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Worldwide Tax News

Approved Changes (1)

Russia

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Russian Federation Council Approves Draft Amendments to CFC and Tax Residence Rules

On 3 June 2015, the Russian Federation Council (upper house) approved Draft Law No. 714002-6, which includes a number of amendments to the country's controlled foreign company (CFC) and tax residence rules. This completes the parliamentary process, as the law was approved by the State Duma (lower house) on 22 May. The main amendments are summarized as follows.

Income Exemption for Active Foreign Holding Companies

Profits of active foreign holding companies and active foreign sub-holding companies that are tax resident in jurisdictions with which Russia has entered into a tax treaty are exempt from taxation, unless the relevant treaty does not provide for information exchange. However, the exemption will not apply for active foreign holding or sub-holding companies if resident in a black-listed jurisdiction.

For the purpose of the exemption an active foreign company is a company whose total income according to financial statements is comprised of at least 80% active income (no change from current rules).

A foreign company may be recognized as an active foreign holding company if it meets the following conditions:

  • The direct Russian participation in the holding company amounts to at least 75% of the capital of the company for at least 365 consecutive days;
  • The holding company has at least a 50% direct participation in each active foreign company held for at least 365 consecutive days;
  • The holding company has at least a 75% direct participation in each active foreign sub-holding company held for at least 365 consecutive days; and
  • Aside from dividend income from active companies and active sub-holding companies, it has no income or its passive income does not exceed 5%

A foreign company may be recognized as an active foreign sub-holding company if it meets the following conditions:

  • The direct active foreign holding company participation in the sub-holding company amounts to at least 75% of the capital of the company for at least 365 consecutive days;
  • The sub-holding company has at least a 50% direct participation in each active foreign company held for at least 365 consecutive days; and
  • Aside from dividend income from active companies, it has no income or its passive income does not exceed 5%

Exemption if Participating through a Listed Company

A Russian individual or company will not be considered a controlling person if participating in a foreign company exclusively through a direct or indirect participation in a Russian listed company.

Dividend Income Exemption

Russian-source dividend income of a CFC will be exempt if the Russian controlling person of the CFC is also the beneficial owner of the dividends.

Controlling Persons of Structures not formed as Legal Entities

The founder of structures not formed as a legal entity will be considered a controlling person for the purpose of the CFC rules, unless the founder:

  • Has no rights to directly or indirectly receive income from the structure;
  • Has no rights to dispose of the profits of the structure;
  • Does not have the rights to reclaim assets transferred to the structure during its existence or upon liquidation; and
  • Does not control the structure

A person other than the founder that exercises control over a structure not formed as a legal entity will be considered a controlling person if the person:

  • Is the beneficial owner of the income of the structure;
  • Has the right to dispose of the structure's assets; or
  • Has the right to receive the structure's assets upon liquidation

Russian Tax Residence of Foreign Companies

A number of changes are made in regard to the determination of Russian tax residence for foreign companies. These include:

  • Holding a majority of board meetings in Russia is removed from the list of criteria for determining tax residence of a foreign company;
  • Analysis of organizational activities and the preparation of management accounts in Russia is not considered effective management in Russia for the purpose of determining residence; and
  • Foreign companies will be allowed to claim residence in Russia voluntarily if they have a registered presence in Russia even if established in a jurisdiction with which Russia has not entered into a tax treaty

Entry into Force and Effect

Having been approved by both houses, the legislation must now be signed by the president before entering into force, and once in force will generally apply from 1 January 2015.

Proposed Changes (2)

South Africa

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South Africa Considering New Measures to Counter Tax-Free Corporate Migrations

The South African National Treasury recently issued the first batch of measures to be included in the Taxation Laws Amendment Bill, 2015. One of the key measures is a replacement of the measure introduced in 2013 to counter tax-free corporate migrations.

The measure introduced in 2013 included the provision that when a South African resident company issues shares as consideration for the acquisition of shares in a foreign company, a taxable capital gain will result for the South African resident company. However, the measure has been criticized as being too broad and affecting legitimate transactions where there is no element of corporate migration or profiting shifting. In addition, a number of other schemes have subsequently been identified in relation to tax-free migration involving the use of participation exemptions.

In order to alleviate the concerns for legitimate transactions and counter participation exemption abuse, it is proposed that the capital gains tax on the issuance of shares be replaced with a participation exemption restriction on the disposal of foreign shares by South African residents to connected persons. Furthermore, it is proposed that if a South African resident ceases to be a resident for tax purposes, any participation exemption benefits enjoyed in the three years before ceasing to be a resident will be subject to tax.

The new measures are intended to apply retrospectively to the date the taxable capital gain rule was introduced; 1 April 2014.

United States-OECD

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U.S. Congressmen Call for Greater Engagement with Treasury in Regard to the OECD BEPS Project

In a recent letter to U.S. Secretary of the Treasury Jack Lew, Senate Finance Committee Chairman Orrin Hatch and House Ways & Means Committee Chairman Paul Ryan called for greater engagement between Congress and the Treasury in regard to proposals being considered under the OECD BEPS Project.

"As your BEPS discussions continue and proposals are considered, we strongly encourage you to continue engagement with us and to solicit input from the tax-writing committees. We have been monitoring, and continue to monitor, the BEPS project, and we understand the significance it carries in the global community and its potential impact on U.S. workers and their multinational employers. We stand ready to work with you as the BEPS discussions conclude and final reports are issued this year so that we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform."

In the letter, concerns are raised in regard to proposed BEPS measures, particularly in regard to:

  • Issues of confidentiality in the country-by-country (CbC) reporting standards and whether the Treasury has the authority to collect the reports;
  • Interest-deductibility limitations, which are seen as being based on questionable empirics and metrics;
  • Modifications of permanent establishment (PE) rules; and
  • Using subjective general anti-abuse rules (GAAR) in tax treaties

Click the following link for the full letter.

Treaty Changes (4)

Bosnia Herz-Switzerland

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Tax Treaty between Bosnia and Herzegovina and Switzerland to be Signed

According to a recent release by Bosnia and Herzegovina's Ministry of Foreign Affairs, officials from Bosnia and Herzegovina and Switzerland met on 27 May 2015 and agreed to the signing of an income tax treaty as soon as possible. The treaty would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Morocco-Estonia

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Morocco Approves Tax Treaty with Estonia

On 9 June 2015, the Moroccan House of Representatives approved the ratification of the pending income tax treaty with Estonia. The treaty, signed 25 September 2013, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Estonian income tax, and Moroccan income tax and corporation tax.

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 3 months within any 12-month period.

A PE will also be deemed constituted when an enterprise provides any services or facilities or supplies plant or machinery on hire in connection with the exploration for, extraction of, or exploitation of mineral resources in a Contracting State. No particular time period is set for a PE in such case.

Withholding Tax Rates

  • Dividends - 6% when the beneficial owner is a company directly holding at least 25% of the paying company's capital, otherwise 10%
  • Interest - 10%
  • Royalties (including technical assistance) - 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 alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or comparable interests deriving more than 50% of their value directly or indirectly from 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

Morocco applies the credit method for the elimination of double taxation, while Estonia generally applies the exemption method. However, in the case of dividends, interest and royalties subject to 10% withholding tax as provided for under the respective Articles (10,11 and12), Estonia applies the credit method.

A provision is also included for a tax sparing credit, whereby tax paid in the other Contracting State shall be deemed to include tax on business profits (Article 7) and/or dividends (Article 10) that would otherwise be payable but has been reduced or exempted under legal provisions of a Contracting State for tax incentives.

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.

Singapore-Thailand

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New Tax Treaty between Singapore and Thailand Signed

On 11 June 2015, officials from Singapore and Thailand signed a new income tax treaty. Once in force and effective, the treaty will replace the 1975 income tax treaty between the two countries, which is currently in force.

Taxes Covered

The treaty covers Singapore income tax, and Thai income tax and petroleum income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise from 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.

Withholding Tax Rates

  • Dividends - 10%
  • Interest -
    • 10% if the beneficial owner is a financial institution or insurance company;
    • 10% for interest paid in relation to the sale on credit of any equipment, merchandise or services, provided the sale was at arm's length;
    • Otherwise 15%
  • Royalties -
    • 5% if for the use or the right to use any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting;
    • 8% if for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment;
    • Otherwise 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 shares deriving at least 75% of their value directly or indirectly from immovable property situated in the other State, unless listed on a recognized stock exchange; and
  • Gains from 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.

Double Taxation Relief

Both countries generally apply the credit method for the elimination of double taxation. However, in the case of dividends paid by a Singapore resident company to a Thailand resident company that holds at least 25% of the paying company's voting shares, Thailand will apply the exemption with progression method.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged. It will apply in Thailand from 1 January of the year following its entry into force. It will apply in Singapore in respect of withholding taxes from 1 January of the year following its entry into force and for other taxes from 1 January of the second year following its entry into force.

The provisions of the 1975 income tax treaty between Singapore and Thailand will cease to have effect for the relevant taxes on the dates the new treaty applies.

Uganda-Untd A Emirates

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Tax Treaty between Uganda and the U.A.E. Signed

On 9 June 2015, officials from Uganda and the United Arab Emirates signed an income tax treaty. The treaty is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Additional details will be published once available.

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