Worldwide Tax News
China Amends Documentation and Other Rules for Special Tax Treatment of Reorganizations
On 30 June 2015, China's State Administration of Taxation issued Public Notice (2015) 48, which amends the rules for special tax treatment (no recognition of gain or loss) available for corporate reorganizations. The changes apply for tax years beginning in 2015.
Under Notice 48, the special tax filing for approval of special tax treatment is no longer required. In order to apply special tax treatment, the parties to a reorganization are required to submit designated forms, schedules, and supporting documents when filing their annual tax returns for the tax year in which the reorganization is completed. The dominant party to the transaction must submit a report explaining the business purpose of the reorganization, including:
- The method of reorganization and the result;
- The change in each party's tax and financial position as a result of the reorganization; and
- Whether non-resident enterprises were involved in the reorganization
If a party to a merger or corporate division results in corporate liquidation, the documentation must be submitted before the tax liquidation process.
The definition of parties to a reorganization, dominant party, and reorganization date are provided in Notice 48 as follows.
- The debtor and creditor in a debt restructuring;
- The transferor, transferee, and acquired entity in an equity acquisition;
- The seller and buyer in an asset acquisition;
- The seller and buyer of the assets and liabilities and the shareholders of the seller in a merger; and
- The seller and buyer of the assets and the shareholders of the seller in a corporate division
The notice also states that individual persons may be a party to a reorganization, but the special tax treatment is not available for such party and the standard rules for individual income taxation apply.
- The debtor in a debt restructuring;
- The transferor in an equity acquisition (if there is more than one, the dominant party is the transferor who sells the highest percentage of equity in the transaction);
- The seller in an asset acquisition;
- The seller of the assets and liabilities in a merger (if there is more than one, the dominant party is the seller with the greatest equity value); and
- The seller of the assets in a corporate division
- In a debt restructuring, the date on which the reorganization agreement or court decision takes effect;
- In an equity acquisition, the date on which the equity acquisition agreement takes effect and the change of ownership of the equity is completed;
- In an asset acquisition, the date on which the asset acquisition agreement takes effect and the parties to the asset acquisition have made the necessary adjustment to accounting records;
- In a merger, the date on which the merger agreement takes effect, the parties to the merger have made the necessary adjustment to accounting records, and the procedural registration or change for the merger has been completed; and
- In a corporate division, the date on which the corporate division agreement takes effect, the parties to the merger have made the necessary adjustment to accounting records, and the procedural registration or change for the separation has been completed
Under China's reorganization rules, if a reorganization involves the transfer of equity or assets in two or more steps within a 12-month period before or after the reorganization, the transactions may be treated as a single transaction. In the case of such step transactions, Notice 48 states that the parties to the reorganization are allowed to temporarily apply special tax treatment in the year of the first step if it is expected that the entire reorganization will meet the conditions for special tax treatment.
The parties must submit the required documentation with their annual tax return for that first year and report whether there were other related transfers of assets or equity in the past 12 months. If there were, the party must explain whether the current reorganization and the past transactions are considered a single transaction. The parties must also report in the second year when the reorganization steps are complete, and determine if the reorganization meets the requirement for special tax treatment. If the requirements are not met, the tax return of the previous year is adjusted.
See China Amends Rules Concerning Special Tax Treatment for Corporate Reorganizations for the general conditions (tests) for special tax treatment.
Portugal's New Tax Regime for Undertakings for Collective Investment has Entered into Force
Portugal's new tax regime for undertakings for collective investment (UCI) (Decree-Law No. 7/2015) entered into force on 1 July 2015 and generally applies from that date.
The new regime applies to the following Portuguese UCI types:
- Securities investment funds (fundos de investimento mobiliário);
- Real estate investment funds (fundos de investimento imobiliário);
- Securities investment companies (sociedades de investimento mobiliário); and
- Real estate investment companies (sociedades de investimento imobiliário)
Under the new regime, UCIs are not subject to withholding tax, and investment income, capital gains and rental income is not included in taxable profits unless it originates from entities resident or domiciled in jurisdictions included on Portugal's blacklist. Costs incurred in relation to excluded income are also not considered in determining taxable profits.
Taxable profits are taxed based on the net profit for the financial year in accordance with the corporate income tax rules. The standard corporate tax rate (21%) applies, but UCIs are not subject to the municipal surcharge or state surcharge. Tax losses may be carried forward up to 12 years.
In addition, UCIs are subject to a stamp tax based on its global net asset value. A 0.0025% rate applies for UCIs investing exclusively in monetary market instruments and deposits. For other UCIs, the stamp tax rate is 0.0125%. The stamp tax must be self-assessed and paid quarterly.
The taxation of investor income from a UCI depends on the residence of the investors and the UCI type.
For individual investors resident in Portugal, income distributed by a UCI or derived from the redemption of units or shares of a UCI is subject to final withholding tax at a rate of 28%. For corporate investors resident in Portugal, a 25% non-final withholding tax applies. However, if the corporate investor benefits from an investment income tax exemption, the withholding tax is final.
For both individual and corporate non-resident investors, income distributed by a securities investment UCI or derived from the redemption of units or shares is tax exempt as long as evidence is provided for their non-resident status and they do not have a permanent establishment in any Portuguese territory to which the income may be attributed. Income derived from a real estate investment UCI is subject to tax at a rate of 10%.
If a non-resident fails to meet the general conditions, is resident in a black-listed jurisdiction, or is directly or indirectly held by a Portuguese resident (25% or more), then the exemption or 10% rate will not apply. In such cases, a final withholding tax of 25% will apply for corporate investors, 28% for individuals, and 35% if resident in a black-listed jurisdiction.
Sri Lanka Issues Notice on Transfer Pricing Documentation Rules
Sri Lanka's Inland Revenue Department has issued a notice on the country's transfer pricing (TP) documentation rules.
One of the key aspects of the notice is that beginning with the 2015-2016 tax year, companies meeting the related party transaction thresholds will be required to submit with their tax return a certified statement by an approved auditor that their TP documentation was reviewed and that the transactions comply with the arm's length principle. A certified statement from the management of the company must also be submitted.
Companies must also submit an informative statement on related party transactions, including:
- The identity of each related party;
- A description of the business carried on with the related party;
- Details of the transactions with each related party, including the amount of remuneration; and
- The TP methods used to determine the arm's length price
The general related party transactions thresholds are an aggregate annual value of LKR 100 million (~USD 748,000) for transactions with non-residents and LKR 50 million (~USD 374,000) for domestic.
European Union-Austria-Belgium-Estonia-France-Germany-Greece-Italy-Portugal-Slovak Republic-Spain-Slovenia
Progress on EU Financial Transactions Tax
On 18 June 2015, a meeting was held between the finance ministers of the 11 EU Member States supporting the introduction of a financial transactions tax (FTT). Although details are limited, progress was reportedly made on coming to an agreement on an FTT proposal, and final agreement should be reached by the end of the year.
Norway Launches Consultation on Exempting EEA Member State Residents from VAT Representative Requirement
Norway's Ministry of Finance has launched a public consultation on a proposed measure that would allow residents of European Economic Area (EEA) Member States to register for Norwegian value added tax (VAT) directly, instead of through a VAT representative. The condition for an EEA resident to register directly would be that Norway has entered into an agreement with the EEA State of residence that provides for mutual administrative assistance in the exchange of information and the recovery of VAT.
Comments must be submitted by 30 September 2015 to firstname.lastname@example.org.
SSA between Austria and India has Entered into Force
The social security agreement between Austria and India entered into force on 1 July 2015. The agreement, signed 4 February 2013, is the first of its kind between the two countries, and generally applies from the date of its entry into force
SSA between Brazil and the U.S. Signed
On 30 June 2015, officials from Brazil and the U.S. signed a social security agreement. The agreement is the first of its kind between the two countries, and will enter into force on the first day of the month following 90 days after the date the countries have notified each other of the completion of all necessary internal procedures.
China Ratifies Mutual Assistance Convention
On 1 July 2015, China ratified the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. The convention as amended will enter into force in China on the first day of the month following a three month period after the deposit of the ratification instrument.
Tax Treaty between Jersey and Rwanda Signed
On 26 June 2015, officials from Jersey and Rwanda signed an income tax treaty. The treaty is the first of its kind between the two jurisdictions, and will enter into force after the ratification instruments are exchanged.
Additional details will be published once available.