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Approved Changes (1)
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OECD Issues Discussion Draft for BEPS Project Action 3

On 3 April 2015, the OECD released a discussion draft for Action 3 (Strengthening CFC Rules) of the Base Erosion and Profiting Shifting (BEPS) Project.

This discussion draft considers all the constituent elements of CFC rules and breaks them down into the “building blocks” that are necessary for effective CFC rules. The majority of these building blocks include recommendations, and the building block that does not yet include a recommendation discusses possible options that could be included in effective CFC rules. The discussion draft also identifies specific questions where input is required in order to advance the work on CFC rules. The options and recommendations included in this discussion draft do not represent the consensus view of the Committee on Fiscal Affairs (CFA) or its subsidiary bodies, but they are intended to provide stakeholders with substantive options for analysis and comment.

Click the following link for the Action 3 discussion draft.

Comments should be submitted by 1 May 2015. A public consultation meeting will be held 12 May 2015 at the OECD Conference Centre in Paris.

Proposed Changes (2)

Belgium

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Belgium Announces New Tax Measures for Liquidation Reserves for SMEs and Withholding Tax on Dividends Paid to EEA States

On 30 March 2015, the Belgian government announced new tax measures. The two main measures for corporate taxpayers are in regard to the liquidation reserve for SMEs and withholding tax on dividends paid to European Economic Area (EEA) Member States.

Liquidation Reserve for SMEs

The transitory regime introduced with the increase in the withholding tax on liquidation gains from 10% to 25% that was expanded for SMEs from 2015, has been extended to also apply for 2013 and 2014. The regime for SMEs includes that up to 100% of after tax profits can be allocated to a liquidation reserve subject to a non-deductible tax of 10%. The reserve can then be distributed tax-free upon liquidation. However, if such reserve is distributed prior to liquidation, a 15% withholding tax will apply if distributed within 5 years of its creation, and a 5% withholding tax will apply if distributed after 5 years.

Dividends Withholding Tax

A new dividends withholding tax rate of 1.69% is introduced for dividends paid by Belgian resident companies to shareholder's resident in EEA Member States, when the shareholder holds less than 10% of the capital of the paying company and the acquisition value of the participation is higher than EUR 2.5 million.

The change is the result of a decision by the Court of Justice of the European Union that Belgium's participation exemption for resident shareholders but not nonresident shareholders was an infringement of the free movement of capital. The Belgium participation exemption is 95% when shareholding is less than 10% but the participation value is EUR 2.5 Million or more, resulting in an effective rate of 1.69%.

Switzerland

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Swiss Federal Council Issues Announcement on Corporate Tax Reform III

On 2 April 2015, the Swiss Federal Council issued an announcement that the parameters for Corporate Tax Reform III legislation have generally been set. The tax reform package includes adjustments made following a public consultation launched in September 2014.

According to the announcement, the aim of the corporate tax reform is to consolidate international acceptance of Switzerland as a business location and secure the legal framework. Further measures are designed to improve the system of corporate tax legislation and its balance. The reform will ensure that companies continue to make an important contribution to financing the tasks of the federal government, the cantons and the communes in the future.

Key measures include:

Abolishing Special Corporate Tax Regimes

Special corporate tax regimes that are no longer in keeping with international standards will be abolished, including the cantonal tax statuses for holding, domiciliary and mixed companies. Companies benefiting from lower tax rates under a special regime and those migrating to Switzerland will be allowed to step up the tax basis of their assets to their fair market values and to amortize those assets on a straight-line basis over 10 years for cantonal or communal tax purposes.

Reduction of Cantonal Corporate Tax Rates

The headline corporate tax rates of several cantons will be reduced to offset the effects of terminating the beneficial regimes (current rates range from 12% to 24%).

Patent Box

A broad patent box regime will be introduced at the cantonal level that will encompass income embedded in the sales price of a product, provided the Swiss company substantially contributed to the development of a patent related to the product. Each canton will be able to set the tax exemption rate of the patent income for cantonal/communal tax purposes. The specifics of the regime will be modified based on the latest international developments. Mainly those resulting from the current OECD work on patent regimes as part of the Base Erosion and Profit Shifting project.

Other measures include:

  • The cantons will be allowed to apply a higher deduction for research and development expenditures;
  • The cantons will be allowed to introduce targeted capital tax reductions;
  • The issuance tax on equity capital contributions will be abolished; and
  • The relief associated with the partial taxation of dividends is to be harmonized for the Confederation and the cantons, and limited to 30%

Measures Removed

Tax measures in the original proposal that will not be part of the Corporate Tax Reform III package include:

  • The capital gains tax on individuals;
  • The notional interest deduction on surplus equity;
  • The change for loss carry-forwards from a 7 year limit to unlimited; and
  • The change from an indirect to a direct participation regime

Reform Timing

The Swiss Federal Department of Finance will prepare a dispatch for Parliament by June 2015, and once adopted, the bill will be ready for parliamentary deliberation. The final enactment of the reform legislation is not expected until 2019.

Treaty Changes (2)

Cameroon-South Africa

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Update - Tax Treaty between Cameroon and South Africa

An income tax treaty between Cameroon and South Africa was signed on 19 February 2015. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Cameroon personal income tax, company tax, minimum tax on companies and individuals, special tax on income, and the housing loans fund tax and the employment fund tax. It Covers South African normal tax, withholding tax on royalties and the tax on foreign entertainers and sportspersons.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement. If the authorities cannot reach mutual agreement, the company will be considered outside the scope of the treaty, except for the provisions of Article 27 (Exchange of Information).

Service PE

The treaty includes the provision that a permanent establishment (PE) will be deemed constituted when an enterprise of one Contracting State furnishes services in the other State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 183 days in any 12 month period.

A PE will also be deemed constituted when an enterprise provides services, or supplies equipment and machinery on hire used or to be used, in exploration for, extraction of, or exploitation of mineral resources in a Contracting State, but only when such activities continue for the same or connected project for a period or periods aggregating more than 183 days in any 12 month period.

Withholding Tax Rates

  • Dividends - 10% if the beneficial owner is a company holding at least 25% of the paying company's capital, otherwise 15%
  • Interest - 10%
  • Royalties - 10%
  • Capital Gains - generally exempt, except for gains for the alienation of immovable property, gains from the alienation of movable property forming party of the business property of a permanent establishment or fixed base, and gains from the alienation of shares deriving more than 50% of the value directly or indirectly from immovable property situated in a Contracting State
  • Fees for Technical Services - 10% on payments of any kind in consideration for any services of a technical, managerial or consultancy nature

Double Taxation Relief

Cameroon generally applies the exemption method, while South Africa applies the credit method. However, in regard to dividends, interest and royalties, Cameroon applies the credit method.

MFN Clause

A protocol to the treaty, signed the same date, includes the provision that if Cameroon enters into a tax treaty with any other state that provides for a lower rate of tax on interest, royalties or fees for technical service, Cameroon must inform South Africa and enter into negotiations to provide comparable treatment.

The protocol also includes the provision that if South Africa enters into a tax treaty with any other state that provides for a higher rate of tax on for interest, royalties or fees for technical service, South Africa must inform Cameroon and enter into negotiations to provide comparable treatment.

Entry into Force and Effect

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

Cyprus-Malaysia

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Tax Treaty between Cyprus and Malaysia under Negotiation

During a meeting held 31 March 2015, officials from Cyprus and Malaysia agreed to begin negotiations for an income tax treaty. Any resulting treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

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