiary acting as a holding company, its income should derive from more than 70% of dividends and capital gains, and the mentioned 5% participation has to be indirectly met by the Spanish entity in the lower-tier subsidiaries or, otherwise, certain other requirements must be met. • The shareholding in which the minimum participation requirement has been met must have been held for at least one year prior to the date on which dividends and capital gains eligible for the participation exemption regime are received. • In the case of dividends, this minimum holding period may be completed after the dividend distribution takes place. The period of time during which other members of the group have held the subsidiaries is also taken into account to calculate the holding period. • Subject to tax test. Foreign subsidiaries held by a Spanish holding company must have been subject to an equal or similar tax to the Spanish Corporate Income Tax at a statutory rate of, at least, 10% (it is allowed for the effective tax rate to be lower due to the application of any reductions or allowances in the subsidiary). This test is considered to be met for subsidiaries resident in a country which has signed a Double Tax Treaty with Spain with an agreement on exchange of tax information. For capital gains purposes, this test has to be met during the entire holding period. • The participation exemption will not apply in case the dividend distribution constitutes a tax-deductible expense in the subsidiary. • The subsidiary cannot be resident in a Spanish listed tax haven unless the jurisdiction is within the EU and the taxpayer proves that it has been incorporated for sound business reasons and it performs an active business. Any capital gains derived from the transfer of shares of the ETVE by non-resident shareholders, other than those that are tax haven-based or with a permanent establishment in Spain, will not be taxable in Spain provided the gain is derived from non-Spanish qualifying source income.

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Finally, Royal Decree 2/2016, of 30 September, has introduced an amendment on the calculation of Corporate Income Tax instalments (or advanced payments) for companies with a turnover equal to or greater than €10m. These advanced payments will be calculated in accordance with the profit and loss account of the company, which includes qualified dividends and capital gains. However, the company will be entitled to a refund of these payments when filing the Corporate Income Tax return.

Industry sector focus Real estate. One of the symptoms of the Spanish economic recovery is the significant increase of real estate transfers and rentals. A large number of real estate transactions have taken place in 2016 as the statistics of the Spanish Ministry of Development show: there was a 12% increase of total real estate transactions as compared to 2015. In line with this, in 2016 the Spanish Supreme Court ruled against the local Tax Authorities which subjected the transfer of urban real estate to Land Value Increased Tax even when the transferor did not obtain a capital gain from the transfer. The Spanish Constitutional Court confirmed the position of the Supreme Court in May 2017. Tourism and leisure. As per its weight in the Spanish GDP, tourism and leisure remains one of the main economic sectors in Spain. In this regard, several regions in Spain are applying a tax on stays in tourist establishments, which increases every year since its implementation. In addition, the Tax Authorities launched a specific plan to widen control over the taxation of online housing platforms.

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Ernesto Lacambra Tel: +34 936 119 232 / Email: [email protected] Ernesto Lacambra is the managing partner of Cases & Lacambra. He leads the Tax practice. Ernesto Lacambra is specialised in advising multinational groups, private equity firms and foreign and national investment funds and in the international tax planning of cross-border investments. He has extensive experience on mergers and acquisitions and reorganisations of multinational groups. In particular, he has focused on the reorganisation of Spanish holding companies for Latin American groups, as well as in investments in Spain by European, American and Asian investors. He has also extensive experience advising high-net-worth individuals, family business groups and large national and multinational business groups. He is an expert in tax audit procedures. He also advises on transfer pricing regulations (reorganisation of the value chain, litigation and master file documentation). He is a regular speaker at international business schools on international taxation matters and bilateral investments between the Middle East and Spain.

Bruno Cámara Tel: +34 936 119 232 / Email: [email protected] Bruno Cámara is an associate in the Cases & Lacambra Tax practice. He joined the firm in 2016 after completing a Master’s in Tax Consultancy at ESADE. His practice focuses on all aspects of national and international taxation of Spanish and foreign private clients. In particular, he is specialised in tax restructurings and family office tax planning.

Cases & Lacambra Avenida Pau Casals 22, 08021, Barcelona, Spain Tel: +34 93 611 92 32 / URL: www.caseslacambra.com/en

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Susanne Schreiber & Corinna Seiler Bär & Karrer Ltd.

Overview of corporate tax work over last year Types of corporate tax work M&A Swiss corporate tax work in 2016 focused primarily on M&A transactions, both in the private and public sector, as well as on reorganisations. The last few weeks of the year 2016 and the early beginning of the year 2017 especially demonstrated the importance of the area, with key transactions such as Lonza’s acquisition of Capsugel or Johnson & Johnson’s acquisition of the Swiss biopharmaceutical company Actelion. Tax litigation During the past year, another major part of tax work related to litigation concerned the refund of Swiss Withholding Tax (dividend-stripping cases). IPOs In the period under review, three companies (Investis Holding SA, KTM Industries AG and Varia US Properties AG) were listed on the Swiss stock exchange. With a placement volume of CHF 163m and an implied total market capitalisation of CHF 734m, Investis Holding SA, a leading residential property company in the Lake Geneva region and a national real estate service provider, was the largest among the three. Further, the pharmaceutical company Galenica (future name Vifor Pharma) announced the IPO of a part of its business (Galenica Sante) in March 2017.

Significant deals and themes M&A The following deals stood out in 2016/17, all requiring tailored corporate tax advice for the transaction itself, the integration or the debt financing: • Galenica’s $1.5bn acquisition of Relypsa Inc.: Galenica, one of the Switzerland’s biggest pharmacy network, bought Relypsa Inc. to gain a new medicine and commercial network in U.S. • Lonza Group Ltd’s $5.5bn acquisition of Capsugel S. A.: On 15 December 2016, Lonza announced its acquisition of Capsugel S.A. With this acquisition, Lonza becomes a leading integrated solutions provider to the global pharma and consumer healthcare industries. The transaction includes the refinancing of existing Capsugel indebtedness of $2bn. • Johnson & Johnson’s $30bn acquisition of Actelion: On 25 January 2017, Johnson & Johnson launched an all-cash tender offer in Switzerland to acquire all of the outstanding

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shares of Actelion. As part of the transaction, immediately prior to completion of the acquisition, Actelion will spin out its drug discovery operations and early-stage clinical development assets into a newly created Swiss biopharmical company (“R&D NewCo”). The shares will be listed on the SIX Swiss Exchange (SIX), and will be distributed to Actelion’s shareholders as a stock dividend upon closing of the tender. Johnson & Johnson will initially hold 16% of the shares of R&D NewCo. Reorganisations • Regus’s Introduction of New Holding: Regus proposed a scheme of arrangement to introduce a new holding company, incorporated in Jersey and with its head office in Switzerland. The new holding company is called IWG Plc and is primarily listed on the main market of the London Stock Exchange. On 19 December 2016, 923.4m Regus shares were delisted and the same amount of IWG shares were admitted to trading, so each Regus shareholder received shares in IWG on a one-for-one basis. Financing • On 22 September 2016, Novartis Finance S.A. completed the placement of two Notes of EUR 1,250,000,000 due 2023 and EUR 500,000,000 due 2028. The 2023 Notes were issued at 99.127% of their principal amount with an interest of 0.125% and will mature on 20 September 2023 at their nominal value. The 2028 Notes were issued at 98.480% with an interest of 0.625% and will mature on 20 September 2028 at their nominal value. Both Notes are guaranteed by Novartis AG. They are provisionally admitted to trading and expected to be listed on SIX Swiss Exchange Ltd. • Lonza Group AG successfully placed 5 million shares by way of an accelerated bookbuilding and completed a capital increase of approximately CHF 865 million to partially finance the acquisition of Capsugel S.A (see above). • On 20 December 2016, Meyer Burger Technology AG completed a rights offering as part of a recapitalisation programme. The recapitalisation programme consisted of three pillars: the amendments of the terms and conditions of the outstanding convertible bonds approved in a bondholder meeting; a capital increase by way of a rights offering in the amount of approximately CHF 164 million; and the extension and amendments of existing bank credit facilities. With the completion of the rights offering, the recapitalisation programme was successfully implemented.

Key developments affecting corporate tax law and practice Domestic legislation Corporate Tax Reform III (CTR III) Mainly upon pressure from the EU, Switzerland committed in July 2014 to abolish its cantonal (holding, domicile and mixed companies) as well as federal tax regimes (finance branch and principal companies). Consequently, approximately 24,000 companies currently benefiting from a privileged taxation status will lose their tax privilege and instead be subject to ordinary taxation. On 5 June 2015, the Federal Council published its draft legislative proposal for the CTR III. On 12 February 2017, the CTR III was submitted to a referendum and rejected by a 59.1% vote. Opponents of the rejected reform proposal were primarily concerned with the potential losses in cantonal tax revenues. Even so, the need to abolish the cantonal tax privileges remains uncontentious as requested by the OECD and EU, but the opponents of the CTR III strive for a more balanced bill. Thus, a new proposal is likely to be less far-reaching. In particular, the provided measures such as the super-deduction for R&D

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bär & Karrer Ltd. Switzerland expenses as well as the Notional Interest Deduction might not be part of a new proposal. Further, potential countermeasures like increasing the partial taxation quota for dividends at the level of individuals will require further discussions. Nevertheless, and similar to the rejected reform proposal, the new bill will have to introduce some measures designed to maintain and reinforce the fiscal attractiveness of Switzerland.1 To avoid unilateral tax repercussions from the EU, the OECD or any other individual countries, Switzerland will be inclined to implement a new corporate tax reform as soon as possible. As a consequence of the rejection, the current corporate tax laws remain in force and the current tax regimes should generally remain available until a revised tax reform is passed and effectively enacted. On 22 February 2017, the Federal Council published a press release outlining that the objective of the new draft legislation remains the strengthening of Switzerland’s competitiveness and safeguarding the tax revenues of the Confederation, cantons and communes. The Federal Council has instructed the Federal Department of Finance to submit substantive parameters during the second quarter of 2017 for a new proposal and suggestions on how to proceed.2 Further, on 2 March 2017, the Federal Department of Finance stated that it is forging ahead with work on a new corporate taxation proposal entitled tax proposal 17 (“TP 17”). The swift implementation and abolishment of the special tax regimes is desired by all sides. According to the TP 17’s timetable, the first important milestone will be the hearings with political parties, cities and communes in March 2017. The cornerstones of the new proposal should then be submitted to the Federal Council in June 2017 for decision-making.3 Dividend Withholding Tax – changes to the notification procedure For Swiss intra-group dividends, the dividend notification procedure instead of paying and reclaiming withholding tax may be applied if the corporate recipient of the dividend holds at least 20% in the Swiss corporation paying the dividends and the recipient is entitled to reimbursement of the withholding tax.4 Similar rules apply under various double tax treaties and the EU-Swiss Interest Savings Agreement. In 2011, the Swiss Federal Supreme Court held that the 30-day filing deadline for the notification is a forfeiture and not a pure administrative deadline. Consequently, missing the deadline resulted in withholding tax payments of 35% (temporary cash out due to the refund possibility) and 5% p.a. late payment interest. This decision led to a significant increase on untreated withholding tax cases and to significant claims regarding interest on late payments by the Swiss Federal Tax Administration (SFTA). In the 2016 fall session of the Swiss Parliament, the Council of States and the National Council reconciled their differences and agreed on an amendment to the Swiss Withholding Tax Ordinance in connection with the application of the dividend notification procedure. Under the revised Swiss Withholding Tax Ordinance, which came into force on 15 February 2017, the 30-day filing period constitutes a mere administrative deadline and, thus, the application of the dividend notification procedure is applicable even if the 30-day filing period has not been complied with as long as the substantive requirements for the notification procedure are met. Late filing of forms does not have default interest consequences any more. However, late filing of the declaration and notification forms can be sanctioned by means of an administrative fine of up to CHF 5,000. As the rules will apply retroactively, interest payments made since 2011 can generally be claimed back via applications to the SFTA during a one-year period, thus starting with the coming into force of the revised law by 14 February 2018.5

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Automatic Exchange of Information (AEOI) On 1 January 2017, Swiss AEOI implementation legislation (the Administrative Assistance Convention, the Multilateral Competent Authority Agreement, the Federal Act on the AEOI, the Ordinance on the International Automatic Exchange of Information in Tax Matters as well as the final version of the AEOI Guideline) entered into force. With the new global standard, the EU-Swiss Interest Savings Agreement will be replaced from 2017/18 (except for the withholding tax exemption for dividends, interest and royalties between certain group companies, which remains in force). In the draft Ordinance, the US was treated as a participating state. This qualification was heavily criticised in the consultation period, where various participants proposed that Switzerland’s treatment of the US should be in line with the other financial centres, having in the meantime taken the US from their list of participating states. Accordingly, the qualification of the US has been changed in the final version of the Ordinance to a non-participating state.6 As part of “Wave 2”, Switzerland’s first exchange of information will take place in autumn 2018. As of 17 March 2017, Switzerland counts 78 partner states including the agreement with the EU which applies for all 28 EU Member States. The agreement with the EU and with nine other states (Australia, Canada, Guernsey, Isle of Man, Iceland, Japan, Jersey, Norway, South Korea) came into force on 1 January 2017 and the first data-exchange between Switzerland and these countries will take place in autumn 2018 with regard to data from 2017. The agreements with the other mentioned states are scheduled to come into effect as of 1 January 2018, with the first data transmission in autumn 2019. Among these countries is the Principality of Liechtenstein with whom Switzerland had to negotiate an AEOI agreement for quite a long time.7 As more than 100 states have already committed to implement AEOI, it is expected that Switzerland’s list of partner states will further increase during the coming months. Spontaneous Exchange of Tax Ruling: see below under the heading BEPS International double tax treaties Switzerland remains active in negotiating new or revising existing double tax treaties. Among the most important ones is the new double tax treaty with Liechtenstein, which entered into force on 22 December 2016 and will facilitate access by Swiss-based companies to the EU market as Liechtenstein is part of the European Economic Area. The new treaty provides for a full withholding tax exemption on dividends with a minimum of 10% shareholdings after a one-year holding period. Revised double tax treaties, which entered into force during June 2016 until February 2017 include treaties with Norway, Latvia, Albania and Italy. As of 22 December 2016, Switzerland has signed 54 double tax treaties in line with international OECD standards on exchange of information, whereof 50 are in force, and 10 tax information exchange agreements, whereof nine are in force. Change in practice regarding the taxation of start-up companies in the Canton of Zurich On 1 November 2016, the Finance Department of the Canton of Zurich issued a directive stating that for the purpose of wealth tax, the value of shares in start-up companies with no market value shall correspond to the net asset value. This principle shall be dropped when a start-up company first achieves representative business results. Further, the directive explicitly states that the prices paid in financing rounds or capital increases are not used to calculate values for the purpose of wealth tax until the company’s start phase is over.8 This is an important clarification to avoid a significant wealth tax burden for the individual Swiss resident shareholders during the start-up phase. A number of other cantons apply similar rules.

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Partial revision of Swiss VAT Act The most important VAT change for companies relates to the mandatory tax liability. Currently, a Swiss domestic company is not subject to VAT if it generates a turnover from taxable supplies of less than CHF 100,000 within one year. Thus, foreign-based companies are currently not subject to Swiss VAT as long as their turnover in Switzerland is below CHF 100,000, irrespective of the worldwide turnover. The partial revision aims at removing this discrimination between domestic and foreign-based companies. According to the new law, which will take force as of January 2018, not only domestic turnover, but also worldwide turnover will be taken into account in order to determine whether a company is liable for Swiss VAT purposes. This partial revision is not only important for foreign companies, but also for Swiss-based companies, which are currently, due to VATable turnover below CHF 100,000, not subject to Swiss VAT. Domestic case law BGer 2C_276/2016: Dutch group request concerning UBS clients On 23 July 2015, the Netherlands submitted a group request for administrative assistance to the SFTA concerning a special group of UBS clients. The SFTA found the Dutch group request to be permissible in fall 2015. However, the Swiss Federal Administrative Court approved the appeal filed by an affected Dutch taxpayer. Last but not least, on 12 September 2016, the Swiss Federal Supreme Court overturned the Swiss Federal Administrative Court’s decision. The highest court concluded that, according to the double tax treaty between Switzerland and the Netherlands, it is sufficient if the group request contains enough information that will allow an identification of the person in question. Further, it also judged that the case at hand was not an inadmissible fishing expedition. BGer 2C_916/2014 and 2C_917/2014: Tax deductibility of financial sanctions In its decision dated 26 September 2016, the Swiss Federal Supreme Court was required to determine whether and to what extent financial sanctions pertaining to a legal entity constitute business-related expenses and are, thus, deductible for tax purposes. In the case at hand, a legal entity was sentenced by the European Commission to a fine in the amount of EUR 348,000 for breaking competition rules. The court concluded that financial sanctions of a criminal nature are non-deductible, while sanctions aimed at profit forfeiture are tax- deductible. The question whether sanctions of a criminal nature shall be tax-deductible was a question of interpretation of the law. The Supreme Court’s main arguments concerned the equal treatment of individuals who are not allowed to deduct personal fines and also that the community shall not have to bear a part of such a fine, which would be the case if it were tax-deductible. However, the court referred the crucial question as to what extent the imposed fine was of criminal nature or aims at profit forfeiture back to the lower court. Therefore, the authority which imposes the fine (e.g. FINMA, WEKO, etc.) has to decide on the nature of the sanction or the affected taxpayer must provide evidence that the fine contains forfeiting elements. It is a question of time as to when the Swiss Federal Court needs to decide whether or to what extent fines of the Department of Justice (“DoJ”) under the US tax programme are tax-deductible. The SFTA already outlined its view on the fiscal treatment of financial sanctions against Swiss banks within the DoJ programme in a letter to the cantonal tax authorities. According to the SFTA, such a fine consists of a criminal, a forfeiture and a restitution element, the criminal and restitution element being non-deductible. As the Swiss Federal Supreme Court has not yet commented on the deductibility of the restitution element, it will be the crucial question for all concerned banks as to whether the SFTA’s guideline on this point will be confirmed by the court.

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BVGer-A-4974/2016: UBS granted party status in administrative assistance procedure initiated by French tax authorities On 11 May 2016, the French tax authorities submitted a request for administrative assistance to the SFTA requiring the transmission of data in relation to a five-digit quantity of client numbers including the domicile code for France. The French authorities had received the list of client numbers from German investigating authorities. Information holders such as banks or fiduciaries have to provide the SFTA with the requested client information, but they are generally not granted party status. In the case at hand, the Swiss Federal Administrative Court decided that UBS as information holder is – because of three reasons – directly affected and therefore has its own interest in having the SFTA’s decision cancelled. First and foremost, the compilation of the requested five-digit number of data sets leads to a huge workload for UBS. Second, the unusual high number of clients concerned by the request could leave the impression that UBS might have systematically helped clients to evade taxes. Lastly, the most important argument was that there is the possibility that this data might be used in criminal proceedings already launched against UBS in France. The consequence of this decision is that the SFTA had to allow UBS to inspect all files and will have to serve it with all final decisions. Furthermore, UBS will be in the position to challenge all final decisions rendered by the SFTA. BGer 2C_404/2015: Swiss Pension Fund entitled to reclaim Swiss Withholding Tax on dividends received indirectly via Irish investment fund In a recent decision, the Swiss Federal Supreme Court ruled that a Swiss regulated and tax-exempt pension fund is entitled to reclaim Swiss federal withholding tax deducted from dividends of publicly traded shares of Swiss companies. The pension fund had invested in these shares only indirectly, via an Irish contractual fund acting as an investment vehicle for several local pension funds of a multinational enterprise. The Supreme Court reasoned that the Irish investment fund was comparable to a Swiss contractual fund, treated as a fiscally transparent entity for Irish tax purposes and thus had to be treated as fiscally transparent for purposes of the Swiss double taxation treaty with Ireland and of the Federal Withholding Tax Act as well. Accordingly, the Court concluded that the Swiss pension fund had to be recognised as the ultimate beneficial owner of the dividends derived through the transparent Irish fund. Furthermore, the Swiss Federal Supreme Court held that in the case at hand, the Swiss pension fund had sufficiently accounted for the income and, thus, met all conditions for reclaiming the Swiss withholding tax. The decision is to be welcomed, as it clarifies the Supreme Court’s position with regard to Swiss withholding tax reclaims on investments held via a fiscally transparent investment vehicle.9 BVGer A-1426/2011 (not final): Swiss Court denies tax treaty benefit to long borrower of Swiss shares On 20 December 2016, the Federal Administrative Court upheld a decision by the SFTA to reject the tax treaty-based partial refund claims of a Luxembourg resident financial institution (hereafter called “LuxBank”) for Swiss withholding taxes withheld from dividends paid on stock exchange-listed Swiss shares, which LuxBank had borrowed from an affiliated financial institution resident in the UK under standardised securities lending and borrowing contracts. The Federal Administrative Court essentially found that the Swiss tax treaty with Luxembourg could not be applied, based on its conclusion that LuxBank was not the beneficial owner of the dividends, as LuxBank was contractually required under the securities lending arrangements to make “manufactured payments” to

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bär & Karrer Ltd. Switzerland the UK Bank. In the Federal Administrative Court’s opinion, this resulted in a passing-on of the dividend benefits to persons that are not entitled to any benefits from the tax treaty between Luxembourg and Switzerland.10 This case is currently pending at the Swiss Federal Supreme Court. International developments BEPS Switzerland has actively participated in the OECD’s BEPS initiative and will implement the BEPS minimum standards as follows:

Action Topic Way of Implementation in Switzerland The new bill of the CTR III/TP 17 will implement Abolition of harmful tax 5 appropriate measures to replace favourable cantonal regimes. and federal tax regimes. Requiring substantial activity A patent box, if implemented in the CTR III/TP 17, will 5 for preferential regimes. follow the OECD standard. Improving transparency, Agreement on OECD/Council of Europe Convention including the compulsory on Mutual Administrative Assistance in Tax Matters 5 spontaneous exchange of and revision of Swiss Federal Act on International information on certain rulings. Administrative Assistance in Tax Matters (see below). Inclusion of new abuse clauses in double tax treaties 6 Prevention of treaty abuse. regarding treaty shopping. Automatic exchange of country Agreement on the multilateral CbCR convention and 13 by country reports (CbCR; enactment of law regarding CbCR (see below). without master and local file). Switzerland already offers access to the required Making the dispute resolution 14 dispute resolution mechanism; all new double tax mechanism more effective. treaties are in line with the OECD minimum standard.

BEPS Action 5: Implementation of the spontaneous exchange of information on tax rulings With regard to BEPS Action 5, Switzerland has implemented the spontaneous exchange of information in tax matters in its domestic legislation with effect from 1 January 2017. The regulations on the spontaneous exchange of tax rulings are included in the Tax Administrative Assistance Ordinance, which was revised due to this purpose. The Ordinance provisions are closely based on the guidelines in the BEPS Action 5 report. The exchange covers Swiss tax rulings, which have been granted after 1 January 2010 and are still in force at 1 January 2018, i.e. the time when the actual exchange of tax rulings will start in Switzerland. In line with BEPS Action 5, only a summary, but not the whole ruling will be spontaneously exchanged. The spontaneous exchange is per se not restricted to rulings; any information which might be of importance for the other state can be subject to a spontaneous exchange of information. However, for the latter the Ordinance does not yet contain specific cases as the practice still needs to be developed in congruence with international standards and practice applied by other countries. As regards the procedural rights, the person concerned by the spontaneous exchange of information will be informed about the intended exchange in advance except in cases where the purposes of the administrative assistance would be defeated and the success of the investigation would be endangered by a prior notification. The persons concerned have participations rights and rights to appeal, similar to other cases of exchange of information. The new transparency should not change the Swiss ruling practice per se – with a full disclosure of the relevant underlying facts and a solid tax analysis on the basis of applicable law. As regards rulings which may not uphold these

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bär & Karrer Ltd. Switzerland standards, there is the possibility to amend or terminate them by the end of 2017. The exact implementation (e.g. electronic submission of summary template) is currently developed and shall be communicated in April 2017.11 BEPS Action No. 13: Country-by-Country Reporting On 23 November 2016, the Swiss Federal Council adopted the dispatch on the Multilateral Agreement on the exchange of Country-by-Country Reports (MCAA-CbCR) of multinational enterprises (MNEs) and draft federal implementing legislation (Federal Act on the International Automatic Exchange of CbCRs of MNEs (ALBA Act)). The proposal is aimed at implementing the BEPS minimum standard. If the dispatch will be approved by the Parliament and provided that no referendum will be requested, the MCAA-CbCR and the ALBA Act might enter into force at the end of 2017, implying that qualifying MNEs operating in Switzerland would start having to prepare such reports from the fiscal year 2018 onwards. Switzerland would implement the automatic exchange of such CbCR with its partner jurisdictions on an annual basis as from 2020. Once the ALBA Act enters into force, the Federal Council will determine the list of jurisdictions with which to automatically exchange such reports. MNEs may, however, voluntarily choose to submit CbCRs even for tax years earlier than 2018, which would be exchanged by the SFTA already as from 2018. Given the minimum consolidated turnover threshold of the equivalent of EUR 750 million, an estimated 200 Swiss MNE will be affected. Non-compliance with the country- by-country reporting obligation may be subject to a penalty of up to CHF 250,000.12 BEPS Action No. 15: Developing a multilateral instrument (MLI) to modify bilateral tax treaties Switzerland has played an active role in the elaboration of the MLI. It called for the MLI to incorporate the reservations and options necessary for Switzerland. The MLI has been ready for signing since the end of December 2016. In Switzerland, the following next steps are planned:13 1. The Federal Council will decide whether Switzerland will sign the MLI. If Switzerland is to sign the MLI, the Federal Council will submit a provisional list setting out the countries and territories in respect of which the MLI should apply for Switzerland. It will also set out the double tax agreements (DTA) adjustments that Switzerland is considering. 2. Once the MLI has been signed, the Federal Council will hold a consultation process. As part of this process, the Federal Council will propose the states and territories with which the MLI is to apply and the provisions of Switzerland’s DTAs that are to be amended. 3. On the basis of the subsequent responses received, the Federal Council will then submit its dispatch to Parliament. Concerning the recommendations that are not in the form of minimum standards, the Federal Council has instructed the Federal Department of Finance, in collaboration with the cantons and business circles, to analyse the amendment of Swiss corporate tax law in the light of international developments.

Tax climate in Switzerland Due to the upcoming spontaneous exchange of rulings with foreign tax authorities as of 2018, it is expected that current tax rulings may be terminated by the taxpayers at the latest before the end of 2017 to avoid an exchange or to amend existing tax rulings in view of the future exchange. The tax authorities will need additional resources for the collection and

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bär & Karrer Ltd. Switzerland analysis of the rulings and may require additional information for future rulings in order to complete the template (with the summary of the ruling, group companies, etc.) for the exchange. In view of the general tax transparency discussion and information on aggressive tax structures with offshore companies, Swiss tax authorities are focusing more on such structures, scrutinising business substance in offshore (non-double tax treaty) countries and the profit allocation to such locations. More court cases covering partnerships, permanent establishments or companies, e.g. in Guernsey, Jersey and the Cayman Islands, have been decided in the recent past, mainly to the benefit of the Swiss tax administration, confirming no (sufficient) activity abroad or no place of effective management in Switzerland. As a general tendency, the current international tax environment and certain BEPS initiatives may actually result in more tax disputes, advance pricing agreements and mutual agreement procedures. Although many of Switzerland’s double tax treaties already provide for an arbitration clause, they have been of little practical importance so far. However, we do expect that arbitration in international tax matters will increase in the years to come. With regard to the arbitration clause in the double tax treaty between Switzerland and Germany, a consultation agreement to ensure uniform application and interpretation of art. 26 para. 5–7 DTA was signed between the authorities on 21 December 2016.14 Further, the Swiss Corporate Tax Reform III/TP 17 may increase competition between the cantons: whereas the tax rate differences for privileged taxed companies were not significant between the cantons, the ordinary tax rates are and the movement of mobile functions within Switzerland may be a consequence. Thus, more disputes under the intercantonal prohibition of double taxation may also arise.

Developments affecting attractiveness of Switzerland for holding companies Currently, holding companies are exempt from cantonal and communal profit tax and pay only a reduced capital tax at the cantonal/communal level as well as a 7.8% profit tax (effective tax rate) at federal level. However, as outlined above, the privileged cantonal holding status will be abolished in the context of the Swiss Corporate Tax Reform III and respectively the TP 17. Thus, holding companies will be subject to ordinary taxation: they will continue to benefit from the participation relief on qualifying dividend income and capital gains, but other income (interest, royalties, management fees) will generally be fully taxable. In view of international tax developments with a focus on substance, functions and key employees, Swiss groups may increase their business activities in holding companies since the requirements (no business activity in Switzerland) for privileged taxation will be abolished.

Industry sector focus Banking From a taxation point of view, a particular challenge for the Swiss banking industry was the ‘US tax programme’. Based on the joint statement signed on 29 August 2013 and the unilateral US tax programme of the US Department of Justice, Swiss banks that had reason to believe they may have violated US law (category 2) had to register with the Department of Justice by 31 December 2013 and fulfil the requirements of the US tax programme by 30 June 2014. Many Swiss banks sought this opportunity to resolve the tax dispute. By 27 January 2016, all Swiss banks in category 2 of the US tax programme had concluded a Non-Prosecution Agreement (NPA) with the DoJ in order to resolve the tax dispute with the United States.15 In a press release dated 29 December 2016, the DoJ

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Bär & Karrer Ltd. Switzerland stated that all applications from category 3 banks which believe they have not violated US tax law have been examined and five Non-Target Letters (confirmation that the bank is not under investigation and that there will be no prosecution) have been issued. Moreover, the DoJ also stated that none of the banks that operate exclusively on a local basis – assigned to category 4 – have received a Non-Target Letter. With regard to category 1 banks, against which criminal investigations are already being carried out by the DoJ, the Swiss-US tax dispute is still ongoing and will keep Swiss tax and litigation lawyers busy in the near future.16 Pharmaceutical industry M&A activity in the pharmaceutical industry continues (see above with regard to the deals during the period under review). For pharmaceutical companies it will be important if or to what extent the patent box and the R&D super-deduction will be included in the TP 17. Fintech industry In November 2016, the Federal Council published a press release stating that there are plans to reduce barriers to market entry for fintech firms as a dynamic fintech system can contribute significantly to the quality of Switzerland’s financial centre and boost its competitiveness. The Federal Council has instructed the Federal Department of Finance to draw up a consultation draft with the required legislative amendments by the start of 2017.17 As regards the taxation of Fintech companies, there are currently no specific tax benefits planned.

The year ahead During the year ahead, the Corporate Tax Reform III and the content of the TP 17 will continue to be at the centre of attention. It is the aim that the Parliament will succeed in finding a robust solution or compromise within a reasonable timeline. Swiss privileged taxed companies need to decide whether they want to change their privileged tax status once the reform comes into effect or even before; most cantons provide for a step up for cantonal tax purposes if a company ceases to benefit from a tax privilege. Such step up to fair market values (plus own created goodwill) may be later depreciated over a limited timeframe, resulting in a reduced tax burden at the cantonal level. For Swiss financial institutions as well as asset managers and trust companies, 2017 will be an important year as the Swiss AEOI implementation legislation came into force on 1 January 2017. Swiss-based financial institutions have to assess whether they qualify as Financial Institution for AEOI purposes, and if so, have to register with the SFTA by 31 December 2017. During 2017, Swiss-based financial institutions are required to perform due diligence on all accounts and need to collect the relevant data, which will then be exchanged in autumn 2018 with foreign tax authorities. Since international work on the BEPS actions as well as the EU anti-tax avoidance package (ATAD II: covering third countries) will continue, Swiss companies need to follow these developments and may need to adjust their set-up. In particular, more stringent CFC rules by foreign jurisdictions may have a negative impact on Swiss companies in view of further tax rate reductions, which are discussed in the course of the Corporate Tax Reform III/TP 2017, and may put more emphasis on business substance and activities.

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Endnotes 1. See Susanne Schreiber / Cyrill Diefenbacher, tax bill rejected, in: IFLR International Briefings, March 2017; http://www.baerkarrer.ch/publications/BK_Briefing_Corporate_ Tax_Reform_III_rejected_by_referendum.pdf (last visited on 12 March 2017). 2. See https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-65753. html (last visited on 14 March 2017). 3. See https://www.estv.admin.ch/estv/en/home/die-estv/medien/nsb-news_list.msg-id-6 5885.html (last visited on 12 March 2017). 4. Art. 26a para. 1 Swiss Withholding Tax Ordinance. 5. See https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-65 481.html (last visited on 12 March 2017). 6. See http://de.baerkarrer.ch/publications/BK_Briefing_Automatic_Exchange_of_Infor mation.pdf (last visited on 12 March 2017); http://de.baerkarrer.ch/publications/BK_ Briefing_Automatic_Exchange_of_Information_0117.pdf (last visited on 12 March 2017). 7. See https://www.sif.admin.ch/sif/en/home/themen/internationale-steuerpolitik/automa tischer-informationsaustausch.html (last visited on 12 March 2017). 8. See https://www.steueramt.zh.ch/internet/finanzdirektion/ksta/de/aktuell.newsextern.- internet-de-aktuell-news-medienmitteilungen-2016-bessere_45_bedingungen_45_ fuer_45_start_45_ups.html (last visited on 12 March 2017). 9. See http://www.baerkarrer.ch/publications-en/publikationen-results/?id=2264&type=p ublications&author=395&practice_areas= (last visited on 16 March 2017). 10. See http://www.baerkarrer.ch/publications-en/publikationen-results/?id=734&type=pu blications&author=395&practice_areas= (last visited on 16 March 2017). 11. Schreiber Susanne / Natassia Burkhalter, Swiss implementation of the spontaneous exchange of information on tax rulings, in: REIDF 1/2017, p. 58 ss; http://de.baerkarrer. ch/publications/BK%20Briefing_Spontaneous%20Exchange%20of%20Rulings%20 -%20Practical%20Implications.pdf (last visited on 12 March 2017). 12. http://de.baerkarrer.ch/publications/BK_Briefing_Federal_Council_Adopts_Dispatch_ on_Exchange_of_Country-by-Country_Reports.pdf (last visited on 12 March 2017). 13. See SIF, Report on international financial and tax matters, February 2017 (https://www. sif.admin.ch/sif/en/home/dokumentation/publikationen/bericht-ueber-internationale- finanz--und-steuerfragen.html, last visited 16 March 2017). 14. See https://www.sif.admin.ch/sif/de/home/themen/internationale-steuerpolitik/doppel besteuerung-und-amtshilfe/dba-verstaendigungsverfahren.html (last visited on 16 March 2017). 15. See https://www.sif.admin.ch/sif/en/home/themen/internationale-steuerpolitik/us-steue rstreit.html (last visited on 12 March 2017). 16. Ibid. 17. See https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-64356.html (last visited on 16 March 2017).

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Susanne Schreiber Tel: +41 58 261 52 12 / Email: [email protected] Susanne Schreiber comprehensively advises corporate clients on domestic and international tax matters. She advises listed or privately held groups on tax-related questions, in particular regarding restructurings, cross-border and domestic M&A transactions (sell- and buy-side, pre-deal carve outs, post-merger integration) and financing. She supports institutional investors and private equity companies throughout the investment cycle with tax advice. Susanne Schreiber is a frequent speaker at national and international tax seminars. She regularly publishes on tax topics, mainly in the area of international corporate tax, mergers & acquisitions and restructurings. She is a qualified Swiss tax expert, German tax advisor and German attorney- at-law. She joined Bär & Karrer as partner and co-head of the tax team in 2015 after having led the Swiss M&A tax department of a Big Four firm. Susanne Schreiber won the category “Rising star: Tax” at the IFLR Europe Women in Business Law Awards 2016.

Corinna Seiler Tel: +41 58 261 52 48 / Email: [email protected] Corinna Seiler’s practice focuses on all aspects of national and international corporate tax law and tax planning for Swiss and foreign private clients. She is a Swiss attorney-at-law and joined Bär & Karrer in 2016.

Bär & Karrer Ltd. Brandschenkestrasse 90, 8027 Zurich, Switzerland Tel: +41 58 261 50 00 / Fax: +41 58 261 50 01 / URL: www.baerkarrer.ch

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Natalya Ulyanova, Katerina Grabovik & Valeriya Mytyushyna ICF Legal Service

Overview of corporate tax work over last year Types of corporate tax work Today, Ukraine strives for transparency and uniformity in corporate taxation which is evidenced by a number of initiatives promoted and supported by Ukrainian officials. The amended Tax Code of Ukraine (TCU), signed into law by the President of Ukraine in December 2016, has brought in certain crucial changes.

Significant deals and themes • Operations with non-residents. Operations with non-residents in the amended TCU have undergone changes. In case of interest accrued on loans to related non-resident parties, the financial result before taxation is increased on the amount of interest exceeding 50% of earnings before interest, tax, depreciation and amortisation accrued on loans, borrowings and other debt (if such debt is 3.5 times higher than equity) owed to such non-residents. Previously, the above adjustment could be made with regard to overall debt, notwithstanding whether it was owed to non-residents. Where royalties are paid to non-residents from the list of low-tax jurisdictions, determined by the Cabinet of Ministers of Ukraine, the financial result before taxation is increased on the excess of the sum of expenses on royalties accrual over the amount of income from royalties increased to 4% of net sales of products (goods and services) for the previous financial year excepting controlled operations. Previously, the tax adjustment could be made with regard to the whole amount of expenses on royalties accrual compared with the current adjustment on the expenses excess. • Transfer pricing. Transfer pricing requirements have undergone significant amendments as well. The value criteria to recognise controlled transactions were increased as follows: annual income – up to UAH 150m; and the value of transactions with a single counterparty – up to UAH 10m. The list of controlled transactions for transfer pricing purposes was extended, with the following operations added: foreign economic transactions involving sale and purchase of goods/services through non-resident commissionaires; transactions with non-residents that do not pay corporate income tax and/or which are not tax residents of the state where they are registered as legal entities. The list of such organisational forms of non-residents will be approved by the Cabinet of Ministers of Ukraine (CMU) with partnerships expected to be introduced therein. New penalties for non-compliance with transfer pricing requirements and amended criteria of transactions’ comparability and the formation of so-called “offshore list” by the CMU (i.e. the list of states, operations with non-residents registered/residing in which are considered as controlled) were also introduced.

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• Controlled foreign companies. In 2017, new changes are in store with regard to the introduction of the definitions of controlled foreign companies and ultimate controlling persons. Taxation aspects referring to CFCs will be regulated as well. For instance, there will be changes in the calculation of profits, fiscal checks and when CFCs will be tax exempt. The relevant Draft Law №4636 was registered with the Parliament in May 2016. • On March 14, 2017, the Ministry of Finance of Ukraine announced the commencement of work on introducing a tax on withdrawn (distributed) capital. It is expected that the tax will be introduced from January 1, 2018. It is proposed to tax only those funds that are withdrawn from the business, in particular, the payment of dividends at a rate of 15%, etc. In turn, the money that is reinvested in the business, and the profits that remain in the turnover of enterprises will not be subject to corporate taxation. The foregoing measure is intended to become a strong economic incentive and promote business development due to non-withdrawal of profits and continuity in business activity.

Significant deals and highlights illustrating aspects of corporate tax Current corporate trends are manifested in the rise of mergers and acquisitions in the banking sector, due to the effects of NBU’s regulatory policy towards the banking industry. There has been a steep fall of investment in the agricultural sector. There is a rise in real estate deals with the value of deals getting lower and the looming possibility of overturning the ban on sale of land in Ukraine in the upcoming years. Additionally, the biggest deal in Ukrainian history of bank nationalisation is worth highlighting – PrivatBank group was nationalised in an attempt at recapitalise and prevent default on non-liquid assets and obligations. The Cabinet of Ministers assumed the control over the bank and a new management board was assigned to govern the bank.

Key developments affecting corporate tax law and practice In 2016, Ukrainian lawmakers mostly focused on the world trend of limiting offshore interactions; however, there were also significant events that have affected or will affect Ukrainian business in general. Corporate developments In December 2016, the new version of the Law “On Limited Liability and Complementary Liability Companies” in the first reading was adopted. It is expected to receive the Parliament’s approval in 2017. This Law is intended to decrease the opportunities for illegal takeover and make corporate management mechanisms more transparent, dispositive and precise, thus preventing capital from being shifted abroad because of national legislation deficiencies. The new legislative act brings in shareholder agreement: a corporate instrument which is still uncommon and unregulated in Ukraine. Among the other introductions are: regulation of significant transactions and transactions for which there is interest; anew approach as to the members’ exclusion when initiated by members holding 10%+ of voting rights; and the possibility of debt-to-equity conversion. Financial & banking developments With a view to counter offshore deals, money-laundering and terrorism financing, the National Bank of Ukraine (NBU) issued Order №369 of August 15, 2016. The Order sets forth the rules on monitoring and testing the documents (information) on financial transactions and their parties. In particular, it prescribes banks to define whether such transactions are high risk, have economic reasoning and sense from a business perspective,

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© Published and reproduced with kind permission by Global Legal Group Ltd, London ICF Legal Service Ukraine comply with counterparties’ activities, etc., thus deciding whether they can be performed. It establishes the criteria of transactions assessment based on the counterparties, jurisdictions and the value of the transaction. On August 29, 2016, the National Bank of Ukraine published Letter №25-0008/72225, in which was listed dubious foreign banks; among them were JSC “Regionala investiciju banka” (Latvia), Versobank AS (Estonia), ABLV Bank AS (Latvia), Rietumu Banka (Latvia), Meinl Bank AG (Austria), East-West United Bank (Luxembourg), Bank Frick Co (Liechtenstein) and Bank Winter & Co. (Austria). In order to regulate the currency and credit markets, the NBU issued Order №410 of December 13, 2016, setting the limitations on currency operations. The restrictions contain bans on operations carried out under NBU individual licences (with certain exceptions), a prohibition on repatriation of dividends to international investors and foreign currency operations in securities deals with Ukrainian issuers. However, the scope of this restriction excludes dividends under corporate rights and shares for 2014–2015; the prohibition as to repatriation thereof was eliminated in June 2016. Further promoting anti-offshore governmental policy, the NBU issued Letter №25- 0008/10883 of February 10, 2017, with recommendations on interpretation of the term “final beneficiary owner (controller)” and its application with regard to due diligence to be performed by banks. Moreover, the Letter contains a definition of the term “nominee beneficiary (holder)” and criteria for identification of a person in such capacity. On February 24, 2017, the NBU eliminated the requirement in regards to individuals to obtain individual licences to allocate proceeds on bank accounts opened abroad if the proceeds to be allocated were obtained from foreign sources. The foregoing relates to a wide range of income: salaries; grants; alimony; dividends, etc. Moreover, individuals are now entitled to invest abroad without individual licences of the NBU, but only using funds obtained outside Ukraine. For example, they will be able to conduct investment from foreign accounts, reinvest funds outside Ukraine, conduct trade with financial instruments on foreign exchanges, etc. This reform will promote liberalisation and decrease the governmental control over individuals’ financial operations. Fiscal developments The fiscal police was eliminated by the amended TCU to be substituted in 2017 by financial police having analytical functions instead of compulsive which is expected to result in a general increase of trust for state authorities by Ukrainian taxpayers.

Changes resulting from/inspired by international developments In 2016, the Ukrainian authorities implemented a number of international tax and anti- money laundering plans to fight profit shifting and tax evasion. Last year was marked by significant events connected with combatting abuse of offshore entities. Following the so-called “Panama Papers” events, the President of Ukraine, Petro Poroshenko, issued a decree on measures against base erosion and profit shifting №180/2016 of April 28, 2016. This Decree provides for the establishment of the Base Erosion and Profit Shifting (BEPS) work group headed by Nina Yuzhanina (who is also the head of Parliament’s Committee on Tax and Customs Policy) and joining the OECD’s Common Reporting Standard for Automatic Exchange of Financial Account Information, as well as amendments in transfer pricing law, controlled foreign companies rules and liberalisation of currency regulation.

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Ukraine’s accession to the list of countries undertaking to implement the BEPS actions constitutes one of the most complex challenges for tax lawyers and business owners. Even though the government decided to implement only four actions of fifteen – Action 5 “Harmful tax practices”, Action 6 “Treaty abuse”, Action 13 “Transfer pricing documentation” and Action 14 “Dispute resolution” – the cost of complying with the new obligation has yet to prove to be cost-effective and useful in improving the investment climate of Ukraine. For example, Action 5 fought many preferential tax regimes in European Union, but might prove to be useless in Ukraine due to a lack of any kind of initiative to bring in non-resident investors without the obligation to set up functioning enterprises in Ukraine. Action 6 might prove to be the most effective one, since it proposes the principle of limitation of benefits and the principle purpose test. The necessity to comply with new requirements will be crucial for tax lawyers as it will be up to them to provide consultations on corporate restructuring, banking and finance compliance and even the political scope of the new policies and regulations. The NBU issued a Concept for a new foreign exchange regulation. This Concept provides for the implementation of BEPS principles. According to the opinion of the NBU, implementation of the main BEPS steps will move from the permit or licensing exchange control system to notifying procedures for currency transactions. The signing of the intergovernmental agreement on U.S. Foreign Account Tax Compliance Act (FATCA) with the United States on February 7, 2017 became an important step for the Ukrainian government aimed at fighting harmful tax practices. The agreement provides for application of the FATCA provisions, meaning that Ukrainian financial institutions are obliged to automatically share tax information on American citizens (in particular, their assets and identities) with the U.S. Department of the Treasury. Therefore, additional attention will be required on the side of Ukrainian lawyers and tax consultants when dealing with clients with USA passports. Thus, the years 2016–2017 were marked with tax, corporate and related legislative developments contributing to higher predictability and transparency in corporate matters to make Ukrainian legislation more compliant with global trends.

Tax climate in Ukraine On January 1, 2016, the agreement on a free trade zone between Ukraine and the EU came into effect. The agreement provides that a free trade zone between Ukraine and the EU will be gradually formed over 10 years. The so-called “tax holidays” until January, 2021, were introduced for corporate income taxpayers in the course of the 2016 tax reform: a zero rate will be applied if their annual income does not exceed UAH 3m and the amount of monthly wage per each employee who is in labour relations with such taxpayer is not less than two minimum wages (UAH 6,400). In addition, these taxpayers must meet one of these criteria: 1) Formed in accordance with the law after January 1, 2017. 2) Already acting, which had annual income declared not exceeding UAH 3m for each of three previous consecutive years and whose average number of employees during that period was from 5 to 20 people. 3) Registered as a unified taxpayer prior to January 1, 2017, whose amount of revenue in the last calendar year did not exceed UAH 3m and the average number of employees fell between 5 and 50 people. On February 22, 2017, the Parliament ratified the agreement between the Government of Ukraine and the EU on Ukraine’s participation in the EU “Competitiveness of Small and

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Medium Enterprises (2014–2020)” programme (COSME). COSME allows Ukrainian companies to participate in seminars, training, receive expert advice and to enter EU markets.

Developments affecting attractiveness of Ukraine for holding companies 2016 was the year of significant amendments in Ukrainian corporate legislation. The main developments are as follows: 1) enhancement of the protection level for minority shareholders: (a) introduction of an independent director office designated to protect minority shareholders; and (b) establishment of derivative claims on reimbursement of damages resulting from improper actions of management and officials of JSCs to be submitted by minority shareholders owning 10%+ of shares in the interest of JSCs; and 2) facilitation of the procedure of dividends distribution in JSCs: the requirement to pay dividends through the depositary system was eliminated, the order of distribution to be determined by a general meeting. The foregoing amendments are intended to increase the general attractiveness of the Ukrainian corporate sector and were adopted as a part of a measures package developed to promote the protection of investors’ rights in Ukraine. Since 2016, a new rule for calculating the financial results for holding companies has been in force. The financial result before taxation is reduced by: a) the amount of income from participation in equity of other payers of corporate income tax; b) the amount of income from participation in equity of taxpayers of the fourth group paying unified tax (i.e. farmers); and c) the amount of accrued dividends from other taxpayers who pay upfront contributions for income tax on the payment of dividends. Notwithstanding the progress in reforming corporate and tax legislation in 2016–2017, Ukraine remains slightly attractive to foreign investors. Currently, no special tax regime exists for holding companies incorporated in Ukraine. The provisions of the Tax Code of Ukraine do not contain clear rules on participation exemption, thus leaving a gap whether dividends received from abroad are subject to taxation. The requirement for Ukrainian residents to obtain special licences to invest abroad (for example, to buy corporate rights in foreign entities) is another obstacle for Ukraine-based holdings. Thus, Ukraine still cannot be considered an attractive jurisdiction for the holdings establishment. Most national industrial groups prefer incorporation of holding companies in Cyprus, the Netherlands, Denmark, Singapore and Ireland.

Industry sector focus The legislative developments in 2016–2017 were focused primarily on the agricultural sector. The key amendment abolished the special VAT regime and introduced an automatic system of subsidies. Therefore, the agriculture industry shall be subject to ordinary VAT with the right to further refund. This amendment is aimed at reducing the level of corruption, equalising all the claimants for VAT subsidies and preventing so-called “VAT- stranding” – the forgery of commodity headings in order to avoid VAT liabilities. However, it is connected with administrative burdens and may result in a lack of state subsidies to the agriculture industry from the government’s side as well.

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Parliament ruled for annual state budget funds to be allocated in 2017–2021 as subsidies to the agriculture industry in the amount of at least 1% of output in agriculture (GDP). The State Budget of Ukraine for 2017 prescribed for UAH 4bn to be provided to the agrarian entities on a monthly basis proportionally to VAT paid with the value of agricultural products sold by such entities taken into account. Commencing January 1, 2018, the distribution of budget subsidies shall no longer increase UAH 150m per year per agrarian and its associated entities. The distribution of subsidies will be performed by the Treasury based on the data in the register of state subsidy recipients, kept by the Revenue Service. Significant amendments concerning excise duty on alcohol, cigarettes and fuels were introduced. At the beginning of 2017, the excise duty for ethyl alcohol will increase by 20% (UAH 126.96 for 1 litre), wines – by 12% (UAH 8.02 for 1 litre), tobacco – by 40% (UAH 445.6 per thousand cigarettes; ad valorem remains the same). The excise duty rate on petrol will increase by 24.5% (€213.5 for 1,000 litres), and that of liquid gas – by 67.8% (€52 for 1,000 litres). A flat excise duty of €139.5 per 1,000 litres is established for diesel fuel (previously it fluctuated between €95–€125.5, depending on the product’s quality). The above amendments are expected to result in overall increase of prices for the listed products. These new excise taxes may lead to market shadowing and a general deterioration of the quality of the product. Diesel fuel is an example where higher standards will become economically, and potentially ecologically, disadvantageous. Regulation of foreign economic operations and export has undergone alterations as well: in November 2016, the Parliament ruled to eliminate administrative barriers influencing provision of services by Ukrainian suppliers to non-residents. It is noteworthy that new legislation significantly facilitated operations between Ukrainian IT specialists and their foreign customers. The main changes are as follows: 1) elimination of the requirement to remit foreign currency proceeds to foreign currency accounts of the exporters of services (except for insurance and traffic services), intellectual property rights, copyright and neighbouring rights within 180 days following the provision thereof; 2) abolition of the mandatory conclusion of foreign economic contract in writing and the opportunity to conclude it in electronic form through the adoption of a public offer, electronic messaging or by invoice; 3) prohibit banks from requiring a translation of documents from English into Ukrainian; and 4) recognition of an invoice as a primary document, which should simplify the procedures for accounting and financial reporting; the invoice can be signed in person or bya digital signature. Thus, 2016 was the year of intensive legislation transformations with regard to industries, the most sufficient amendments affecting the agricultural sector, excise duties and export (primarily that of ITs).

The year ahead The year 2017 is expected to be marked with a reduction in small business. As a result of changes in single social contribution (SSC) payment requirements, commencing January 1, 2017, all private entrepreneurs are obliged to pay SSC, notwithstanding whether they obtain proceeds – more than 330,000 of private entrepreneurs closed, and this trend is expected to go on in 2017. The above is further intensified with the increase of the minimum wage from UAH 1,600 to UAH 3,200, which is burdensome for small businesses.

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In the context of anti-offshore efforts, Ukraine is very likely to join the CRS exchange of information, adopt the controlled foreign company rules and intensify the implementation of four minimum standards of the BEPS Plan. We expect tax and corporate legislation to be volatile, new rules aiming to bring in foreign investors and replenish the state budget, and traditional tax reform to take place at the end of 2017, which is usually conditioned by the adoption of a state budget for the following year.

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Natalya Ulyanova Tel: +38 044 255 57 67 / Email: [email protected] The managing partner of ICF Legal Service, Natalya Ulyanova has 16 years of professional experience. Natalya’s main practice expertise lies in the areas of international tax planning, tax risk assessment, construction of asset protection structures, structuring of M&A transactions, banking and corporate law, foreign legal entities and foreign investments. She has profound experience in international tax planning, complex consulting on corporate and tax schemes, tax risk assessment and consulting on risk optimisation, design of individual schemes of assets security and consulting on international tax-related matters. In addition, Ms. Ulyanova has broad expertise in the areas of asset protection by using special structures (trusts, foundations), international tax planning, structuring of business operations, investment & financial management and consulting on corporate and tax law. Natalya Ulyanova has more than 11 years’ experience in speaking at a number of conferences and seminars on the latest achievements, developments and solutions of international tax planning. Ms. Ulyanova is the author of numerous publications on tax and corporate matters in the leading Ukrainian and international business media. Katerina Grabovik Tel: +38 044 255 57 67 / Email: [email protected] Katerina Grabovik has more than nine years of legal practice experience in Ukraine. Her main fields of expertise are international tax planning, information technology law, intellectual law, legal structuring, tax and legal optimisation, consulting on international legal issues, drafting and legal analysis of corporate documents and agreements and structuring of business operations. Katerina has shown exceptional expertise and flexibility in the resolution of complex legal cases, both for Ukrainian and international business. In addition, Ms. Grabovik is a regular speaker at various professional events, such as workshops and seminars by Liga Zakon, conferences of the All-Ukrainian Public Organization and the Ukrainian Bar Association, and the International economic summit, “Ukraine and the world. The new dialogue”, etc. Valeriya Mytyushyna Tel: +38 044 255 57 67 / Email: [email protected] An associate of ICF Legal Service, Valeriya Mytyushyna has six years of professional experience. Valeriya has a solid background in the spheres of international and Ukrainian tax law, corporate and personal taxation, business structuring and corporate administration, complex corporate structure formation, financial and banking law, investment and deoffshorisation trends (BEPS, CRS, etc.). Ms. Mytyushyna specialises in currency regulations, cross- border activities, foreign economic operations, securities trade and circulation, intellectual property and information technologies, and legal support of modern business activities exercised via the Internet (online trading, electronic platform maintenance and functioning, etc.). She has comprehensive experience in dealing with state authorities in the course of business protection and support. Valeriya is the author of publications in top-tier Ukrainian legal and business media: Ukrainian Lawyer, Legal Practice, AIN.UA Portal and many others. ICF Legal Service Office 101–102, 1st Floor, 10 Muzeynyi Lane, 01001, Kyiv, Ukraine Tel: +38 044 255 57 67 / Fax: +38 044 255 56 29 / URL: www.icf.ua

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Sandy Bhogal & Ben Fryer Mayer Brown International LLP

Overview of corporate tax work over last year M&A M&A activity was down globally in 2016 after a record year in 2015, with an 18.1% drop in total deal value. The UK remained the third largest M&A market globally after the US and China, largely supported by the decrease in value of sterling which encouraged activity from overseas buyers, but saw total deal value decrease by 55% from £321.5bn to £144.5bn (although this represented an increase in activity over the average for the five years to 2015). The two largest deals were Softbank Group Corp.’s $30.7bn offer for a 98.55% stake in ARM Holdings Plc and Twenty-First Century Fox Inc.’s $14.6bn acquisition of the remaining 60.9% stake in Sky Plc.1 So far, the evidence in 2017 is that there continues to be a degree of hesitation regarding investment into the UK, although the continuing low value of sterling has prevented the UK M&A market from stagnating entirely. A total of 1,366 transactions were announced in Q1 2017, a decline of 25.5% from Q1 2016, with volumes falling in each of the small, mid- market and large value segments; however, deals exceeding £1bn in value increased from nine in Q1 2016 to 14 in Q1 2017, leading to a 57% increase in total deal value compared to Q1 2016. Key transactions include the £14bn acquisition of Mead Johnson, the sale of a £6.4bn stake in ARM Holdings Plc, and the debt funded buy-out of Aon’s employee benefits outsourcing business by Blackstone. The greatest number of transactions occurred in the financial services sector.2 The trend towards taking out warranty and indemnity or specific risk insurance in respect of M&A transactions continues, with this becoming an established alternative to traditional seller liability. Investors, however, are not always fully cognisant of the need to conduct detailed due diligence in order to give insurers confidence as to the risks of the transaction and prevent unwanted exclusions being included in policies, so it may be that we see changes in due diligence standards as this becomes better understood. Financing In 2016, there were 54 IPOs in the UK (across the Main Market and AIM), with total proceeds of $7.2bn, representing 4.9% of global IPOs and 5.3% of global IPO proceeds.3 The most active sectors for IPO activity on the Main Market were pharma, biotechnology and healthcare (six IPOs), finance (five IPOs) and real estate (two IPOs), with thetwo largest IPOs being ConveTec Group Plc’s listing in October 2016 at £4.39bn and Metro Bank Plc’s premium listing in March 2016 at £1.6bn. However, this represented a decrease in activity from the high-water mark in 2014 and this decrease appears to have continued into 2017. Although the UK had the highest number

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Mayer Brown International LLP United Kingdom of IPOs in Europe (12) in Q1 2017 and was second only to the Bolsa de Madrid in terms of IPO proceeds ($1.1bn), this represented a 25% drop in number and a 61% drop in proceeds compared with Q1 2016, amid challenging market conditions arising as a result of Brexit uncertainty and the fluctuation in the value of sterling. UK IPO activity is expected to remain relatively low until the full implications of Brexit are better understood, perhaps increasing through Q4 2017 and Q1 2018.4 Real estate Although interest among Asian investors in particular remains relatively strong, supported by the fall in the value of sterling following the Brexit referendum in June 2016, real estate investment dropped to an estimated £49bn in 2016, compared with a robust 2015 which saw record total property investment of £69bn; this represents a 30% fall in the value of total property investment in the UK and the lowest level of investment since 2012, reflecting investor uncertainty regarding the stability of the UK market (see tax climate section below). It is expected that real estate transaction levels will continue to be depressed throughout 2017 and into 2018, given continuing uncertainty regarding the likely outcome of the Brexit process.5 Transfer pricing Transfer pricing continues to be a focus for HMRC resources, with the amount of tax viewed by HMRC as potentially under dispute continuing to increase (reaching £3.8bn for 2015/16, up 60% from the previous year).6 However, HMRC has published revised guidance requiring transfer pricing discussions to take place via advanced pricing agreement (“APA”) requests or enquiries only (rather than via informal discussion), which essentially directs taxpayers with transfer pricing queries towards entering the formal APA process unless an enquiry is appropriate.7 It is not clear whether this reflects a deliberate attempt to reduce the number of transfer pricing discussions (perhaps by discouraging taxpayers from engaging in respect of transfer pricing where significant sums are not at stake) or merely a shift in policy towards formalising such discussions. However, it is worth noting that the number of transfer pricing reviews conducted by HMRC decreased to 362 in 2015/16 from 415 in 2014/15,8 which is also suggestive of a shift in focus towards tackling larger, higher-value disputes as a priority. Tax disputes Tax disputes are beginning to arise under the diverted profits tax regime introduced in 2015, with a number of companies, including the London Stock Exchange Group Plc, making accounting provisions for uncertain tax liabilities in relation to the potential application of this new regime.9 Although it was reported that a number of charging notices had been issued by HMRC in the latter half of 2016, FTSE100 drinks company Diageo is the first company to have publicly announced that it faces a charging notice, with assessments (which it intends to challenge) expected to be in the region of £107m.10

Key developments affecting corporate tax law and practice Domestic Hybrid mismatches As anticipated, the UK’s hybrid mismatch rules (enacted in Finance Act 2016 to implement the OECD’s BEPS action 2 recommendations) came into effect on 1 January 2017. These rules are complex, and guidance from HMRC remains incomplete in many areas, which does not help the UK’s bid to be an attractive jurisdiction for foreign direct investment.

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In addition, as the UK is one of the first jurisdictions to implement hybrid mismatch rules consistent with the BEPS project outcomes, UK taxpayers are likely to bear a disproportionate share of counteractions due to the application of the imported mismatch rules, although this disadvantage is expected to recede over time as other jurisdictions implement similar regimes. Limitation on interest deductibility Following consultation in 2016, the UK introduced legislation in Finance Bill 2017 to impose a restriction on the tax deductibility of corporate interest expense, based on the OECD’s BEPS action 4 recommendations, with effect from 1 April 2017. Although the draft legislation was withdrawn from the Finance Bill 2017 when the ‘snap’ general election was called, it is expected to be re-introduced in a post-election Finance Bill, potentially without change to the effective date, notwithstanding that there had previously been calls to delay implementation until 2018 at the earliest in order to give businesses an opportunity to get to grips with the detail of the draft legislation (which is extremely complicated and is expected to be onerous for taxpayers to apply). The basic aim of the draft legislation is to introduce a “fixed ratio rule” restricting deductible interest to 30% of a group’s tax EBITDA (being corporation tax profits and losses, excluding interest and certain tax reliefs); however, as an alternative, taxpayers can elect to apply the “group ratio rule”, which permits deductions based on the group’s net interest expense as a proportion of group EBITDA. Both rules are also subject to a modified debt cap, which aims to prevent net interest deductions in the UK exceeding the total net interest expense of the worldwide group, and the rules permit excess net interest expense and excess capacity to be carried forward to future accounting periods. There is a de minimis amount such that groups with net tax interest expense amounts of £2m or less for a period of account will not be subject to restrictions for that period, meaning that only larger groups with high borrowing levels are likely to be caught. However, for those businesses that are caught, the new rules introduce considerable complexity to the UK tax code and thus a significant compliance burden at a time when a number of other factors are making investment in the UK less attractive than it has been previously. Amendments to substantial shareholding exemption In a positive move for investors, the Spring Budget 2017 confirmed that the criteria required to be satisfied in order for the UK’s substantial shareholding exemption to apply would be relaxed substantially with effect for disposals on or after 1 April 2017. Although the regime will remain more complicated than participation exemptions in a number of other jurisdictions, a number of significant changes have been announced: (i) the period during which a substantial shareholding must have been held continuously for 12 months is to be increased from two to six years; (ii) the company selling the shares (the “investing company”) will no longer need to be a trading company or a trading group in order for the exemption to apply; and (iii) the target company will only need to be a trading company (or a holding company of a trading group or sub-group) immediately after if it is disposed of where the target is sold to a person connected to a seller (recognising that, in sales to unconnected parties, the seller has no control over the post-sale conduct of the buyer). There is also to be a new exemption that may apply where the target is not a trading company (or a holding company of a trading group or sub-group) before it is sold and at least 80% of the investing company is owned by one or more “qualifying institutional investors” (i.e. pension schemes, life assurance businesses, persons exempt from tax as a result of sovereign

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Mayer Brown International LLP United Kingdom immunity, charities, investments trusts, certain widely held authorised investment funds and unauthorised unit trusts) immediately before the disposal, with a partial exemption available where less than 80%, but at least 25%, of the investing company is held by qualifying institutional investors. This exemption also provides for an investing company to be deemed to satisfy the substantial shareholding requirement, even if its investment in the target represents less than 10% of the ordinary share capital of the target, where the cost of its shares or interests in shares on acquisition was at least £20m and it has a proportionate beneficial entitlement to profits and assets of the target, which significantly increases the ability of portfolio investors to benefit from the exemption. However, this exemption will not apply where the company selling the shares is a “disqualified listing company” (i.e. a company whose ordinary shares are listed on a recognised stock exchange, is not itself a qualifying institutional investor and is not a qualifying UK REIT). The draft legislation to enact these changes was withdrawn from the Finance Bill 2017 as a result of the calling of the general election, meaning the date from which these new rules will apply is currently uncertain; however, they are expected to be reintroduced in a post- election Finance Bill, possibly with the same effective date. Changes to rules governing use of losses It was also confirmed in the Spring Budget 2017 that Finance Bill 2017 would include legislation to reform the rules governing corporate losses (other than capital losses) carried forward from earlier periods. Although the draft legislation was withdrawn from the Finance Bill 2017 as a result of the calling of the general election, it is expected to be re- introduced in a post-election Finance Bill and may apply from 1 April 2017 onwards, so merits some discussion. There are two key elements to the proposals (which, once introduced, should be applied after other parts of the UK tax code, e.g. transfer pricing): (i) carried forward losses arising on or after 1 April 2017 may be used against profits from other trades and sources of the same company or of other group companies – this makes the use of such losses significantly more flexible, although it is worth noting that pre-1 April 2017 trading losses must continue to be streamed against profits of the same trade and will not be capable of surrender via group relief; and (ii) the amount of carried forward losses that can be used by a group in an accounting period is to be restricted, such that if losses are claimed against more than £5m of profits then only 50% of profits over that limit (and arising on or after 1 April 2017) may be relieved by carried forward losses. The draft legislation also includes anti-avoidance measures, including a broad “targeted” anti-avoidance rule designed to counteract arrangements that seek to circumvent the new legislation. Although these rules are clearly of benefit to smaller groups that are unlikely to be affected by the 50% restriction, since they will be able to take full advantage of the increased flexibility on offer, there may be larger groups for whom the net effect of these proposals will be detrimental in some years, depending upon their profit and loss profiles. Large businesses operating in the UK will therefore need to consider their business forecasts in light of these proposals. It is worth noting that banks continue to be subject to more stringent restrictions on the use of carried forward losses introduced from 1 April 2016.

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European Union Given that the two-year period for the UK to negotiate its withdrawal from the EU (following the Brexit referendum and the giving of notice to withdraw under Article 50 of the Treaty on European Union) will expire in March 2019, there is an open question regarding the extent to which the UK will (or will be required to) implement any of the EU legislation that has been adopted recently or is currently under discussion. Nevertheless, the volume of tax proposals coming from the EU over the last 12–18 months is unprecedented and there have been a number of significant developments in the direct tax sphere that should be mentioned. ATAD The EU’s Anti-Tax Avoidance Directive (“ATAD”) was adopted on 12 July 2016 and requires EU Member States to implement legislation in relation to a series of BEPS-related measures by 1 January 2019/2020, in order to tackle perceived tax avoidance by taxpayers subject to corporate tax in one or more EU Member States (including EU permanent establishments of taxpayers in third countries). The measures to be adopted as a result of the ATAD include an interest limitation rule, exit taxation provisions, a general anti-abuse rule, controlled foreign companies rules, and hybrid mismatch rules. The UK has, or is in the process of introducing, legislation on each of these topics, so will not be required to introduce any entirely new regimes (unlike, for example, those jurisdictions that do not currently have controlled foreign companies rules); however, the UK’s existing/proposed legislation is not necessarily consistent with the principles agreed in the ATAD, and in some cases it is not clear whether the UK’s rules would be considered more or less stringent than those in the ATAD, so (subject to the comment above re the timing of Brexit) it is possible some changes to the UK tax system may be anticipated. Where the ATAD measures are derived from the BEPS project outcomes, they are largely much less comprehensive than those recommendations, which reflects the fact that they are intended to introduce agreed minimum standards across the EU but also risks inconsistent implementation as a result of some EU Member States seeking to implement higher standards. In particular, the hybrid mismatch rules included in the ATAD are noticeably less complex than those recommended as a result of BEPS action 2, seeking to counteract only two straightforward types of mismatch in circumstances where the mismatch arises between EU taxpayers. ATAD II ATAD II is the name given to the subsequent EU directive, adopted on 29 May 2017, which seeks to strengthen the EU’s approach to tackling hybrid mismatches and make it consistent with and no less effective than the BEPS action 2 recommendations. Accordingly, although it was originally proposed in order to ensure that mismatches between EU Member States and third countries were brought into scope, ATAD II also seeks to address types of hybrid mismatch that were not within scope of the ATAD rules – namely hybrid mismatches involving permanent establishments, hybrid transfers, imported mismatches, dual-resident mismatches and reverse hybrids. ATAD II amends the ATAD by altering the definition of “hybrid mismatch” and replacing the hybrid mismatches article in its entirety. As none of the provisions of ATAD II are scheduled to be applied before 1 January 2020, it appears unlikely that the UK will be required to comply with it; however, the UK has already introduced legislation to implement the BEPS action 2 recommendations, as discussed above.

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Common (consolidated) corporate tax base In October 2016, the European Commission re-launched its proposal to introduce a common consolidated corporate tax base (“CCCTB”) across the EU, with the intention that this would create a level playing field for multinationals in Europe. In broad terms, the proposal would result in profits being consolidated at group level and then apportioned between applicable EU Member States on the basis of a prescribed formula, with each EU Member State continuing to apply its own domestic tax rates to its share of the profits. To succeed, the CCCTB requires an unprecedented level of international co-ordination and co-operation. Notwithstanding that previous attempts to introduce a CCCTB have failed to achieve this, the European Commission has put forward a two-stage proposal, with a common corporate tax base (“CCTB”) to be introduced from 1 January 2019 and consolidation to be brought into effect from 1 January 2021. This is a very ambitious timeline, allowing only two years for the terms of the CCTB proposal to be agreed and implemented, and it is by no means certain that it can be achieved, as a number of EU Member States remain unconvinced by the proposals. So far as the UK is concerned, if the EU succeeds in agreeing a CCTB for implementation from 2019, the UK could find itself obliged to implement the CCTB principles for a brief period before its withdrawal from the EU. Even if it does not do so, the CCCTB proposals should be monitored closely as, if the CCCTB succeeds once the UK has left the EU, this could have a significant impact upon the attractiveness of the UK for foreign direct investment. Dispute resolution Following the OECD’s BEPS action 14 recommendations regarding tax dispute resolution, the EU is seeking to strengthen the existing Arbitration Convention (which only covers transfer pricing disputes) and a new system for resolving double tax disputes within the EU was agreed by the European Council on 23 May 2017. The draft directive introduces mandatory binding dispute resolution, with clearly defined time limits and a requirement to reach a conclusion – in broad terms, it is proposed that arbitration will be launched if discussions under the mutual agreement procedure fail to reach agreement within two years, with an advisory panel being appointed to issue an opinion which will be binding on the EU Member States concerned unless they agree on an alternative solution. It is worth noting that many EU Member States, including the UK, have already stated a public commitment to mandatory binding arbitration and confirmed an intention to sign up to the optional arbitration provisions in the MLI (see discussion below) – the extent to which the two sets of provisions will be consistent with each other remains to be seen, but this is indicative of a clear trend towards enhancing co-operation between tax authorities. BEPS Over the last year, the BEPS project has largely moved into an implementation phase, and the UK continues to be an early mover in this regard – it had already taken steps to implement the recommendations of action 5 (countering harmful tax practices) regarding patent boxes and action 13 (country-by-country reporting), and in the last year has introduced legislation to implement the recommendations of actions 2 (neutralising hybrid mismatches) and 4 (limiting interest deductibility) (see discussion above). A key development that will affect the corporate tax landscape in the UK is the completion of BEPS action 15 (developing a multilateral instrument to modify bilateral tax treaties) with the publication in November 2016 of the text of the multilateral convention to implement

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Mayer Brown International LLP United Kingdom tax treaty-related measures to prevent BEPS (the “MLI”), which was developed by an ad hoc group chaired by Mike Williams of HM Treasury. The MLI seeks to implement treaty- related recommendations under actions 2 (neutralising hybrid mismatches), 6 (preventing treaty abuse), 7 (preventing the artificial avoidance of permanent establishment status) and 14 (effective dispute resolution). Taking each BEPS action in turn, in December 2016 the UK indicated the following: • action 2: it intended to make a reservation in respect of provisions that would amend the rules governing the elimination of double taxation for transparent entities, but did intend to adopt the new corporate residence tiebreaker test (which is consistent with recent/current UK treaty policy); • action 6: it intended to adopt the principal purpose test but would not adopt any form of limitation on benefits provision, nor would it adopt new rules targeting avoidance via dividend transfer transactions or the contribution of assets to an entity pre-sale to dilute the value attributable to immoveable property; • action 7: it did not intend to adopt most of the provisions targeting abuse involving permanent establishments, with the exception of the anti-fragmentation rule; and • action 14: it intended to adopt the provisions to amend/improve the mutual agreement procedure in their entirety, as well as the optional provisions on mandatory binding arbitration. These intentions were mostly borne out in the list of expected reservations and notifications submitted by the UK when it signed up to the MLI at a signing ceremony attended by 68 jurisdictions on 7 June 2017. However, the MLI must enter into force (which requires five instruments of ratification to be deposited with the OECD) and be ratified by the UK in order for it to apply to UK treaties (vis-à-vis treaty partners that have also signed up to and ratified the MLI, provided that both parties have notified that they wish the relevant treaty to be covered and the various options and reservations made by each party are not incompatible), so it is not likely to apply to any UK treaties before 2018 at the earliest.

Tax climate in the UK The UK is currently experiencing a period of considerable uncertainty, created by the outcome of the Brexit referendum in June 2016 and the lack of any clear direction for the UK’s departure from the EU and not assisted by the calling of an unanticipated general election in June 2017, which has resulted in a marked decrease in the level of foreign direct investment into the UK (notwithstanding the advantage to foreign investors as a result of the depreciation in the value of sterling). However, this does not appear to have deterred the UK government from seeking to implement a raft of changes to the UK tax code – until a number of provisions were withdrawn as a result of the calling of the general election reducing the opportunity for parliamentary scrutiny, the Finance Bill 2017 was the longest Finance Bill in history and contained extensive legislation on a number of significant topics. The UK also remains intent on pursuing “first mover” status in relation to the BEPS project (see discussion above), despite concerns that this, in combination with Brexit, could harm the UK’s attractiveness to business. By implementing the recommendations of BEPS action 2 (neutralising hybrid mismatches), the UK has added significant complexity to its tax code and imposed a considerable burden on taxpayers, not least because the burden of counteraction will inevitably fall on the UK unless and until other jurisdictions introduce equivalent rules. Add to that the draft legislation to implement BEPS action 4 (limiting

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Mayer Brown International LLP United Kingdom interest deductibility), which is expected to be re-introduced in a post-election Finance Bill, and the UK has substantially increased the compliance burden for businesses operating in the UK in ways which will have at best a tax neutral result for those businesses. Having said that, the UK also maintains that it is committed to having the most attractive corporate tax regime in the G20 and, notwithstanding its continued progress on BEPS implementation, is also introducing other measures that are likely to be attractive to business, including the continuing reduction in the corporation tax rate (currently expected to reach 17% by 2020) and the proposed amendments to the substantial shareholding exemption (see discussion above). However, the International Tax Competitiveness Index for 2016 ranked the UK 16th out of the 35 OECD countries overall and 19th out of 35 for corporate tax,11 compared to its 11th place overall ranking and 14th place corporate ranking in the 2015 Index,12 so it remains to be seen whether this policy will be successful.

Developments affecting attractiveness of the UK for holding companies As noted above, the UK government continues to state that the UK is “open for business”, and is taking a number of steps to demonstrate this, including: (i) lowering the corporation tax rate to 19% with effect from 1 April 2017 and committing to lower it to 17% with effect from 1 April 2020; (ii) introducing draft legislation (expected to be re-introduced in a post- election Finance Bill) to relax the conditions to be satisfied in order for UK companies to achieve an exemption from tax on chargeable gains accruing as a result of the disposal of a substantial shareholding; and (iii) introducing increased flexibility in the use of carried forward losses (by allowing them to be surrendered as group relief or set against different types of profits). This is also supported by administrative simplifications such as the long- awaited extension of the double tax treaty passport scheme. However, the UK has also taken a number of steps that have arguably reduced the UK’s attractiveness as a holding jurisdiction (or might be expected to do so once the relevant measures have been enacted), including: (i) the early introduction of BEPS measures targeting hybrid mismatches and interest deductibility; and (ii) the introduction of restrictions on the amount of carried forward losses that can be used. Although many of these measures are only expected to impact a small proportion of businesses, these are typically the largest and most international businesses and may well be capable of relocating significant operations if the UK’s tax system becomes too unfavourable. Accordingly, it remains to be seen whether the positive changes will be sufficient to retain multinational corporate holding structures in the UK or to attract many more multinationals to establish corporate holding structures here, especially in light of the wider political context.

Industry sector focus Financial institutions The trend towards automatic exchange of information between tax authorities is continuing, with the burden of providing the required information largely falling on financial institutions under FATCA, CDOT or the CRS. As the CDOT regime is being merged into the CRS, 2017 should be the only year in which reporting is required under both regimes (with financial institutions required to report on the basis of the more onerous obligations), so the reporting burden may be slightly alleviated from 2018 onwards; however, financial institutions will still be required to report for both FATCA and CRS jurisdictions.

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Overseas property investors It has been proposed that, with effect from 6 April 2018, non-UK resident corporate property investors should be subject to the corporation tax regime rather than the income tax regime. Although potentially attractive to overseas investors as a result of the corporation tax rate having dropped below the income tax rate as of 1 April 2017, this also has the disadvantage for overseas investors of bringing them within scope of regimes that only apply to corporation tax payers, such as the proposed corporate interest restriction (discussed above). A consultation on this topic is expected in summer 2017, although appears to have been delayed by the calling of the general election. Lenders At the Spring Budget 2017, the UK announced that it intends to introduce an exemption from withholding tax on interest paid on debt traded on a “multilateral trading facility”. This proposal, which reflects a desire to reverse the competitive disadvantage (vis-à-vis other jurisdictions) for debt traded on UK multilateral trading facilities, is subject to consultation, with the intention that legislation will be introduced to take effect from 1 April 2018.

The year ahead Over the coming year, the two biggest topics of conversation in the corporate tax sphere are likely to be Brexit and BEPS. It is to be hoped that, by this time next year, there will be greater clarity as to the likely shape of Brexit and what this means in terms of the UK’s relationship with EU and non-EU countries going forward. Only once we have some visibility on that will it be possible to make any sensible predictions as to the likely tax implications of Brexit, whether as a direct result of no longer being bound by EU legislation (for example, the UK could choose to make substantial modifications to its VAT regime) or in order to ensure that the UK without the support of the EU continues to be an attractive jurisdiction for foreign direct investment (for example, the UK might wish to relax or simplify tax provisions in order to appeal to businesses frustrated by the increasing complexity of tax systems around the world). Related to this are the developments we can expect to see from the EU over the next year, in particular regarding dispute resolution mechanisms and the CCCTB, as there are open questions regarding the extent to which the UK may be required to implement these if they are adopted by the EU. Also, if it appears that the CCTB/CCCTB will become a reality, the UK will need to consider amending its tax system post-Brexit in order not to be disadvantaged by the introduction of a pan-EU corporate tax system to which it is not a party. From a purely domestic perspective, as noted above, we can expect to see the measures that were dropped from Finance Bill 2017 re-introduced, as well as consultation (and possibly legislation) on subjecting non-resident corporates investing in UK property to corporation tax rather than income tax. So far as BEPS is concerned, no significant domestic measures are anticipated once the corporate interest restriction has been enacted. However, it is possible that the MLI may start to come into effect for UK treaties at some point over the next year, so this should be monitored by businesses involved in cross-border activity.

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Endnotes 1. http://uk.businessinsider.com/thomson-reuters-data-british-m-and-a-merger-acquisition- steady-2016-post-brexit-2016-12?r=UK&IR=T. 2. http://www.experian.co.uk/assets/business-information/marketiq/Quarterly%20Rep orts%20-%20UK/experian-miq-ma-report-uki-q1-2017.pdf. 3. http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey- global-ipo-trends-q1-2017.pdf. 4. Ibid. 5. http://www.cbre.co.uk/portal/pls/portal/!PORTAL.wwpob_page.show?_docname =57013454.PDF. 6. https://www.economicvoice.com/hmrc-carries-out-over-350-reviews-into-business- transfer-pricing-in-the-last-year/. 7. https://www.gov.uk/hmrc-internal-manuals/international-manual/intm480540. 8. Ibid., endnote 6. 9. https://www.law360.com/articles/898549. 10. https://www.cchdaily.co.uk/diageo-first-uk-company-face-diverted-profits-tax-claim. 11. https://files.taxfoundation.org/20170112205157/TF-ITCI-2017.pdf. 12. https://files.taxfoundation.org/legacy/docs/TF_ITCI_2015.pdf.

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Sandy Bhogal Tel: +44 20 3130 3645 / Email: [email protected] Clients appreciate his “wealth of experience”, and say that he “delivers advice in an efficient manner and is always around to help us work through issues” – Chambers UK 2016. Sandy Bhogal heads Mayer Brown’s Tax group in London. His experience ranges from general corporate tax advice to transactional advice on matters involving corporate finance, banking, capital markets, asset finance and property. He also has significant experience with corporate tax planning, as well as with advising on the development of domestic and cross-border tax- efficient structures. In the five years prior to joining Mayer Brown in 2005, Sandy was associated with Ernst & Young LLP and with a leading international legal practice. Education • BPP Law School, Legal Practice Course. • University of Bristol, LL.B., Honours, LL.M. (International Law), 1998. Admissions • England and Wales. Activities • Member of the Alternative Investment Management Association Tax Committee. • Law Society of England and Wales. • Member of Law Society Tax Committee. • Chairman of the Law Society Sub-Committee on International Taxes.

Ben Fryer Tel: +44 20 3130 3552 / Email: [email protected] Ben Fryer is a senior associate in the tax practice of the London office. Ben has advised on the tax aspects of a wide range of domestic and cross- border matters and transactions, including in relation to banking, capital markets, corporate finance, corporate reorganisations, debt restructuring, mergers and acquisitions, real estate and structured finance. Education • BPP Law School, Legal Practice Course (with Distinction). • The London School of Economics and Political Science, LL.B. (Hons) in Law with French Law. • Université Robert Schuman, Strasbourg III, France, Diplôme d’Etudes Juridiques. Admissions • England and Wales.

Mayer Brown International LLP 201 Bishopsgate, London, EC2M 3AF, United Kingdom Tel: +44 20 3130 3000 / Fax: +44 20 3130 3001 / URL: www.mayerbrown.com

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Gary Mandel Simpson Thacher & Bartlett LLP

Overview Following President Trump’s election on November 8, 2016, the United States has witnessed renewed momentum toward comprehensive tax reform. With a Republican president in office for the first time in eight years, the Republican Congress has a rare opportunity to enact sweeping changes to the existing tax system. Although tax legislation has yet to be submitted for congressional vote, both the Trump Administration and Republican leadership are advocating for a tax overhaul. Anticipation of fundamental changes to tax policy has propelled taxpayers and tax practitioners to carefully consider and prepare for the potential impact of such reforms on different industries and future transactions. Until these potential tax reforms are implemented, current law continues to govern, including several significant Treasury regulations that were issued toward the end of the Obama Administration. As of January 20, 2017, a regulatory freeze was implemented on all government departments which has halted the promulgation of any new (or previously anticipated) Treasury regulations.

Tax climate in the United States Potential U.S. federal income tax reform Although the Trump Administration and the House of Representatives have not yet reached consensus on how tax reform will be implemented, both President Trump’s most recent proposal, which was released in April 2017, and the “Blueprint” released by the House in July 2016, call for significant reforms.1 The key objectives of both President Trump and the House Republicans include the simplification of the Internal Revenue Code of 1986, as amended (the “Code”), a shift to a “territorial” tax system and a reduction in corporate tax rates. Republicans continue to uphold tax reform as a top legislative priority; however, the continued lack of consensus around the details of the proposed reforms, the contentious political climate, and the increasingly complex internal debate among Republicans about how the current health insurance regime should be replaced, suggests that true reform may not be imminent.2 Reduction in corporate tax rate A reduction in the top federal corporate tax rate, which is currently 35%, is a key element to both President Trump and the House’s plans. The House Blueprint calls for a reduction of the corporate tax rate to 20%, while the Trump Administration is proposing an even greater reduction of the corporate tax rate to 15%.3 These tax rate reductions are driven by the House and President Trump’s view that the comparatively high corporate tax rate in the United States is a primary factor in American

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA corporations either redomiciling or moving jobs offshore.4 Therefore, the desired impact of lowering the corporate tax burden (coupled with a shift to “territorial” taxation, as discussed below) is: (i) that U.S. multinational corporations will be more competitive in the global market; and (ii) that an increase in domestic corporate operations and investments will trigger noticeable economic growth, which will counteract any potential reduction in corporate tax revenues.5 A reduction of the corporate tax rate could have far-ranging effects on corporate transaction structures, including, for example, decreasing the tax savings of structures such as tax-free reorganisations or the value of deductions generated to corporate taxpayers in “Up-C IPOs”.6 International business taxation and repatriation of foreign earnings Currently the U.S. tax system is a “worldwide” tax system, taxing the income of a U.S. person wherever derived and using foreign tax credits to mitigate double taxation. Foreign corporations are generally not taxed if the corporation does not engage in U.S.-based activities or receive U.S.-source income. However, the “Subpart F” provisions of the Code tax certain U.S. persons currently on their share of foreign income earned by their controlled foreign corporations (“CFCs”), whether or not the CFC distributes such income to its U.S. owners.7 Both President Trump’s proposal and the Blueprint support a “territorial” tax system, which would exempt most, or all, foreign-derived profits from U.S. tax and (presumably) eliminate foreign tax credits.8 The Blueprint would also eliminate the Subpart F rules, except those requiring current taxation of certain passive income (e.g., interest and dividends from investments9). Both the Trump Administration and the House view the United States’ current “worldwide” tax system as overly burdensome, and an impediment to the ability of American companies to effectively compete in a global economy.10 One of the most frequently cited benefits of a territorial system is that it is “investment neutral”. In other words, because a territorial system would only tax income of U.S. corporations that is derived from U.S. activities, U.S. corporations would be less motivated by tax planning, and the current incentives for domestic corporations to move investments and labour overseas would be reduced.11 However, economists and practitioners have also suggested that a territorial system may cause foreign investments to become more attractive as all income derived from such investments would be entirely exempt from U.S. tax. Therefore, it remains unclear whether the impact of switching to a territorial system will help curtail base erosion and whether the anticipated impact of the reduction in corporate tax rates (described above) will compensate for any revenue deficit that may result from capital and jobs continuing to flow abroad.12 In conjunction with the proposed shift to a “territorial” system, both President Trump’s proposal and the Blueprint advocate for a “deemed” repatriation of accumulated earnings of U.S. corporations held abroad. Currently, cash and other assets held by foreign subsidiaries of U.S. corporations are subject to a 35% corporate income tax if repatriated to the United States, which has led to trillions of dollars of foreign cash being “trapped” offshore.13 The Trump Administration supports a “one-time” lower repatriation tax rate for cash held overseas, though no rate or timing for payment has been specified.14 Under the Blueprint, unrepatriated earnings held in cash or cash equivalents would be taxed at 8.75% and other earnings would be taxed at 3.5%. This would be a one-time, non-elective tax on all cash and other accumulated earnings payable over eight years. The Blueprint would exempt all future dividends paid by foreign subsidiaries to U.S. corporations from U.S. tax under the territorial system described above, thereby enabling U.S. corporations to bring home

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA future foreign-derived earnings without incurring U.S. tax. To further encourage domestic investment and production, the Blueprint also includes border adjustments, under which U.S. imports would be subject to tax (with no ability to deduct the cost), while exports would be fully exempt.15 Supporters of border adjustments claim that despite concerns surrounding the potential need for import-dependent companies to pass the heightened cost of imports on to consumers (assuming foreign trading partners refuse to bear that cost), the export subsidy and expected appreciation of the dollar will ultimately offset the import tax, and that border adjustments could raise up to $120 billion per year.16 President Trump has not formally endorsed border adjustments, which suggests that their enactment is unlikely, though President Trump has shown support for a tariff on imported goods.17 As the key revenue raising element of the Blueprint, President Trump’s reluctance to support border adjustments remains a significant area of conflict.18 NOLs The Blueprint would allow U.S. corporations to carry forward net operating losses (“NOLs”) indefinitely (compared to the 20-year carryforward period allowed under current law), increased by an interest factor that compensates for inflation and a real return on capital to maintain the value of amounts that are carried forward. The deduction allowed with respect to NOLs carried forward every year would be limited to 90% of the taxpayer’s net taxable income for each year, determined without regard to the carryforward.19 Businesses would not be allowed to carry back NOLs at all, which would require businesses to revise their tax planning to the extent that carried-back NOLs are a part of their strategy. These changes could affect valuation allowances established against NOL tax assets for financial reporting purposes. President Trump’s proposal is silent on NOLs, suggesting that this proposed change may not be implemented. Immediate expensing of investment and interest deductions In advocating tax reform, the House of Representatives and the Trump Administration have cited the struggles faced by American businesses that invest capital to create jobs and expand their operations without the ability to recover the full value of such capital investments in all scenarios. In order to address this issue, which the Blueprint describes as an effective tax on funds such companies reinvest in their businesses, both the Blueprint and previous iterations of President Trump’s proposal support expanding the scope of investment costs that taxpayers can immediately expense rather than depreciate over time.20 The Blueprint allows businesses the option to immediately expense both tangible and intangible property (excluding land),21 and President Trump’s previous proposals supported immediate expensing for investments in equipment, structures and other manufacturing investments.22 Furthermore, the Blueprint would allow deductions for net interest expense solely against net interest income (instead of allowing deductions against all business income), though businesses would be allowed to carry over any net interest expense not used in a given year, indefinitely. The Blueprint further specifies that special rules in this area have yet to be determined for financial services.23 Under President Trump’s previous proposals, interest deductions would still be permitted unless a business made the election to fully expense a business asset.24 Although the Trump Administration and the House have yet to agree on how interest deductions will be addressed, and President Trump’s proposal as of April 2017 is silent on the issue, the possibility that tax reform will include any limitation on the applicability of interest deductions is noteworthy. The potential impact of such change includes a reduction in the popularity of leveraged acquisitions and stock buybacks, as well as in the preference

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA for corporate debt over equity financing. Furthermore, without interest deductions, U.S. companies may pay a higher effective rate on borrowings than other foreign competitors, because many trading partners, such as the United Kingdom, France and Germany, provide a deduction for interest against taxable income. Disallowing interest deductions would have a particularly significant impact on the real estate industry, and other industries that rely heavily on the use of leverage.25 Although supporters of the Blueprint have suggested that the ability to immediately deduct capital expenditures would offset any potential detrimental impact that the denial of the interest expense deductions may have, the benefits of this proposed trade-off would be highly fact-specific. Generally, the present value of any reduction in taxes that would stem from immediate expensing would have to be compared with the present value of any additional taxes that would be incurred as a result of the loss of net interest deductions.26 Moreover, whether certain industries will reap any benefit from the adoption of immediate expensing will ultimately depend on the categories of investments that are subject to these rules. Finally, if the House proposal is adopted and interest deductions are limited to interest income, companies are likely to accumulate a larger number of unused deductions, a consequence that is not addressed in the Blueprint. Taxation of pass-through entities and carried interest Under current law, income from pass-through entities flows through to the owners (without being subject to tax at the entity level) and is taxed at the rate of the applicable owners. President Trump’s proposal, however, suggests that a 15% rate would apply to income derived by individuals from a pass-through entity27 – an approach that is generally intended to harmonise the 15% rate paid by corporations with the rate paid by individuals on business profits. The Trump Administration has acknowledged that mechanisms would be implemented to ensure that “wealthy people can’t create pass-throughs and use that as a mechanism to avoid paying the tax rate that they should be on the personal side”.28 Under the Blueprint, income from pass-through entities would be taxed at a maximum rate of 25% for active business income and pass-through entities will “pay or be treated as having paid” reasonable compensation to any owner/operator, which will be deductible by the business and taxable to the owner/operator at the applicable graduated rate.29 Despite the promise of safeguards to prevent business owners from converting ordinary income to business income, any new pass-through regime will likely present a significant tax planning opportunity for high-taxed owner/operators. Moreover, it could cause operators in some industries (e.g., real estate) to rethink the common position that their activities constitute passive investment activities rather than active businesses. How these proposals will impact compensation structures typically used in the private equity and hedge fund industry is yet to be seen. Carried interest received by private equity and hedge fund sponsors is in general currently eligible to be taxed at the long- term capital gains rate of 15%. Although the treatment of carried interest earned by such sponsors generated substantial debate under the Obama Administration30 and previous announcements by President Trump suggested support for subjecting carried interest to taxation as compensation income,31 neither President Trump’s current proposal nor the Blueprint propose any reform to its current treatment. Regulatory freeze On January 20, 2017, the White House implemented a regulatory freeze on all government departments. The “Freeze Memo” ordered (i) a freeze on all new regulations until a Trump Administration appointee personally approves them, (ii) the withdrawal of Obama-era regulations that were not published as of January 20, 2017, and (iii) a 60-day postponement

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA of the effective date of any Obama-era regulations that were published prior to January 20, but not yet in effect, in order to allow the new administration time to review questions of law, fact and policy.32 Shortly thereafter, President Trump issued an “Executive Order on Reducing Regulation and Controlling Regulatory Costs” requiring (a) the repeal of at least two existing regulations (unless prohibited by law) whenever an executive department or agency promulgates any new regulation, and (b) that the total incremental cost of all new regulations for fiscal year 2017 (which includes such repealed regulations) be no greater than zero, unless required by law or permitted by the Director of the Office of Management and Budget. As a result of the regulatory freeze, the Internal Revenue Service pulled the proposed “partnership audit” regulations, which generally set forth procedures for the collection of tax from a pass- through entity (rather than its owners) in connection with an audit.33 Furthermore, the broader impact of the regulatory freeze and how exactly it should be implemented remains unclear. Some practitioners have suggested that the scope of the freeze extends beyond regulations, to include notices and revenue procedures as well, but this is also uncertain.34

Key developments affecting corporate tax law practice As the tax reform story in the United States continues to unfold, taxpayers will be affected by a number of significant regulations issued by the Obama Administration in its final months. In addition, practitioners are developing new ways to address tax opinion requirements in merger agreements following the 2017 breakdown of the ETE/Williams merger. New Section 385 regulations On October 13, 2016, the U.S. Internal Revenue Service (“the IRS”) and Treasury issued final regulations under Section 385 of the Code allowing the IRS to recast certain debt arrangements between related entities as equity for U.S. federal income tax purposes. These regulations were designed to strengthen the IRS’ separately released inversion guidance, and, more broadly, to prevent multinational corporate groups from using intercompany debt to strip earnings out of the United States and into lower-taxed jurisdictions. Generally speaking, the regulations feature two important sets of provisions. First, the tainted transaction rules treat debt between members of an “expanded group” as equity for tax purposes if such debt is issued (a) in a distribution by an issuer with respect to stock, (b) in exchange for the stock of an affiliate, (c) in exchange for property in certain tax-free reorganisations, or (d) in a debt issuance the principal purpose of which is to fund a transaction described in (a)–(c) (the “funding rule”).35 The rules contain a presumption that transactions undertaken during the three-year period before the debt issuance or the three-year period beginning with the debt issuance will generally be subject to the funding rule. In addition, the documentation requirements provide that debt issued between expanded group members will be recast as equity unless the taxpayer can provide (i) written evidence of an unconditional obligation to pay a sum certain on demand or on one or more fixed dates, (ii) documentation that the holder of the loan has the rights of a creditor, (iii) documentation supporting a reasonable expectation of repayment at the time of issuance, and (iv) documentation of payments of interest and principal as well as enforcement remedies on non-payment.36 For the purposes of both the tainted transaction rules and the documentation requirements, an expanded group is generally a group of corporations with a common corporate parent, each one of which is 80% owned by the common corporate parent or another group member.37 The tainted transaction rules and the documentation requirements are subject to a number of taxpayer-friendly exceptions. For instance, the regulations do not apply to debt issued by

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA non-U.S. corporations or debt between members of a U.S. consolidated group.38 Moreover, short-term debt instruments issued in the ordinary course of an expanded group’s business are exempt from the funding rule.39 A number of other exceptions also apply, either to the regulations generally or to particular provisions. The Section 385 regulations will likely have a significant effect on U.S. corporate tax law practice. Most importantly, the regulations will meaningfully limit the ability of U.S. entities that are part of a corporate group with a non-U.S. parent to engage in earnings stripping by issuing debt to their non-U.S. affiliates. In addition, although the regulations were issued with the intent to limit the benefits of earnings stripping available to U.S. entities that have engaged in so-called “inversion” transactions in which a corporate group with a U.S. parent moves abroad, the rules could have an impact on transactions between domestic entities as well. Because application of the rules is limited to debt between group members with a corporate parent; however, the regulations are not expected to implicate most “leveraged blocker” structures implemented by private equity sponsors.40 All this being said, a number of factors make the future of the Section 385 regulations uncertain. On April 21, 2017, President Trump issued an executive order directing the Treasury to review all significant regulations issued in 2016 with the aim of identifying regulations that are unduly burdensome or complex or that exceed their statutory authority.41 In public statements, Treasury Secretary Steven Mnuchin has indicated that the regulations may be repealed or scaled back pursuant to this order.42 In addition, several Republican members of Congress have threatened to repeal the rules.43 Finally, the regulations could be repealed or rendered obsolete as a part of broader tax reform legislation or in an effort to allow for new regulations to be issued in compliance with the regulatory freeze. New Section 367 regulations On December 15, 2016, the IRS and Treasury issued final regulations under Sections 367(a) and 367(d) of the Code that prevent certain property, including foreign goodwill and going concern value, from being transferred offshore to a non-U.S. corporation on a tax-free basis. In general, prior to the promulgation of these regulations, U.S. persons could move property used in the active conduct of a non-U.S. trade or business offshore without incurring an upfront or ongoing U.S. tax cost.44 Transfers of certain intangible property (e.g., patents, copyrights, trademarks, and similar items), however, were subject to an alternative rule under which the U.S. person would recognise gain on the transfer over the useful life of the property instead of all at once in the year of the exchange.45 Under the final regulations, outbound transfers of specified property, including foreign goodwill and going concern value, are excluded from the active trade or business exception.46 Instead, such transfers will be either immediately taxable, or, at the taxpayer’s election, taxable over the useful life of the property under Section 367(d).47 The final regulations generally apply to transfers occurring after September 13, 2015 (the date the proposed regulations preceding the final regulations were issued). The final Section 367 regulations will have a significant effect on the ability of U.S.-based businesses to move assets offshore, even if those assets will be used in an active trade or business conducted abroad. While the Code had previously curtailed tax-free outbound transactions of intellectual property, in general a taxpayer could move an integrated active business offshore without the incurrence of U.S. tax. The final regulations raise the spectre that any outbound transfer of business assets to which goodwill and going concern value could attach will automatically trigger U.S. taxation. In addition, the new regulations will increase the tax cost of incorporating a foreign branch where the branch has been operating for some time and has undergone an appreciation of value.48 Such costs will likely be felt

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA by, among others, financial institutions, which have been under increasing pressure from regulators to reorganise branch operations into locally incorporated subsidiaries.49 Proposed Section 355 regulations On July 14, 2016, the IRS and Treasury released proposed regulations under Section 355 of the Code. The proposed regulations would limit the ability of a parent corporation to spin off a subsidiary on a tax-free basis where the parent or the subsidiary owns significant non- business assets compared to its other assets.50 Released after Yahoo abandoned its plans to spin off a subsidiary whose assets consisted of $40 billion worth of Alibaba stock along with a relatively small operating business in response to announcements from the IRS that it would not issue a favourable private letter ruling, the proposed regulations will likely discourage transactions like the planned Yahoo/Alibaba deal going forward.51

Tax opinion closing conditions in acquisition agreements after the ETE/Williams breakdown It has long been common practice for transaction agreements to condition closing upon the delivery of an opinion by outside tax counsel that the transaction will qualify for the parties’ intended tax treatment of the transaction. Some practitioners have begun to rethink this practice; however, following the breakdown of the ETE/Williams merger, where the buyer was able to walk away from the deal post-signing after its tax counsel determined it was unable to deliver an opinion on the transaction’s intended tax treatment.52 The parties to the ETE/Williams deal were two publicly-traded oil and gas pipeline operators, Energy Transfer Equity, L.P. (the buyer), and the Williams Companies, Inc. (the target). ETE and Williams entered into an agreement in September of 2015. The agreement conditioned the closing of the deal on ETE’s outside tax counsel, delivering an opinion that the merger should qualify as a tax-free transaction. After signing but before closing, the energy market declined substantially, greatly reducing Williams’ market value. Subsequently, ETE’s tax lawyers concluded that, contrary to their initial expectation, they could not opine that the transaction should be tax-free. ETE then attempted to walk away from the transaction on the grounds that a closing condition had not been satisfied. Williams sued, arguing that ETE had breached its obligations under the contract to use “commercially reasonable efforts” to obtain the tax opinion and “reasonable best efforts” to ensure that all closing conditions were met. The Delaware Court of Chancery ruled in favour of ETE, holding that the company had not breached its obligations. The Delaware Supreme Court upheld this decision, but on different grounds, holding that ETE was not liable because its tax counsel would have been unable to deliver the opinion regardless of whether ETE had used the requisite efforts.53 The ETE/Williams controversy can be expected to have a significant impact on market practice in M&A transactions. Seeking to avoid a repeat of the ETE/Williams breakdown, tax and M&A practitioners have already taken a variety of previously less-common approaches to tax opinion closing conditions. For instance, in AT&T’s recent acquisition of Time Warner, Inc., the agreement did not condition closing on the issuance of a tax opinion. Instead, the parties represented that they were not aware of any facts or circumstances that would prevent tax-free treatment, covenanted that they would not take (or fail to take) any actions that would prevent such treatment, and covenanted that they would explore alternative structures in good faith in the event that the target’s counsel could not issue a tax opinion.54 In Rockwell Collins’ acquisition of B/E Aerospace, Inc., the agreement did include a tax opinion closing condition, but the condition was structured to avoid the

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© Published and reproduced with kind permission by Global Legal Group Ltd, London Simpson Thacher & Bartlett LLP USA outcome in ETE/Williams. Specifically, the agreement contained a condition that each party receive a tax opinion from its own counsel, but the language of the opinions and representation letters were agreed to at signing. In addition, the agreement provided that if either counsel failed to deliver its opinion, the closing condition could be satisfied instead by the opinion of one party’s counsel and an alternate counsel. Finally, the agreement included a novel provision that if either party’s signing date representation letter contained an inaccuracy that caused a failure of the tax opinion condition, that party would be liable for a termination fee.55 A slightly different termination fee provision was used in MacDonald, Detweiler and Associates’ acquisition of DigitalGlobe, Inc. In that deal, the parties were required to accept the opinion of the other party’s tax advisor identified in the agreement, and the acquirer agreed to pay a significant reverse termination fee in the event that none of the specified counsel was able to deliver a tax opinion.56 Although parties have long adopted a variety of approaches to address tax opinion closing conditions, the fallout of the ETE/Williams transaction will make M&A practitioners increasingly cognisant of the risk inherent in such closing conditions.

The year ahead While the push for tax reform remains ongoing, a comprehensive overhaul of the U.S. tax system looks less promising now than it did shortly after the November 2016 elections. Time will tell whether Congress is able to pass tax legislation before the midterm elections, and if it is, what form such legislation will take. The prospect of tax reform – and in particular, the potential of significant restrictions on the deductibility of interest – may have a significant effect on the M&A marketplace. In some cases, parties may delay entering into taxable transactions in anticipation of the potential fall in tax rates. Moreover, the regulatory freeze means that new regulations from Treasury and the IRS are unlikely, and it is unclear what will come from President Trump’s April 21, 2017 executive order calling for a review of significant Treasury regulations issued in 2016.

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Endnotes 1. “A Better Way: Our Vision for a Confident America” (“The Blueprint”) (June 24, 2016), available at http://abetterway.speaker.gov; President Trump’s April 26, 2017 tax proposal, available at http://www.cnn.com/2017/04/26/politics/white-house-donald-trump-tax- proposal/. See also Alan Cole, Details and Analysis of the Donald Trump Tax Reform Plan, Tax Foundation (September 19 2016), https://taxfoundation.org/details-analysis- donald-trump-tax-plan-2016/; Davis Hirschfield & Alan Rappeport, White House Proposes Slashing Tax Rates, Significantly Aiding Wealthy, New York Times (April 26, 2017), https://www.nytimes.com/2017/04/26/us/politics/trump-tax-cut-plan.html?_r=0. 2. Howard Gleckman, How Russia and the Affordable Care Act Are Killing Tax Reform, Forbes (May 6, 2017), https://www.forbes.com/sites/beltway/2017/03/06/how-russia- and-the-affordable-care-act-are-killing-tax-reform/#63500ef42704. See also, Bob Bryan, Trump’s Self-Inflicted Crisis Could Derail the GOP’s Plans for Healthcare Reform and Tax Cuts, Business Insider (May 16, 2017), http://www.businessinsider. com/trump-russia-classified-information-healthcare-tax-reform-2017-5; Ginger Gibson, Democrat Sen. Wyden Warns of Diminishing Potential for Tax Reform, Reuters (May 19, 2017), http://www.reuters.com/article/us-usa-tax-wyden-idUSKCN18F2DH. 3. President Trump’s April 26, 2017 tax proposal, supra endnote 1.

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4. “The Blueprint” supra endnote 1, at 10. See also, Jon Hartley, President Trump’s Proposed Corporate Tax Rate Reductions Provide Hope for Wages and Economic Growth, Forbes (May 1, 2017), https://www.forbes.com/sites/jonhartley/2017/05/01/ president-trumps-proposed-corporate-tax-rate-reductions%E2%80%AFprovide-hope- for-wages-and-economic-growth/2/#2b5ab4d3492b. 5. Adam Michel, The U.S. Tax System Unfairly Burdens U.S. Business, The Heritage Foundation (May 16, 2017), http://www.heritage.org/taxes/report/the-us-tax-system- unfairly-burdens-us-business. 6. For background on Up-C IPO structures, see generally Phillip W. DeSalvo, The Staying Power of the Up-C: It’s Not Just a Flash in the Pan, 152 Tax Notes 865 (August 8, 2016). 7. I.R.C. §§ 951–965. 8. “The Blueprint,” supra endnote 1, at 15, 28; Hirschfield & Rappeport,supra endnote 1. 9. “The Blueprint” supra endnote 1, at 29. 10. Id. See also, Step.Org, Trump Proposes Move to Territorial Tax System (2017), available at http://www.step.org/news/trump-proposes-move-territorial-tax-system. 11. Curtis Dubay, A Territorial Tax System Would Create Jobs and Raise Wages for U.S. Workers, The Heritage Foundation, (September 12, 2013), http://www.heritage.org/ taxes/report/territorial-tax-system-would-create-jobs-and-raise-wages-us-workers. 12. Alex Brill, Tax Reform: Ryan-Brady Plan is a Better Way, AEI Economic Perspectives (October 31, 2016), http://www.aei.org/publication/tax-reform-ryan-brady-plan-is-a- better-way/. See also, Chuck Marr & Huang Chye-Ching Proposed “Tax Reform” Requirements Would Invite Higher Deficits and A Shift in Low Taxes to Low-and Moderate-Income Families, Center on Budget and Policy Priorities (July 31, 2013), http://www.cbpp.org/research/proposed-tax-reform-requirements-would-invite- higher-deficits-and-a-shift-in-taxes-to-low. 13. Citizens for Tax Justice, Offshore Shell Games 2016 (2016), available at http://ctj. org/ctjreports/2016/10/offshore_shell_games_2016.php. 14. Jacob Pramuk, The White House Just Outlined Its Tax Plan. Here’s What’s In It, CNBC Politics (April 26, 2017), http://www.cnbc.com/2017/04/26/the-white-house-just- outlined-its-tax-plan-heres-whats-in-it.html. Previous versions of President Trump’s proposal supported a 10% rate for cash and a 4% rate for other earnings payable over 10 years. 15. “The Blueprint”, supra endnote 1, at 27–29. 16. John Hartley, The Benefits and Risks Of Border Adjusted Corporate Taxation In The U.S., Forbes (February 20, 2017), https://www.forbes.com/sites/jonhartley/2017/02/20/the- benefits-and-risks-of-border-adjusted-corporate-taxation-in-the-u-s/#6e65150a4405. 17. Richard Rubin & Peter Nicholas, Donald Trump Warns on House Republican Tax Plan, Wall Street Journal (January 26, 2017), https://www.wsj.com/articles/trump-warns- on-house-republican-taxplan-1484613766. 18. Sahil Kapur, House-Tax Panel Chairman Still Committed to Border-Adjusted Plan, Bloomberg Politics (April 30, 2017), https://www.bloomberg.com/politics/ articles/2017-04-30/house-tax-panel-chairman-still-committed-to-border-adjusted-plan. 19. “The Blueprint”, supra endnote 1, at 26. 20. Id. See also, Cole, supra endnote 1. 21. “The Blueprint”, supra endnote 1, at 26. 22. Cole, supra endnote 1. 23. “The Blueprint”, supra endnote 1.

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24. Cole, supra endnote 1. 25. Peter Reilly, Housing Industry Panicking About Tax Reform, Forbes (May 22, 2017), https://www.forbes.com/sites/peterjreilly/2017/05/22/housing-industry-panicing- about-taxreform/#eceddf67c283. 26. James B. Sowell & Dene A. Dobensky, Possible Issues for Real Estate under the House Republican Blueprint, KPMG (January 16, 2017), https://home.kpmg.com/content/ dam/kpmg/us/pdf/2017/01/tnf-wnit-tax-reform-jan16-2017.pdf. 27. President Trump’s April 26, 2017 tax proposal, supra endnote 1. 28. Rappeport & Hirschfield,supra endnote 1. 29. “The Blueprint”, supra endnote 1. 30. Eric Kroh, Obama Seeks Carried Interest Take Hike In Budget Talks, Law 360 (Sept. 16, 2016), https://www.law360.com/articles/703355/obama-seeks-carried-interest-tax- hike-in-budget-talks. 31. Mary Conway, Kathleen L. Ferrell, Ethan R. Goldman, Omer Harel, & Anne E. McGinnis, Tax Reform and the Treatment of Carried Interest, Davis Polk: Tax Reform and Transition, Current Developments and Perspectives (March 28, 2017), https://www. taxreformandtransition.com/2017/03/tax-reform-and-the-treatment-of-carried-interest/. 32. Reince Priebus, Memorandum for the Heads of Executive Departments and Agencies, White House (January 20, 2017), https://www.whitehouse.gov/the-press office/2017/01/20/memorandum-heads-executive-departments-and-agencies. 33. Colleen Murphy, Alison Bennett & Lauren Davison, Tax Rules Stymied on Trump Regulatory Freeze, Bloomberg Daily Tax Report, https://www.bna.com/tax-rules- stymied-n73014450150/. 34. Allyson Versprille, Trump’s Regulatory Freeze: How Broad and For How Long, Bloomberg Daily Tax Report (January 26, 2017), https://www.bna.com/trumps- regulatory freeze-n73014450305/. 35. Treas. Reg. § 1.385-3. 36. Treas. Reg. § 1.385-2. 37. Treas. Reg. § 1.385-1(c)(4). 38. Treas. Reg. § 1.385-2(d)(3). 39. Treas. Reg. § 1.385 -3T(b)(3)(vii). 40. For background on leveraged blocker structures, see generally John LeClaire & Jamie Hutchinson, Tackling Blockers: Using Passthroughs to Power Your Investment, BNA Daily Tax Report (April 26, 2016), http://taxandaccounting.bna.com/btac/T11100/ split_display.adp?fedfid=88129097&vname=dtrnot&jd=a0j3b4a6u4&split=0. 41. Exec. Order No. 13789, 82 Fed. Reg. 79 (April 26, 2017). 42. Andrew Velarde & Emily Foster, Trump Order Will Require Review of Significant 2016 Tax Regs, 2017 TNT 77-1 (April 24, 2017). 43. Dylan F. Moroses, No Decision to Use CRA on Debt-Equity Regs, Brady Says, 2017 TNT 61-3 (March 31, 2017). 44. I.R.C. § 367(a)(3). 45. I.R.C. §§ 936(h)(3)(B), 367(d). 46. Treas. Reg. § 1.367(a)-2. 47. Treas. Reg. § 1.367(a)-1(b)(5). 48. Andrew Velarde, With New Administration, Further Inversion Rules Hard to Predict, 2017 TNT 25-3 (February 8, 2017). 49. Dolores W. Gregory, Financial Services Companies Seek Exceptions to 367(d) Rules, BNA Daily Tax Report (December 29, 2015), https://www.bna.com/financial-services- companies-n57982065568/.

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50. For a summary of the proposed regulations, see generally Gary Mandel, Robert Holo & Jonathan Goldstein, Internal Revenue Service Changes Course in Proposed Regulations Regarding Active Trade or Business Requirement and Device Prohibition in Spinoffs, Simpson Thacher & Bartlett LLP (July 19, 2016), http://www.stblaw.com/ docs/default-source/memos/firmmemo_07_19_16_1.pdf. 51. Amy S. Elliot, Yahoo Drops Plan to Spinoff Alibaba, Aims for Reverse Spinoff, 2015 TNT 237-2 (December 10, 2015). 52. Diana Wollman & Jonathan Gifford, Tax Opinion Closing Conditions in M&A Transaction Following Delaware Litigation Over ETE/Williams’s Busted Deal, Cleary Gottlieb Steen & Hamilton (March 28, 2017), https://client.clearygottlieb.com/51/141/ uploads/20170328-tax-opinion-closing-conditions-in-m-and-a-transactions.pdf. 53. The Williams Companies, Inc. v. Energy Transfer Equity, L.P., No. 330, 2016, slip op. (Del. S. Ct. March 23, 2017). 54. Wollman & Gifford, supra endnote 52. 55. Id. 56. Id.

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Gary Mandel Tel: +1 212 455 7963 / Email: [email protected] Gary Mandel is a Partner at Simpson Thacher & Bartlett LLP. His area of concentration is federal income tax, with an emphasis on corporate mergers and acquisitions, joint ventures, restructurings and spin-offs. He advises a wide mix of clients, including financial institutions and private equity funds. Chambers describes him as a professional “who knows how to get a deal closed” in the face of “seemingly intractable tax issues”. Also a certified public accountant, Gary is an adjunct professor at Columbia and New York law schools. Early in his career, he clerked for the Hon. Carolyn Miller Parr of the U.S. Tax Court. He received his B.S. in 1985 from Brooklyn College, his M.B.A. in 1990 from Pace University and his J.D., cum laude, in 1994 from Saint John’s School of Law. Gary earned an LL.M. with distinction in 1996 from Georgetown University School of Law.

Simpson Thacher & Bartlett LLP 425 Lexington Avenue, New York, NY 10017, USA Tel: +1 212 455 2000 / Fax: +1 212 455 2502 / URL: www.stblaw.com

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Alberto I. Benshimol B. & Humberto Romero-Muci D’Empaire Reyna Abogados

Overview of corporate tax work Significant corporate tax issues usually arise in connection with foreign investments in Venezuela. Current investments in Venezuela mainly consist of regional or worldwide M&A transactions, which include the purchase of subsidiaries in Venezuela and the purchase of companies by the Venezuelan Government. The Government has also engaged in energy, infrastructure and other strategic projects with foreign investors. Transfer pricing has been an area of rapid development in Venezuela. Since 2007, the Venezuelan tax administration has audited local branches and subsidiaries of multinationals in connection with their related party transactions. Recently, the tax administration has emphasised joint transfer pricing and custom valuation audits. A number of audits have resulted in tax claims, and many such claims have been challenged by the taxpayer. Venezuelan courts have resolved some of the challenges made by taxpayers but most of the cases are still pending a final decision of the Supreme Court of Justice.

Significant deals and highlights illustrating aspects of corporate tax Below we summarise significant transactions with interesting or particularly complex tax issues/implications which have taken place over the last 12 months: • Corimon purchased Bridgestone’s Venezuelan subsidiary. • Fairfax purchased AIG’s Venezuelan insurance company. • Liberty Mutual sold its Venezuelan subsidiary, the largest Venezuelan insurance company (Seguros Caracas) to local investors. • General Mills sold its Venezuelan subsidiary to a local investor.

Key developments affecting tax law and practice After the tax reforms that took place between 2014 and 2015, which included a new tax code, amendments to the income tax law and the VAT law as well as the creation of a new financial transactions tax, there are no significant changes in Venezuelan tax legislation. In 2016, several Venezuelan taxpayers have seen an increase in their income tax liabilities as a result of the 2015 amendment to the income tax law, which eliminated the possibility for most taxpayers of applying the adjustment for inflation for calculating their income tax. Tax court decisions on transfer pricing • In Sodexho Pass Venezuela v. República Bolivariana de Venezuela (8th Tax Court of Caracas, December 15, 2016) the plaintiff (Sodexho Pass Venezuela) appealed an adjustment to its taxable profits made under the Venezuelan transfer pricing rules. The Venezuelan tax authority claimed that the interest rate charged by Sodexho Pass

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Venezuelan (LIBOR rate) on a loan made to a related party outside Venezuela (a company of the Sodexo Group) was not on arm’s-length terms. The Venezuelan tax authority based its position claiming that when applying the uncontrolled price method and comparing its related party transaction with an uncontrolled transaction, Sodexho Pass Venezuela should have used an active rate such as the Prime rate. In this case, the tax court ruled that Sodexho Pass Venezuela correctly applied the uncontrolled price method when comparing uncontrolled transactions and determining that the LIBOR interest rate charged to its related party (LIBOR) was on arm’s-length terms and thus annulled the transfer pricing adjustment. This case will be decided by the Venezuelan Supreme Court since the ruling was appealed by the Venezuelan tax authority. • In Brightstar de Venezuela v. República Bolivariana de Venezuela (5th Tax Court of Caracas, February 23, 2017) the plaintiff (Brightstar de Venezuela) appealed an adjustment to its taxable profits made under the Venezuelan transfer pricing rules. The Venezuelan tax authority claimed that the plaintiff profitability was not within the profitability range of comparable companies, calculated according to the Transactional Net Margin Method (“TNMM”). The tax auditors analysed the transfer prices of the controlled transaction related to the account “purchase of inventory for distribution” based on the segmented financial information of income and costs for that specific transaction. However, regarding the operational expenses, the tax auditors added other accounting items. In this case, the tax court ruled that Brightstar de Venezuela correctly applied the TNMM and the tax auditors made a mistake since they calculated Brightstar’s profitability for the “purchase of inventory for distribution” based on the information of the transfer pricing return filed by Brightstar, which does not show the segmented financial result of the controlled transaction and should not have been used as the basis of this analysis, breaching the OECD 2010 Guidelines. Moreover, the court ruled that the tax authorities (i) should have analysed each individual transaction when applying the TNM, and (ii) should have taken into account the segmented financial information of the audited transaction as the TNM required, according to the OECD 2010 Guidelines. This case will be decided by the Venezuelan Supreme Court since the ruling was appealed by the Venezuelan tax authority. Foreign exchange control • Currently, the purchase of foreign currency can only be made through two systems set up and managed by the Venezuelan Government: (i) the system created to allocate foreign currency for essential goods controlled by the Venezuelan National Center for Foreign Trade (Cencoex System); and (ii) the Foreign Exchange Complementary System (Dicom system). • As a result of this exchange control regime, there are two exchange rates in Venezuela: (i) the protected foreign exchange rate (Dipro) of Bs. 10 per USD; and (ii) the supplementary floating market exchange rate (Dicom) currently at approximately Bs. 2,200 per USD (this rate is determined by the Venezuelan Central Bank periodically). The Cencoex System and the Dicom are very limited mechanisms and are not currently effective to convert local currency into foreign currency, except with respect to certain limited priority sectors. • However, on May 19, 2017 the Venezuelan Central Bank and the Ministry of Economy and Finance issued the Fx Regulation No. 38 (Convenio Cambiario No. 38), which sets forth the new rules governing the mechanism for auctioning foreign currency through the Dicom System.

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• Individuals and entities can bid directly through the Dicom system website and the result of each auction will be published on the Venezuelan Central Bank’s website, and on the Dicom system website. • Entities are able to purchase a monthly amount equal to 30% of the monthly average gross income reported by the purchasing entities in their Venezuelan income tax return of the immediately preceding year, up to a maximum of USD 400,000. Entities requiring the purchase of foreign currency above these limits may apply to the Auction Committee, which through an ad hoc committee will approve or reject including the bid in ordinary auctions. These special requests may not exceed USD 9,600,000 per year. • Individuals will be able to purchase up to USD 500 each quarter. • Fx Regulation No. 38 abrogates Fx Regulation No. 33 of February 2015 (Simadi system) except for most of the regulations governing the Fx retail market, which will remain in force as applicable. • The exchange controls create a significant distortion in local costs resulting from the differences among the official exchange rates, the illegal black market exchange rate, and local inflation. This may negatively affect foreign companies that need to convert foreign currency into local currency at the official exchange rate.

Attractions for holding companies • Venezuela has a wide network of tax treaties, including the UK and the United States. However, there are no preferential holding company regimes in Venezuela. • Venezuelan resident companies and individuals are generally subject to income tax on their worldwide income at a progressive tax rate of up to 34%. A branch of a foreign company is subject to income tax on its Venezuelan attributable income at a progressive tax rate of up to 34%. Non-resident companies or individuals are subject to Venezuelan income tax on their gross income that is derived from a source within, or deemed to be within, Venezuela, less deductible expenditure. • In general, the income tax is levied on net taxable income, calculated by subtracting the costs and allowable deductions (i.e., salaries, interest, amortisation, depreciation, technical assistance and any expense that is “normal and necessary” to generate income) from annual gross revenue. • In general, any reasonable depreciation or amortisation charge for fixed assets located in Venezuela assigned to income-producing activities is admissible; units of production and straight line depreciation method are admissible, among others. The “exhaustion” amortisation method of depletion is also allowed. • Taxable income must be reported on an accrual basis, except for income from leased property, royalties, dividend distributions, professional fees, wages, salaries and transfer of real estate property which is taxed on a cash receipt basis. • Capital gains obtained by a local corporation for the sale of shares in a non-local affiliate will be subject to income tax in Venezuela as extraterritorial source income of the Venezuelan corporation. • The sale of shares listed in the Venezuelan capital stock is subject to a 1% tax on the gross receipts of the transaction. • The sale of shares of a Venezuelan company by a legal entity is generally subject to a withholding tax of 5%, creditable against the final income tax liability. • In the event that the non-local affiliate is resident in a country that has concluded a Tax Treaty with Venezuela, the tax on capital gains may be reduced or exempted. The following chart summarises the tax treaties currently in effect in Venezuela.

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Country Dividends Interest Royalties Austria 15% or 5% if the 4.95% on interest paid 5% shareholder is an to banks entity that directly 10% other interest controls at least 15% payments of the capital of the distributing entity Barbados 10% or 5% if the 5% on interest 10% shareholder directly payments to banks controls at least 5% 15% other interest of the capital of the payments distributing entity Belarus 15% or 5% if the 5% 5% copyrights and shareholder directly or leases indirectly owns at least 10% other royalties 25% of the capital of the distributing entity

Belgium 15% or 5% if the 10% 5% shareholder directly or indirectly owns at least 25% of the capital of the distributing entity

Brazil 15% or 10% if the 15% 15% shareholder is a corporation that directly or indirectly controls at least 20% of the capital of the distributing entity Canada 10% or 15% if the 10% 5% copyrights except shareholder controls on videos 25% of the capital of 10% other royalties the distributing entity

China 10% or 5% if the 5% on interest 10% shareholder is a payments to banks corporation that 10% other interest directly controls payments at least 10% of the capital of the distributing entity Cuba 15% or 10% if the 10% 5% shareholder is a corporation that directly controls at least 25% of the capital of the distributing entity

Czech Republic 10% or 5% if the 10% 12% shareholder is a corporation that directly controls at least 15% of the capital of the distributing entity

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Country Dividends Interest Royalties Denmark 15% or 5% if the 5% 10% shareholder controls 25% of the capital of the distributing entity France 5% or exempted if the 5% 5% shareholder directly or indirectly owns at least 10% of the capital of the distributing entity

Germany 15% or 5% if the 5% 5% shareholder owns at least 15% of the capital of the distributing entity Indonesia 15% or 10% if the 10% 20% royalty payments shareholder directly 10% technical controls at least 10% assistance fees of the capital of the distributing entity Iran 10% or 5% if the 5% 5% shareholder is a corporation that directly controls at least 15% of the capital of the distributing entity Italy 10% 10% 7% copyrights 10% other royalties Korea 10% or 5% if the 5% on interest 5% lease payments shareholder is a payments to banks 10% on other corporation that 10% other interest distributions directly controls payments at least 10% of the capital of the distributing entity Kuwait 10% or 5% if the 5% 20% shareholder is a corporation that directly owns at least 10% of the capital of the distributing entity Malaysia 10% or 5% if the 15% 10% shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity Netherlands 10% or exempted 5% 5% leases and other if the shareholder royalty payments controls at least 25% 7% trademarks of the capital of the 10% copyrights distributing entity

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Country Dividends Interest Royalties Norway 10% or 5% if the 5% interest paid to 12% royalties shareholder directly banks 9% technical controls 10% of 15% other interest assistance fees the capital of the payments distributing entity Portugal 10% 10% 12% royalties 10% technical assistance fees Qatar 10% or 5% if the 5% 5% shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity

Russia 15% or 10% if the 5% on interest paid to 15% royalties shareholder is a banks 10% technical corporation that 10% other interest assistance fees directly controls payments at least 10% of the capital of the distributing entity and invested at least $100,000 in such entity

Spain 10% or exempted 4.95% on interest 5% if the shareholder payments to financial controls 25% of institutions the capital of the 10% other interest distributing entity payments

Sweden 10% or exempted 10% 10% copyrights if the shareholder 7% other royalties controls at least 25% of the capital of the distributing entity Switzerland 10% or exempted 5% 5% if the shareholder controls at least 25% of the capital of the distributing entity

Trinidad and Tobago 5% of the gross 15% 10% amount of the dividends if the beneficial owner is a company that holds directly or indirectly at least 25% of the capital of the company paying the dividends. 10% in all other cases

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Country Dividends Interest Royalties United Arab Emirates 5% of the gross amount 10% 10% of the dividends if the beneficial owner is a company (other than a partnership) that holds directly at least 10% of the capital of the company paying the dividends. 10% in all other cases

United Kingdom 10% or exempted 5% 7% copyrights if the shareholder 5% other royalties directly or indirectly controls at least 10% of the voting rights of the distributing company

United States 15% or 5% if the 4.95% on interest 5% lease payments shareholder owns paid to financial or 10% other royalty at least 10% of the insurance institutions payments voting shares of the and 10% on other distributing company interest payments

Vietnam 5% or 10% if the 10% 10% shareholder is a corporation that directly controls at least 10% of the capital of the distributing entity

Industry sector focus • Over recent years, the Venezuelan Government has nationalised a number of businesses. The Government has also imposed price controls on many core goods, and significant exchange control restrictions that limit the ability to purchase foreign currency. Venezuela suffered a decline of 3% in GDP during 2014, being the only major Latin American economy to remain in recession. • The tax burden of Venezuelan and foreign companies carrying on economic activities in Venezuela has significantly increased. Income obtained by the Venezuelan Government has become insufficient to subsidise public expenses. By creating new special contributions and by increasing tax rates, the Government aims to obtain more resources to meet public expenses and subsidise social projects.

The year ahead The country will face major challenges during 2017, including: (1) the risk of greater radicalisation of Government policies; (2) potential further deterioration of economic conditions, including an inflation rate estimated at over 2,000% by the IMF; (3) the scarcity of several basic goods and distortions caused by the exchange control regime; (4) political instability; and (5) the possibility of default on the country’s debt in 2017 or 2018. Despite all these setbacks, Venezuela continues to be a country with significant business opportunities for foreign investors willing to assume risks, for a number of reasons:

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• Venezuela is one of the largest Latin American economies, given its status as one of the world’s largest oil producers and exporters, according to the IMF. For this reason, the Venezuelan market is a significant source of profits for several multinational consumer products-makers operating in the country, and Venezuelans spend a relatively high proportion of discretionary income on personal products and services, beverages and tobacco, apparel, communications (mobile and smartphones), TVs and electronic products. In the next few years, imports are expected to increase much faster than exports, together with the expansion of consumer demand. • Venezuela has the fifth-largest proven oil reserves in the world (and the largest in the Western Hemisphere), and the second-largest proved natural gas reserves in the Western Hemisphere. If we include an estimated 235 billion barrels of extra heavy crude oil in the Orinoco Belt region, Venezuela holds the largest hydrocarbons reserves in the world. PDVSA, Venezuela’s oil and gas state-owned company, is one of the world’s largest oil companies. PDVSA has acknowledged that significant additional foreign investment would be required to achieve its production goals. The Government has signed joint venture agreements for the development of oil and gas projects with international partners from China, India, Italy, Japan, Russia, Spain, the United States of America, and Vietnam, among others. All of this creates enormous business opportunities for companies in the oil and gas sector. • Venezuela has signed economic cooperation treaties with several countries, including Brazil, China and Russia, providing an adequate framework for investments in projects by companies from such countries. • Additionally, the country is a party to bilateral investment treaties with several European, Latin American and Asian countries, which provide for adequate compensation in case of expropriation or nationalisation and access to international arbitration in a neutral forum. Despite Venezuela’s withdrawal from the International Centre for Settlement of Investment Disputes, several of the existing bilateral investment treaties permit arbitration under the UNCITRAL Arbitration Rules and the ICSID’s Additional Facility rules. Venezuela is also a party to international treaties to avoid double taxation with several countries that protect investors against certain changes in tax legislation. • In certain cases, the Venezuelan Government has reached agreements with foreign investors in businesses subject to nationalisation and has paid compensation in US dollars. In light of this political and economic environment, doing business in Venezuela involves significant risk, but continues to provide opportunities for investment.

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Alberto I. Benshimol B. Tel: +58 212 264 7376 / Email: [email protected] Alberto Benshimol has been a tax partner in D’Empaire Reyna Abogados since 2005. He has been recognised by Chambers and Partners, Practical Law Review, Who’s Who Legal, and World Tax as a leading Venezuelan tax practitioner and he was also included by Latin Lawyer in the list of top Venezuelan counsel under 40. He received his law degree summa cum laude from Universidad Católica Andres Bello in 1996 and a Master of Laws degree (LL.M.) in international taxation from New York University in 1997. As part of his experience, Alberto was a member of the Venezuelan team that conducted and completed the negotiations of the US-Venezuela Tax Treaty in 1998. In 1997 he was an international associate at Wilmer, Cutler, Pickering, in Washington, DC. He is admitted to practise in Venezuela and in the State of New York.

Humberto Romero-Muci Tel: +58 212 264 6244 / Email: [email protected] Humberto Romero-Muci received his law degree summa cum laude from Universidad Católica Andres Bello in 1985, a Master of Laws degree (LL.M.), and a Diploma in international taxation from Harvard Law School in 1986 and a Ph.D. in law from Universidad Central de Venezuela in 2003. Humberto has been named as one of the most distinguished tax specialists in Venezuela by Chambers and Partners and International Tax Review. He is Chair Professor of tax law in Universidad Católica Andres Bello and Universidad Central de Venezuela. He is also a member of the Venezuelan Academy of Jurisprudence and a former Alternate Supreme Court Justice between 1996 and 2000. He is fluent in Spanish and English.

D’Empaire Reyna Abogados Plaza La Castellana, Edificio Bancaracas, PH, La Castellana, Caracas 1060,Venezuela Tel: +58 212 264 6244 / Fax: +58 212 264 7543 / URL: www.dra.com.ve

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