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Worldwide Tax News

Approved Changes (2)

Canada

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Canada Announces that Delaware and Florida Limited Liability Partnerships will be Treated as Corporations for Tax Purposes

On 26 May 2016, the Canadian Revenue Agency (CRA) announced that it has taken the position that limited liability partnerships (LLP) and limited liability limited partnerships (LLLP) organized under the laws of the U.S. states of Delaware and Florida will be treated as corporations for tax purposes. The reasoning for the treatment as corporations is based on the separate legal personality and extensive limited liability of the two forms. However, CRA will be willing to treat existing LLPs and LLLPs as partnerships if certain conditions are met, including that:

  • The LLP or LLLP was formed and began to carry on business before July 2016;
  • The LLP or LLLP is converted to a partnership form recognized by the CRA before 2018;
  • The LLP or LLLP was never converted from an entity form treated as a corporation by the CRA;
  • The LLP or LLLP (or any of its members) has never taken a position with the CRA that the entity was anything other than a partnership; and
  • It is clear based on surrounding facts and circumstances that the members of the LLP or LLLP are carrying on business in common with a view to profit, and intended to create an entity that would be treated as a partnership.

Since the CRA announcement only mentions Delaware and Florida, it is unclear whether the CRA intends to take a similar position on similar entities formed under the law of other U.S. states. CRA is expected to issue additional guidance on the matter in the near future.

Hong Kong

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Hong Kong Publishes New and Revised Practice Notes on Profits Tax Exemption for Offshore Private Equity Funds

On 31 May 2016, Hong Kong Inland Revenue published new and revised practice notes to take into account the extension of the profits tax exemption for offshore funds to offshore private equity funds, which was approved in July 2015 (previous coverage).

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The Inland Revenue Department today issued the Departmental Interpretation and Practice Notes No. 51 (Profits Tax Exemption for Offshore Private Equity Funds) which sets out the Department’s interpretation and practice in relation to the relevant provisions in the Inland Revenue (Amendment) (No. 2) Ordinance 2015. The amendment ordinance was principally enacted to extend the profits tax exemption for offshore funds to offshore private equity funds. The Departmental Interpretation and Practice Notes No. 43 (Revised) (Profits Tax Exemption for Offshore Funds) has also been updated to reflect the legislative changes brought about by the amendment ordinance.

Proposed Changes (2)

Malawi

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Malawi Budget 2015/2016 Presented to the National Assembly

On 27 May 2016, Malawi's Minister of Finance Goodall Gondwe presented the draft Budget 2016/2017 to the National Assembly. The main tax-related measures of the Budget include:

  • Extending the standard 16.5% value added tax (VAT) rate to several products that are currently zero-rated or exempt in order to expand the tax base and reduce the administrative burden of processing and providing related refunds;
  • Allowing companies engaged in mining activities to register for VAT during the exploration phase so they may claim VAT incurred (companies may generally not register for VAT until they begin providing taxable goods and services);
  • Treating multiple mining projects separately for tax purposes, even if operated by the same company;
  • Abolishing the reduced 21% corporate tax rate for insurance companies (standard 30% rate would apply); and
  • Requiring taxpayers to produce tax clearance certificates before concluding transactions with government ministries, departments, etc., in order to improve compliance.

Pending approval by the National Assembly, the measures are to apply from 1 July 2016.

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OECD Issues Public Discussion Draft on the Multilateral Instrument to Implement Tax-Treaty Related BEPS Measures

On 31 May 2016, the OECD issued a public discussion draft on the Multilateral Instrument to implement the tax-treaty related measures of the BEPS Project. The Multilateral Instrument is being developed by an Ad Hoc Group of 96 countries, and will provide for a consistent and efficient implementation of the measures, which would otherwise require separate negotiations to amend each of the thousands of existing bilateral tax treaties. The particular BEPS measures to be implemented include:

  • The measures developed under Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements), including (1) the revision of Article 1 (Persons Covered) of the OECD Model Tax Convention to address fiscally transparent entities; and (2) the measures to address issues with the application of the exemption method to relieve double taxation;
  • The measures developed under Action 6 (Preventing the granting of treaty benefits in inappropriate circumstances), including the minimum standard on treaty abuse, the introduction of a "saving clause" to make explicit that treaties do not restrict a State’s right to tax its own residents, and the specific anti-abuse rules related to (1) certain dividend transfer transactions; (2) transactions involving immovable property holding companies; (3) situations of dual-resident entities; and (4) treaty shopping using third-country PEs;
  • The measures developed under Action 7 (Preventing the Artificial Avoidance of PE Status), including (1) the measures to address commissionaire arrangements and similar strategies; (2) the modifications to the specific activity exemptions under Article 5(4) of the OECD Model and the addition of an anti-fragmentation rule; and (3) the measures to address the splitting-up of contracts to abuse the exception in Article 5(3) of the OECD Model;
  • The measures included in the minimum standards and best practices produced under Action 14 (Making Dispute Resolution Mechanisms More Effective), including the changes to paragraphs 1 through 3 of Article 25 of the OECD Model, as well as the inclusion of paragraph 2 of Article 9 of the OECD Model.

The discussion draft seeks comments on the technical issues that may arise in relation to implementing the above measures through the Multilateral Instrument.

Click the following link for the discussion draft. Comments are due by 30 June 2016.

Treaty Changes (5)

Costa Rica-Italy

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TIEA between Costa Rica and Italy Signed

On 27 May 2016, officials from Costa Rica and Italy signed a tax information exchange agreement. The agreement is the first of its kind between the two countries and is in line with the OECD standard for information exchange. It will enter into force after the ratification instruments are exchanged.

Estonia-Belgium-Canada-Denmark-Finland-France-Hungary-Iceland-Italy-Ireland-Netherlands-Spain-Sweden-Switzerland-United Kingdom

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Impact of Protocol to Estonia's Tax Treaty with Switzerland on Other Treaties

As previously covered, Irish Revenue announced on 4 May 2016 that the MFN clause in its tax treaty with Estonia was triggered effective 1 January 2016 by the 2014 protocol to the Estonia-Switzerland tax treaty, resulting in a 0% withholding tax rate for royalties. While similar announcements have not been made by Estonia's other tax treaty partners, for the treaties that have relevant MFN clauses, the 0% royalty rate also applies. In addition to Ireland, the affected treaties and date of effect are as follows:

  • 1999 Belgium treaty, effective from 1 January 2016;
  • 1995 Canada treaty, effective from 1 January 2016;
  • 1996 Denmark treaty, effective from 1 January 2016;
  • 1993 Finland treaty, effective from 1 January 2016;
  • 1997 France treaty, effective from 16 October 2015;
  • 2002 Hungary treaty, effective from 1 January 2016;
  • 1994 Iceland treaty, effective from 1 January 2016;
  • 1997 Italy treaty, effective from 1 January 2016;
  • 1997 Netherlands treaty, effective from 1 January 2016;
  • 1993 Norway treaty, effective from 1 January 2016;
  • 2003 Spain treaty, effective from 1 January 2016;
  • 1993 Sweden treaty, effective from 1 January 2016; and
  • 1994 United Kingdom treaty, effective from 16 October 2015.

In addition to the effect of the Estonia-Switzerland protocol on royalty withholding rates, the protocol also reduced the withholding rate on interest to 0%, which triggers the relevant MFN clauses of Estonia's treaties with France, Spain and the United Kingdom. The effects are as follows:

  • For the treaty with France, the 0% rate applies for interest paid in respect of any kind of loan granted by a bank;
  • For the treaty with Spain, the 0% rate applies for all interest payments; and
  • For the treaty with the United Kingdom, the 0% rate applies for interest paid in respect of a loan made, guaranteed or insured by a financial institution of a public character.

The interest withholding tax changes apply for the respective treaties from the same dates as the 0% rate for royalties listed above.

Portugal-Vietnam

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Update - Tax Treaty between Portugal and Vietnam

The income tax treaty between Portugal and Vietnam was signed on 3 June 2015. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Portuguese personal income tax, corporate income tax, and surtaxes on corporate income tax. It covers Vietnamese personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when 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.

Withholding Tax Rates

  • Dividends -
    • 5% if the beneficial owner is a company that directly owns at least 70% of the paying company's capital;
    • 10% if the beneficial owner is a company that directly owns at least 25% of the paying company's capital;
    • Otherwise 15%
  • Interest - 10%
  • Royalties - 10%
  • Technical Fees (managerial, technical or consultancy services) - 7.5%

Capital Gains

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 movable property forming part of the business property of a permanent establishment in the other State;
  • Gains from the alienation of shares or comparable interests in a company, the property of which consists directly or indirectly of more than 50% of immovable property situated in the other State; and
  • Gains from the alienation of shares or comparable interests representing a participation of at least 25% in a company resident 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.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Limitation on Benefits

The protocol to the treaty, signed the same date, includes that the benefits of the treaty will not be granted to a resident of a contracting state that is not the beneficial owner of the income. The protocol also includes that that provisions of the agreement will not apply if the main purposes or one of the main purposes of any person concerned with the creation or assignment of the property or right in respect of which the income is paid was to take advantage of those provisions by means of such creation or assignment.

MFN Clause

The protocol to the treaty includes that if Vietnam enters into a tax treaty with an EU Member State after the Portugal-Vietnam treaty enters into force, and such other treaty provides for a lower withholding tax rate or exemption for dividends, interest or royalties, such lower rates will automatically replace the rates provided in the Portugal-Vietnam treaty from the date such other treaty enters into force.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

South Africa-Andorra-Brunei-Isle Of Man-Jamaica-Macao-Maldives-Marshall Isl-Panama-Saint Lucia

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South Africa Negotiating TIEAs with Andorra, Brunei, Isle of Man, Jamaica, Macau, Maldives, Marshall Islands, Panama, and St. Lucia

According to a recent update from the South African Revenue Service, negotiations are ongoing for tax information exchange agreements with Andorra, Brunei, Isle of Man, Jamaica, Macau, Maldives, Marshall Islands, Panama, and Saint Lucia. Any resulting agreements will be the first of their kind between South Africa and the respective jurisdictions, and must be finalized, signed and ratified before entering into force.

Uganda-OECD

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Uganda Deposits Ratification Instrument for Mutual Assistance Convention

On 26 May 2016, Uganda deposited the ratification instrument for the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. Uganda signed the convention as amended on 4 November 2015.

According to the OECD overview of signatories to the convention, the convention will enter into force in Uganda on 1 September 2016.

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