Worldwide Tax News
AG Opinion Issued on whether Belgian Rules Restricting Interest Deductions Violates Parent-Subsidiary Directive
On 27 April 2017, an opinion was issued from Advocate General (AG) Kokott of the CJEU on whether the EU Parent-Subsidiary Directive conflicts with a Belgian rule according to which interest payments by a company are non-deductible to the extent that in the same tax year it receives exempted dividends from holdings that have been owned by the company for less than a year.
The case involves Belgian-based credit institution Argenta Spaarbank, which in the financial years 1999 and 2000 (tax years 2000 and 2001) incurred interest expense and also received dividends from company shares that had been held for less than a year. The interest paid was not connected with loans for the purchase of the holdings in question. However, in applying the provision of Article 198(10) of the Income Tax Code, the Belgian tax administration disallowed as a deduction the amount of interest expense equal to the amount of the dividend income. Argenta appealed, arguing that the application of that provision must be limited to cases in which there is a causal relationship between the interest and the dividends for which a deduction is being claimed.
In reviewing the case, the Belgian Court of First Instance decided to refer to the CJEU for a preliminary ruling on whether Article 198(10) conflicts with the Parent-Subsidiary Directive as in force for the tax years 2000 and 2001. In particular, whether Article 198(10) violates the Directive and whether Article 198(10) can be considered a provision for the prevention of tax evasion and abuses within the meaning of the Directive given that the interest payments do not need to relate to the holding from which the dividends qualifying for exemption were derived.
In the opinion, the AG holds the view that Article 198(10) does not violate the Parent-Subsidiary Directive on the basis of the exemption clause in the second indent of Article 3(2), which provides that Member States have the option of exempting their companies from the Directive if they have not remained in possession of a holding for an uninterrupted period of at least two years. As such, the opinion proposes that the CJEU answer the request for a preliminary ruling as follows:
- Directive 90/435/EEC does not preclude a legislative provision of a Member State such as Article 198(10) of the Belgian Income Tax Code of 1992, according to which interest up to the level of an amount corresponding to the amount of the exempted dividends received by a company on shares that it has not held for an uninterrupted period of at least one year at the time of their transfer is not to be considered a business expense.
However, should the CJEU not regard Article 198(10) as being covered by the second indent of Article 3(2) of the Directive, the AG proposes that the request be answered in the alternative as follows:
- Article 4(2) of Directive 90/435/EEC precludes a legislative provision of a Member State such as Article 198(10) of the Belgian Income Tax Code of 1992, according to which interest costs up to the level of exempted dividend income from holdings generally cannot be claimed as decreasing profits, without account being taken of whether the interest is causally connected to those holdings. Nor does such a provision constitute a provision of national law for the prevention of tax evasion and abuses whose application is not precluded under Article 1(2) of Directive 90/435/EEC.
Click the following link for the full text of the opinion.
Danish Tax Tribunal Issues Ruling Highlighting Importance of Complete Transfer Pricing Documentation
The Danish National Tax Tribunal has recently issued a ruling concerning transfer pricing adjustments based on estimated assessments in cases where the required transfer documentation for a taxpayer is inadequate. Under Danish law, transfer pricing documentation is to be submitted upon request from the tax authority (typically within 60 days). In the event the documentation is not submitted or does not fulfill the documentation requirements, that tax authority is allowed to make an adjustment based on an estimated assessment.
The case involved a Danish production and sales company in the construction industry and its foreign branch, which is engaged in sales and project development and design. For the years 2006-2009 the tax authority requested the submission of transfer pricing documentation, which the company submitted, but without a comparative analysis. The company claimed that due to the closed nature of the industry, it was impossible to perform a meaningful analysis. Despite the company's reasoning, the tax authority determined that the documentation submitted was inadequate to serve as a basis of assessment on whether prices and terms are at arm’s length. As such, the tax authorities made an estimated assessment using their own benchmark analysis and made a transfer pricing adjustment accordingly, which was appealed
In its ruling, the Tax Tribunal found in favor of the tax authority. The tribunal found that the transfer pricing documentation was inadequate for determining the arm's length price and that the tax authority was justified in making an estimated assessment. However, some relief was granted for the company as it had successfully proven that the branch carried more specialized functions than most of the companies in the benchmark-analysis, and therefore the Tribunal ruled that it is comparable with the companies included in the third quartile of the analysis.
The Greek Public Revenue Authority has issued Circular POL 1049/2017, which regulates the Mutual Agreement Procedure (MAP) under applicable tax treaties for cases where a person considers that the actions of one or both Contracting States have resulted in taxation not in accordance with the provisions of the applicable treaty. The Circular is the result of recent amendments to the Greek Tax Procedure Code allowing the tax authority to authorize and ratify MAP agreements. The Circular sets out the details for MAP requests, including the competent authority, the timing and admissibility of requests, the content of a request, the evaluation of a request, the consultation between competent authorities, and other related matters. In addition, MAP guidelines (Greek language) have been published that provide additional details on the MAP procedure.
On 24 April 2017, the India Supreme Court issued its decision on whether Formula One World Championship Ltd. (FOWC) had a permanent establishment (PE) for its races held in India at Buddh International Circuit in 2011, 2012, and 2013. The case involved UK based FOWC and India based Jaypee Sports International Ltd. (Jaypee), which had entered into a five-year race promotion agreement in September 2011 under which FOWC granted Jaypee the right to host, stage, and promote Formula One Grand Prix of India races for a consideration of USD 40 million. In addition, an artworks license agreement was entered into for the use of certain marks and IP belonging to FOWC for a consideration of USD 1 million
After the agreements were entered into, FOWC and Jaypee applied to the Authority for Advance Rulings (AAR) for an advance ruling on whether the consideration paid to FOWC was a royalty under the India-UK tax treaty and whether the FOWC had a permanent establishment in India under the treaty. In reviewing the application, the AAR found that the consideration paid is a royalty subject to tax at source, but that FOWC does not have a PE in India. Both conclusions were challenged, with FOWC and Jaypee challenging that the consideration was a royalty and the Indian tax authority challenging that FOWC did not have a PE. The challenges were heard by the Delhi High Court, which essentially reversed the AAR conclusions. The High Court found that the consideration was not a royalty since the consideration was only paid for the facilitation of the races, but the FOWC did have a fixed place PE in India. FOWC then appealed the High Court decision with respect to the existence of the PE.
In its appeal, FOWC argued it could not have a fixed-place PE because in neither had a fixed place of business nor regularly carried on business in India (races take places three days out of the year), and did not have full access to the track where the races took place. Further, FOWC argued that there was no link between the consideration and a fixed-place PE because Jaypee had complete control of the event and conducted the race-related activities.
In its decision, the Supreme Court upheld the decision of the High Court, finding that FOWC did have a fixed place PE in India. Despite the fact that the race is only for a few days, the Supreme Court found that that FOWC activities met all the conditions for a PE in India, including the existence of an enterprise; the carrying on of a business; and the existence of a fixed place of business (the circuit), which is at the disposal of FOWC. In meeting the conditions for a PE, the Court notes several aspects of the agreements, including that FOWC had final approval on the constructions of the circuit itself, the requirements for unrestricted access for FOWC employees and affiliates, and the strict requirements regarding audio and video and other aspects of the races, which extremely restricted Jaypee in its capacity to act as a promoter. With the existence of a PE established, the case goes back to the tax authority to determine how much of FOWC's income is attributable to the PE.
Jersey has published the Finance (2017 Budget) (Jersey) Law 2017 as enacted on 21 April 2017. The law includes the budget measures approved by the States Assembly in December 2016 (previous coverage), including the introduction of unilateral double taxation relief and the alignment of the information return deadline with the corporate tax return deadline (31 December).
Slovenia Consulting on Regulation for Implementing Amendments to Tax Procedures Act including for CbC Reporting
The Slovenia Ministry of Finance has opened a public consultation that ends 5 May 2017 on a draft regulation proposal for the implementation of certain aspects of amendments to the Tax Procedures Act, including in relation to the information submission requirements for Country-by-Country (CbC) reporting, U.S. FATCA, and the OECD Common Reporting Standard (CRS). With regard to Slovenia's CbC reporting requirements (previous coverage), the regulation proposal details the required content and submission of both the CbC notification and the CbC report. The CbC notification on the reporting entity for a group is to be submitted in electronic form together with the notifying entity's corporate tax return. The CbC report must also be submitted in electronic form using the prescribed OECD CbC XML schema via the eDavki online services website.
On 27 April 2017, both the Finance Act 2017 and the UK Criminal Finances Act 2017 received Royal Assent (were enacted). As previously reported, the Finance Act as passed contains mostly standard annual provisions, such as the setting of the income and corporation tax charge and rates, while several important measures were removed, such as those related to the use of losses and interest deduction restrictions (still expected in future legislation). In addition to the tax charge and rates, the Finance Act also includes various provisions regarding the taxation of employee remuneration and pensions income, certain value added tax and excise duty changes, provisions regarding tax avoidance schemes enablers, and the introduction of the soft drinks industry levy from April 2018.
The Criminal Finances Act 2017 includes measures to improve the government’s ability to tackle money laundering and corruption, recover the proceeds of crime, and counter terrorist financing (previous coverage). One of the main measures of the bill affecting corporate taxpayers is the introduction of a corporate criminal offense when a relevant body fails to prevent an associated person from criminally facilitating the evasion of a tax, whether the tax evaded is owed in the UK or in a foreign country. For this purpose, a relevant body means an incorporated body or partnership, regardless of whether it is established under UK law or the law of a foreign jurisdiction. An associated person means an employee, agent or other person who performs services for or on behalf of the relevant body, and can be an individual or an incorporated body. The corporate criminal offense measures will enter into force on whatever day or days the Treasury appoints by regulations made by statutory instrument, which is expected September 2017.
According to a recent article in the Russian government gazette, the government will be moving forward with plans to reduce the combined social security contribution rate from 30% to 22% while offsetting the cut with an increase in the standard value added tax (VAT) rate from 18% to 22%. The planned changes are to take effect from 1 January 2019.
On 27 April 2017, officials from Kosovo and Switzerland concluded negotiations with the initialing of a social security agreement. The agreement will be the first of its kind directly between the two countries, although the 1962 agreement between Switzerland and the former Yugoslavia had applied in respect of Kosovo until its application was terminated in 2010. According to a release from the Kosovo Ministry of Labour and Social Welfare, the agreement is to be signed in the second part of 2017.
The income and capital tax treaty between Luxembourg and Ukraine, as well as the amending protocol, entered into force on 18 April 2017. The treaty, signed 6 September 1997, is the first of its kind between the two countries. The amending protocol was signed 30 September 2016.
The treaty covers Luxembourg income tax on individuals, corporation tax, tax on fees of directors of companies, capital tax, and communal trade tax. It covers Ukrainian tax on profits of enterprises and individual income tax.
The amending protocol adds the provision that a permanent establishment will be deemed constituted if an enterprise furnishes services in a Contracting State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 6 months within any 12-month period
- Dividends - 5% if the beneficial owner is a company directly holding at least 20% of the paying company's capital; otherwise 15% (the amending protocol deleted a provision allowing for an exemption if the beneficial owner held at least 50% of the paying company's capital for at least 3 years and the investment is at least USD 1 million)
- Interest - 5% for interest paid on any loans of whatever kind granted by a bank or any other financial institution, including investment banks and saving banks, and insurance companies; otherwise 10% (the amending protocol changed the rate for bank loans from 2% to 5%)
- Royalties - 5% for royalties paid for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for information (know-how) concerning industrial, commercial or scientific experience; 10% for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting)
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
- Gains from the alienation of immovable property situated in the other State;
- Gains from the alienation of shares or interest in a partnership deriving the greater part of their value directly or indirectly from immovable property situated in the other State (exemption for shares quoted on an approved stock exchange); and
- Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State.
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Ukraine applies the credit method for the elimination of double taxation. Luxembourg generally applies the exemption method, but will apply the credit method in respect of income covered by Articles 10 (Dividends), 11 (Interest), and 12 (Royalties). However, Luxembourg will exempt dividends received by a Luxembourg resident company if the resident company has directly held, since the beginning of its accounting year, at least 10% of the paying company's capital and the paying company is subject to an income tax in Ukraine corresponding to the Luxembourg corporation tax.
Aside from the amendments regarding service PEs and withholding tax on dividends and interest, the amending protocol also makes the following main changes:
- Article 26 (Exchange of Information) is replaced to bring it in line with the OECD standard for information exchange; and
- Article 28 (Exclusion of Certain Companies) is deleted and the following Articles are renumbered accordingly (Article 28 excluded holding companies within the meaning of special Luxembourg laws from the application of the treaty).
The treaty and amending protocol apply from 1 January 2018.
According to recent reports, the U.S. IRS has entered into bilateral competent authority agreements (BCAA) for the exchange of Country-by-Country (CbC) reports with the Netherlands and one other yet to be named country. The agreements are needed for U.S. based MNEs to avoid local filing requirements in the relevant countries they operate in, including for fiscal years for which CbC reports are filed in the U.S. voluntarily. A separate CBC BCAA will be needed with each jurisdiction that has adopted CbC reporting requirements.
Information on U.S. CbC BCAA's is to be made available on the IRS CbC Reporting Guidance webpage. Additional details will be published once available.