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Approved Changes (2)

Italy-Hong Kong

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Italy Removes Hong Kong from Blacklist for Non-Deductible Expenses and CFC Regime

On 30 November 2015, Italy published a Ministerial Decree amending the country's blacklist for non-deductible expenses and the controlled foreign company (CFC) regime, which includes the removal of Hong Kong. Hong Kong's removal is due to the entry into force of the 2013 Hong Kong-Italy income tax treaty on 10 August 2015 (previous coverage), which provides for adequate information exchange; a condition for the blacklist.

Expenses incurred in transactions with companies in blacklisted jurisdictions require additional proof that the transaction relates to an actual business interest and that the transaction has actually been carried out in order to be deductible. Under Legislative Decree No. 147, a safe harbor limit is introduced, so that the additional proof is only required if the transaction amount exceeds the fair market value (previous coverage).

Under the CFC regime, Italian residents with controlled companies in blacklisted jurisdictions are restricted from claiming the CFC rules exemption. In addition, the participation exemption will not be available for dividends and capital gains from companies in blacklisted jurisdictions.

Russia

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Russia Clarifies that Interest on Loans Used to Pay Dividends is Deductible

The Russian Ministry of Finance recently published Letter No. 03-03-06/1/63388, which clarifies the deductibility of interest expense in connection with a loan used to pay dividends. According to the letter, expenses incurred in connection with the generation of income are deductible, including interest payable on debt obligations of any kind undertaken as part of the taxpayer's income-generating activities. Furthermore, the payment of dividends, while not deductible, is to be classified as an undertaking assumed in connection with the taxpayer's income-generating activities. Based on this, interest expense incurred to repay a loan used to pay dividends may be deducted for corporate tax purposes.

Proposed Changes (3)

Canada

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Canada Announces Proposed Cut in the 22% Personal Income Tax Rate to 20.5% and New Top Rate

On 7 December 2015, the Canadian Department of Finance announced a government proposal to cut the federal personal income tax rate for the second bracket from 22% to 20.5%. The cut would be offset with the introduction of a new top bracket with a 33% rate for income over CAD 200,000, which will be adjusted for inflation. As proposed, the brackets and rates for 2016 would be as follows:

  • up to CAD 45,282 - 15%
  • over CAD 45,282 up to 90,563 - 20.5%
  • over CAD 90,563 up to 140,388 - 26%
  • over CAD 140,388 up to 200,000 - 29%
  • over CAD 200,000 - 33%

If approved, the changes would apply from 1 January 2016 and subsequent years.

India

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India Planning Legislation for CbC Reporting and Other BEPS Project Measures

According to recent comments from an official from India's Ministry of Finance, the government is currently planning to introduce transfer pricing reporting requirements in line with Action 13 of the OECD BEPS Project, including a Country-by-Country (CbC) report, master file and local file. Legislation for the requirements is to be issued by 31 March 2016, and may be included as part of the upcoming Union Budget for 2016-2017. The requirements would apply from the 2016 fiscal year, with an initial annual group revenue threshold for CbC reporting equal to EUR 750 million as converted into Indian rupees using a conversion rate from February 2015 (~INR 52.79 billion).

The government is also planning to implement standards regarding Action 5 (Countering Harmful Tax Practices), Action 6 (Preventing Treaty Abuse), and Action 14 (Improving Dispute Resolution).

Saudi Arabia

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Saudi Arabia Approves New Draft Company Regulation

Saudi Arabia's Cabinet has recently approved a draft of a new Company Regulation Law. The main changes under the new regulation are summarized as follows.

Available Corporate Forms

Under the new regulation, five corporate forms will be available, including:

  • Limited liability company (LLC) - may be formed as a holding company;
  • Joint stock company (JSC) - may be formed as a holding company;
  • Joint venture company;
  • General partnership; and
  • Limited partnership.

Current corporate forms that will no longer be available under the new regulation include:

  • Cooperative company;
  • Variable capital company; and
  • Partnership limited by shares

Companies that currently have one of the above three forms will be required to convert to one of the five forms available under the new regulation. If the company does not take one of the five available forms, it will be void, subject to certain exceptions.

Minimum Shareholder, Capital, and Reserve Requirements

The new regulation reduces the minimum number of shareholders for an LLC from two to one, and reduces the minimum number of shareholders for a JSC from five to two and the minimum capital from SAR 2 million to SAR 500,000. It also provides for a single shareholder JSC for government-owned companies, public legal entities, and companies with capital of at least SAR 5 million.

Foreign invested companies may still be subject to higher capital requirements imposed by the Saudi Arabian General Investment Authority on a case-by-case basis.

Regarding reserve requirements for LLCs and JSCs, reserve contributions are no longer required once the reserve is equal 30% of the company's capital amount (currently 50%).

The new Company Regulation Law must be enacted, and will enter into force 150 days after being published in the Official Gazette.

Treaty Changes (3)

Andorra-Spain

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Tax Treaty between Andorra and Spain to Enter into Force

According to a notice published by Spain's Ministry of Foreign Affairs and Cooperation, the pending income tax treaty between Andorra and Spain will enter into force on 26 February 2016. The treaty, signed 8 January 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Andorran corporation tax, individual income tax, tax on income from economic activities, tax on income of non-residents, real estate capital gains tax, and local income taxes. It covers Spanish individual income tax, corporation tax, non-resident income tax, and local taxes on income.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital, otherwise 15%
  • Interest - 5%
  • Royalties - 5%

A maximum rate of 5% is included in Article 10 (Dividends) for the taxation of repatriated profits attributed to a permanent establishment.

Capital Gains Taxation

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation 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 similar rights in a company directly or indirectly deriving more than 50% of their value from immovable property situated in the other State (exemption for shares listed on a recognized stock exchange in either State);
  • Gains from the alienation of shares representing a direct or indirect ownership of 25% or more of the capital of a company resident in the other State; and
  • Gains from the alienation of shares or other rights that directly or indirectly entitle the owner of such shares or rights to the enjoyment of immovable property situated 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

A protocol to the treaty, signed the same date, includes the provision that a benefit of the treaty will not be granted with respect to an item of income if it can be reasonably considered that one of the main purposes of an agreement or transaction was to directly or indirectly gain such benefit. In such cases, a benefit may still be granted if it is determined that the granting of the benefit would be in line with object and purpose of the treaty.

Effective Date

The treaty generally applies from the date of its entry into force, 26 February 2016.

Italy-Panama

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Italy Approves Tax Treaty with Panama

On 4 December 2015, Italy's Council of Ministers approved the law for the ratification of the pending income tax treaty with Panama. The treaty, signed 30 December 2010, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Italian personal income tax, corporate income tax and the regional tax on productive activities (IRAP). It covers Panamanian income tax (the impuesto sobre la renta provided in the Código Fiscal, Libro IV, Título I, and its related decrees and regulations).

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 based on its place of effective management. If no agreement is reached, the company will not be entitled to claim any relief or exemption from tax provided for by the treaty.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within 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 directly holding at least 25% of the paying company's capital; otherwise 10%
  • Interest - 0% if paid in relation with the sale on credit of merchandise or equipment to an enterprise of a Contracting State; 5% if the beneficial owner is a bank; otherwise 10%
  • Royalties, including technical assistance, technical services and consulting services - 10%

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 deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; and
  • Gains from the alienation of shares or comparable interests representing more than 10% of the voting rights or capital in a company resident in the other State when those shares or comparable interests have been held for less than a 12-month period (this provision is included in a protocol signed with the treaty)

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Services

Article 14 (Services) includes the provision that income derived by a resident of a Contracting State from the rendering of services that qualify as professional services, consulting services, industrial commercial advice, technical or management services or similar services in the other State may be taxed in that other State at a maximum rate of 10%.

Double Taxation Relief

Italy applies the credit method for the elimination of double taxation, while Panama applies the exemption method.

Limitation on Benefits

Article 28 (Limitation on Benefits) includes the provision that a resident of a Contracting State will not receive the benefit of any reduction in or exemption from taxes provided for in the treaty if the main purpose or one of the main purposes of the creation or existence of such resident or any person connected with such resident was to obtain the benefits of the treaty that would not otherwise be available.

In addition, the beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 21 (Other Income) will not apply if the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares, debt-claims or other rights in respect of which the dividends, interest, royalties or other income are paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of those Articles.

Entry into Force and Effect

The treaty will enter into force on the first day of the fourth month following the exchange of the ratification instruments, and will generally apply from 1 January of the year following its entry into force. With respect to exchange of information, information requests may be made for any date within three years prior to the treaty's entry into force.

Netherlands-South Africa-Sweden

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Dutch Court Holds that MFN Clause Regarding Dividends in Netherlands-South Africa Treaty Triggered by Signing of Protocol to South Africa-Sweden Tax Treaty

In a recent decision published 26 November 2015, the Dutch lower Court of Zeeland-West Brabant has ruled that the most favoured nation (MFN) clause concerning dividends under the 2008 protocol to the 2005 Netherlands-South Africa income and capital tax treaty was indirectly triggered by the signing of the 2010 protocol to the 1995 income tax treaty between South Africa and Sweden.

The case involved an appeal on a refund claim for 5% Dutch withholding tax withheld on dividends paid in 2013 by a Netherlands BV to a South African beneficial owner. The claim is based on the MFN clause included in the 2008 protocol to the 2005 Netherlands-South Africa income and capital tax treaty. The clause was added by a new Article 10 (Dividends), which lowers the withholding tax on dividends to 5% if the beneficial owner is a company that holds at least 10% of the paying company's capital (otherwise 10%), and further provides that if South Africa agrees to a lower dividend withholding tax rate, including an exemption, in any future treaty with a third country, then that lower rate or exemption shall also apply in the relationship between South Africa and the Netherlands.

South Africa has not concluded any treaties with more favorable tax treatment of dividends since concluding the Netherlands treaty, but did conclude a protocol to the treaty with Sweden in 2010 that also included an MFN clause concerning dividends. The Sweden MFN clause, however, does not include the restriction that the MFN clause contained therein would only be triggered by future more favorable treaties.  

The claimant argued that the Sweden MFN clause would have been triggered by pre-existing South African tax treaties that do not have withholding tax on dividends, including the 1997 Treaty with Cyprus, the 2004 Treaty with Kuwait and the 2002 treaty with Oman (treaties with Cyprus and Oman have subsequently been amended with 5%/10% withholding rates). Based on this, the claimant argued, the MFN clause of the Netherlands-South Africa treaty should have been triggered in turn because the protocol to the Sweden-South Africa treaty was concluded after the Netherlands-South Africa treaty. The tax administration argued that while the protocol to the South Africa-Sweden treaty can be equated with a new treaty and is, thus, subsequent in conclusion to the South Africa-Netherlands treaty, it did nevertheless not trigger the MFN clause in the latter. This is, according to the tax administration, because the Swedish MFN was triggered, if at all, by reference to pre-existing treaties, while the Dutch MFN can only be triggered by future treaties.

The Court sided with the claimant, determining that the MFN clause in the South Africa-Netherlands was indeed triggered as a result of the protocol to the South Africa-Sweden treaty and ordered the refund of the 5% withholding tax levied on the dividends in the Netherlands.

This is a unique and complex interpretation on how MFN clauses may be triggered in Dutch treaties, and may be appealed by the Dutch tax authorities. The decision applies only in relation to the refund claim in this case.

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