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Worldwide Tax News

Approved Changes (2)

Japan-United States

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Japan Clarifies Treatment of U.S. Limited Partnerships as Fiscally Transparent

Japan's National Tax Agency (NTA) issued a release on 9 February 2017 concerning the tax treatment under Japanese law of income derived by Japanese partners through a U.S. Limited Partnership (U.S. LP). The release provides clarification given a 17 July 2015 Japanese Supreme Court decision that Delaware LPs should be treated as opaque entities and not as fiscally transparent entities. That decision was in relation to losses claimed by Japanese individual taxpayers that had invested in U.S. real estate through Delaware LPs.

According to the release:

In light of 2005 tax reform (newly introduced loss limitation rules for foreign partnerships), the NTA will no longer pursue any challenge to the fiscally transparent entity (FTE) treatment of an item of income derived through a U.S. LP. The NTA treats an item of income paid to and through a U.S. LP of which Japanese residents are partners as derived by the Japanese resident partners and subject to tax on a current basis in the hands of the partners, irrespective of distributions from the U.S. LP, and the character and source of the item of income in the hands of the Japanese partners are determined as if such items were realized directly from the source from which realized by the U.S. LP, provided that the U.S. LP has not made an election to be classified as an association taxable as a corporation for U.S. federal income tax purposes.

The release also notes that Japanese residents that derive income through a U.S. LP may claim benefits under the Japan-U.S. tax treaty if meeting treaty eligibility requirements.

Switzerland

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Swiss CTR III Fails to Pass Public Referendum

Switzerland's Corporate Tax Reform (CTR) III package was rejected in a public referendum held 12 February 2017, with a vote of 59.1% against. The CTR III legislation had been approved by parliament in June 2016 (previous coverage), but its implementation was dependent upon being approved in the referendum.

The reform package was meant to bring Switzerland in line with international standards while remaining a competitive and attractive destination for international businesses. It includes a number of measures including the abolishment of privileged cantonal tax regimes, the introduction of a patent box regime in line with the modified nexus approach, and the introduction of optional R&D super deductions and notional interest deductions. In connection with the reforms, a number of cantons had also planned to reduce the cantonal tax rates in order to remain competitive after the abolishment of the special regimes.

With the referendum complete, the future of the planned reforms and cantonal tax cuts is uncertain. Initial reports indicate that the legislation will now go back to the Swiss government and parliament for revisions and possible removal of controversial measures, including the removal of the notional interest deduction. A revised version could be completed later in 2017 and put to a vote, with implementation in 2019 still possible.

Proposed Changes (1)

Singapore

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Committee Report on Singapore Economic Strategies Recommends Tax Policy Review and Refinement

Singapore's Committee on the Future Economy (CFE) has published its report submitted to the Prime Minister on 9 Feb 2017. The CFE was convened in January 2016 to develop economic strategies for Singapore over the next decade. The report includes a number of recommendations within seven main strategies:

  1. Deepen and diversify international connections;
  2. Acquire and utilize deep skills;
  3. Strengthen enterprise capabilities to innovate and scale up;
  4. Build strong digital capabilities;
  5. Develop a vibrant and connected city of opportunity;
  6. Develop and implement Industry Transformation Maps; and
  7. Partner each other to enable innovation and growth.

As part of strategy 7, recommendations are made regarding Singapore's tax system. These includes that the government needs to review and refine the tax policy in light of domestic and global changes, including in relation to international tax developments resulting from the OECD BEPS project, and that the government should maintain a tax regime that upholds two principles:

  • One, the tax system should remain broad-based, progressive, and fair; and
  • Two, Singapore’s tax regime should remain competitive and pro-growth.

The report also includes separate sub-committee reports providing recommendations in five areas:

  1. Future corporate capabilities and innovation;
  2. Future growth industries and markets;
  3. Future of connectivity;
  4. Future city; and
  5. Future jobs and skills.

Click the following link for the full report.

Treaty Changes (7)

Armenia-Argentina

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Armenia Ratifies TIEA with Argentina

On 9 February 2017, the Armenian parliament ratified the pending tax information exchange agreement with Argentina. The agreement, signed 7 July 2014, is the first of its kind between the two countries. It will enter into force 30 days after the ratification instruments are exchanged, and will apply for criminal tax matters on that date and will apply for other matters from 1 January of the following year.

Armenia-Slovak Republic

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Tax Treaty between Armenia and Slovakia has Entered into Force

The income and capital tax treaty between Armenia and Slovakia entered into force on 1 February 2017. The treaty, signed 15 May 2015, is the first of its kind between the two countries.

Taxes Covered

The treat covers Armenian profit tax, income tax, and property tax. It covers Slovak income tax on individuals and income tax on legal persons.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise of one Contracting State furnishes services in the other State through employees or other engaged personnel 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 10% of the paying company's capital; otherwise 10%
  • Interest - 10%
  • Royalties - 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 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 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

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

Limitation on Benefits

Article 28 (Limitation of Benefits) provides that the benefits of the treaty will not be granted to companies of either Contracting State if the purpose of such companies is to obtain benefits under the treaty that would not otherwise be available.

Effective Date

The treaty applies from 1 January 2018.

Austria-Luxembourg

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Exchange of Notes between Austria and Luxembourg to Enter into Force

The exchange of notes to the 1962 income tax treaty between Austria and Luxembourg will enter into force on 1 March 2017. The exchange of notes, signed 18 June 2015, amends the diplomatic notes that were exchanged with the 2009 protocol to the treaty with respect to Article 24 (exchange of information), which was replaced by the 2009 protocol. The new exchange of notes applies from 1 January 2011, the date the 2009 protocol became effective.

Bahamas-Japan

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Protocol to TIEA between the Bahamas and Japan Signed

Japan's Ministry of Finance has announced that officials from the Bahamas and Japan signed a protocol on 9 February 2017 to the 2011 tax information exchange agreement between the two countries. The protocol:

  • Adds Article 5A (Automatic Exchange of Information);
  • Replaces Article 3 (Jurisdiction);
  • Amends Article 8 (Confidentiality) regarding the non-disclosure of information; and
  • Adds Paragraph 4 to Article 18 (Entry into Force) with respect to Article 5A, which will apply from 1 January 2017.

The protocol will enter into force 30 days after the ratification instruments are exchanged.

Ireland-Azerbaijan-Ghana-Kazakhstan-Oman-Turkmenistan

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Ireland Concludes Negotiation for Tax Treaties with Azerbaijan, Ghana, Kazakhstan, Oman and Turkmenistan

According to a recent update from Irish Revenue, negotiations for tax treaties with Azerbaijan, Ghana, Kazakhstan, Oman and Turkmenistan have concluded and the treaties are expected to be signed shortly. The treaties will be the first of their kind between Ireland and the respective countries, and must be signed and ratified before entering into force.

Italy-France

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Italian Supreme Court Holds Lack of Organizational Structure does Not, by Itself, Result in Lack of Beneficial Ownership for Treaty Benefits

A December 2016 decision of the Italian Supreme Court was recently published concerning the entitlement to treaty benefits of a sub-holding company for dividends received from Italy. The case involved a French company (FRCo) wholly owned by a U.S. company that acted as a sub-holding company for all European subsidiaries.

In 2002, an Italian company paid dividends to FRCo, for which FRCo claimed a partial dividend tax credit refund. FRCo would be entitled to such a refund under the 1989 France-Italy tax treaty. Subject to certain conditions, paragraph 4 of Article 10 (Dividends) provides that if a French company receives from an Italian company dividends that would be granted a "tax credit" if they were received by a resident of Italy, the French company is then entitled to a payment from the Italian Treasury equal to half of such "tax credit", less withholding tax. One of the main conditions for the credit payment is that the receiving company is the beneficial owner.

In its determination, the Italian tax authority found that the true beneficial owner was the U.S. company and therefore FRCo was not eligible for the partial tax credit refund. This determination was based mainly on the tax authority's conclusion that FRCo lacked the necessary organizational structure and that its role as a sub-holding company was merely to allow the partial refund of the tax credit. This decision was appealed, with the first level tax court finding in favor of FRCo and the second level court then finding in favor of the tax authority. The case was then heard by the Supreme Court.

In its decision, the Supreme Court found in favor of FRCo. The Court found that in determining beneficial ownership, FRCo's lack of organizational structure and wholly owned status are relevant, but that focus should be given to the level of autonomy in the use of the funds and where the key decisions are taken with regard to FRCo itself and the coordination of the Italian company paying the dividends. In this respect, the Court found that the French company had its legal and administrative seats in France; the directors of the company were resident of France; and based on available documentation, the key business decisions were taken in France. As a result, the decision of the second level court was overturned, and the case must be reconsidered based on the factors for beneficial ownership determination set out by the Supreme Court.

South Africa-Saint Kitts and Nevi

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TIEA between South Africa and St. Kitts and Nevis to Enter into Force

The tax information exchange agreement between South Africa and St. Kitts and Nevis was published in the South African Government Gazette on 10 February 2017 and will enter into force on 18 February 2017. The agreement, signed 7 April 2015, is the first of its kind between the two countries. It will apply for criminal tax matters on the date of its entry into force and will apply for other matters from 1 January 2018.

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