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Approved Changes (2)

Hong Kong

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Hong Kong Issues Practice Notes on Interest Deduction Rules for Intra-Group Financing and Concessionary Profits Tax Rate for Corporate Treasury Centers

On 9 September 2016, Hong Kong Inland Revenue issued Departmental Interpretation and Practice Notes No. 52 - Taxation of Corporate Treasury Activity, which covers the new interest deduction rules for intra-group financing and concessionary profits tax rate for corporate treasury centers as approved in Inland Revenue (Amendment) (No. 2) Ordinance 2016. The Ordinance enables, under specified conditions, the deduction of interest payable on money borrowed by a corporation carrying on an intra-group financing business in Hong Kong. It also provides for a concessionary profits tax rate of 8.25% (half the standard rate - 16.5%) for qualifying corporate treasury centers in Hong Kong. The main conditions are summarized as follows.

Interest Deduction Rule

The interest deduction rule allows a corporate borrower carrying on an intra-group financing business in Hong Kong to deduct interest payable on money borrowed from a non-Hong Kong associated corporation, provided that:

  • The deduction claimed is in respect of interest payable by a corporation (the borrower) on money borrowed from a non-Hong Kong associated corporation (the lender) in the ordinary course of an intra-group financing business;
  • The lender is, in respect of the interest, subject to a similar tax in a territory outside Hong Kong at a rate that is not lower than the reference rate (standard 16.5% or 8.25% if concession below applies); and
  • The lender’s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm’s length.

For the purpose of the deduction, "intra-group financing business" in relation to a corporation means the business of the borrowing of money from and lending of money to its associated corporations.

The interest deduction rule applies to sums payable on or after 1 April 2016.

Concessionary Rate for Corporate Treasury Centers

The concessionary tax rate (half rate) applies for corporate treasury centers (CTC) that are considered qualifying corporate treasury centers (QCTC). A corporation is considered a QCTC if:

  • It is a dedicated CTC that has carried out one or more corporate treasury activities in Hong Kong, and has not carried out any other activities in Hong Kong;
  • It is a CTC which has satisfied either a 1-year or multiple-year safe harbor rule (percentage of corporate treasury profits/assets is at least 75% of total profits/assets for year(s) of assessment); or
  • The Commissioner has exercised his discretion to determine that it is a QCTC.

Financial institutions are specified as ineligible to be a QCTC.

The concessionary tax rate for QCTCs applies from 1 April 2016. Any sums received or accrued before that date are not eligible.

Click the following link for Departmental Interpretation and Practice Notes No. 52 - Taxation of Corporate Treasury Activity for additional information and examples.

Poland

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Poland Adopts Legislation including Reduced Tax Rate for Small Businesses, Clarification of Polish-Source Income and Anti-Avoidance Measures

On 5 September 2016, Poland's parliament adopted legislation amending the country's individual and corporate income tax laws. The main measures are summarized as follows.

Reduced Tax Rate for Small Taxpayers and Startups

A reduced corporate income tax rate of 15% is introduced for small taxpayers with annual sales below EUR 1.2 million and for startups for the first year of operations. The reduced rate is not available for new operations resulting from the restructuring of a former taxpayer.

Polish-source Income Clarified

The meaning of Polish-source income is clarified to include:

  • Income from any economic activity carried out in Poland, including activities of permanent establishments;
  • Income from property, rights to property, or the sale of property situated in Poland;
  • Income from securities or derivatives traded on the Polish stock exchange, including from disposals;
  • Income from the transfer of shares or other rights in Polish companies, partnerships, or investment funds, the assets of which consist mainly (at least 50%) of property or rights to property situated in Poland; and
  • Income from contractual payments paid by individuals or corporate or non-corporate entities resident in Poland.

The income types above will be automatically considered Polish-source income if not covered by a tax treaty between Poland and the respective jurisdiction in which the income recipient is resident.

Beneficial Ownership Defined

The concept of beneficial ownership is introduced into law, which is defined as the entity receiving income for its own benefit that is not an agent, a representative, a trustee or any other entity entrusted to forward all or part of the income to another entity. The concept is mainly for the determination of whether the exemption under the EU Interest and Royalties Directive (Directive 2003/49/EC) applies.

Anti-avoidance Measures

The following measures are introduced targeting tax avoidance in relation to share exchanges, reorganizations and transfers:

  • The conditions for the tax deferral for the exchange of shares is modified so that the deferral will only apply for an exchange of shares if performed for sound economic reasons and not only for tax purposes;
  • Mergers and divisions will assume to be motivated by tax purposes and subject to tax assessment if no sound economic reasons can be shown; and
  • The value of in-kind contributions of assets to corporate entities is specified as the value indicated in the company's articles of association and not the nominal value of shares issued to the taxpayer, as is often argued currently to limit income tax on assets transfers.

Effective Date

Subject to being signed into law by the president and published in the Official Gazette, the measures will apply from 1 January 2017.

Treaty Changes (5)

Bahamas

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Bahamas Committed to Implement Exchange of Financial Account Information Using Bilateral Approach

On 6 September 2016, the Bahamas government issued a release announcing that implementing the OECD's Common Reporting Standard (CRS) for the automatic exchange of financial account information is the priority initiative for its global regulatory tax compliance regime. For the implementation, the Bahamas will enter into separate bilateral agreements with each jurisdiction with which it will automatically exchange information.

The Bahamas is committed to begin the automatic exchange of financial account information in 2018.

Chile-South Africa

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Tax Treaty between Chile and South Africa has Entered into Force

The income and capital tax treaty between Chile and South Africa entered into force on 11 August 2016. The treaty, signed 11 July 2012, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Chilean taxes imposed under the Income Tax Act, and South African normal tax, secondary tax on companies and withholding tax on royalties.

Residence

The treaty includes the provision that 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 no agreement is reached, the company will not be entitled to any relief or exemption from tax provided 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 183 days within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is company directly holding at least 25% of the paying company's capital; otherwise 15% (the rates set in the treaty will not limit Chile's application of the additional tax payable on dividends (35%) provided that the first category tax (FCT) is fully creditable in computing the amount of the additional tax)
  • Interest - 5% for interest on loans granted by banks and insurance companies, bonds or securities that are regularly and substantially traded on a recognized securities market, and a sale on credit of machinery and equipment; otherwise 15%
  • Royalties - 5% for royalties for the use of, or the right to use, any industrial, commercial or scientific equipment; otherwise 10%

Limitation on Benefits

The provisions of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties) 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 or royalties are paid was to take advantage of those Articles by means of that creation or assignment. The limitation is included in each of the Articles.

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 other rights representing the capital of a company, or comparable interests or rights in any other person, resident 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.

Effective date

The treaty applies from 1 January 2017.

India-Mauritius

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Indian Authority for Advance Ruling Upholds Capital Gains Tax Relief on Share Transfer under Tax Treaty with Mauritius

India's Authority of Advance Ruling (AAR) recently issued a ruling on whether the capital gains tax relief provided under the 1982 India-Mauritius tax treaty may apply on the transfer of an Indian company's shares by a Mauritius company to a U.S. company. The ruling involves Mahindra BT Investment Company (Mauritius) Limited (Mauritius Co) and the transfer of shares in India-based Tech Mahindra Limited (India Co) to U.S.-based AT&T International Inc.

In the year concerned, Mauritius Co transferred its 8.12% holdings in India Co to AT&T as per an option agreement that Mauritius Co and AT&T had entered into prior Mauritius Co's acquisition of India Co's shares. Under the agreement, AT&T was able to exercise the option when it had given a certain level of business to India Co. The transfer of shares resulted in a long-term capital gain for Mauritius Co, which would be exempt from taxation as per the provisions of Article 13 (Capital Gains) of the India-Mauritius tax treaty. However, the tax authority's position was that Mauritius Co had no economic substance and was only incorporated with the purpose of holding shares in India Co to facilitate a transfer to AT&T with the benefit of the India-Mauritius tax treaty. The tax authority also took the position that Mauritius Co's control and management was situated in India, which would make it ineligible for the benefits under the treaty.

In its ruling, the AAR evaluated two main aspects of the transaction; the commercial rationale of the holding structure and agreement, and the control and management of Mauritius Co. Regarding the commercial rationale, the AAR rejected the tax authority's position that Mauritius Co was only incorporated to obtain the treaty benefits, and found that the options agreement was a sound commercial agreement that included certain business targets that AT&T had met. Regarding Mauritius Co's control and management, the AAR found that given the key decisions made by Mauritius Co's board of directors in Mauritius, there was no basis to determine that Mauritius Co was being controlled from India or ineligible for treaty benefits. As a result, the AAR held that the gains on the transfer of shares in India Co are not taxable in India.

Note - Due to the 2016 protocol to the India-Mauritius tax treaty, gains arising from alienation of shares acquired on or after 1 April 2017 in a company resident in India will be subject to source-based taxation in India (previous coverage).

Japan-Kenya

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Tax Treaty between Japan and Kenya to be Negotiated

According to a release from the Japanese Ministry of Foreign Affairs, officials from Japan and Kenya met August 26 to 28 to discuss ways to promote bilateral trade and investments, including the negotiation of an income tax treaty. Any resulting treaty would be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.

Saudi Arabia-Sweden

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Tax Treaty between Saudi Arabia and Sweden has Entered into Force

The income and capital tax treaty between Saudi Arabia and Sweden entered into force on 31 August 2016. The treaty, signed 19 October 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Saudi Zakat and income tax including the natural gas investment tax. It covers Swedish national income tax, withholding tax on dividends, income tax on non-residents, income tax on non-resident artistes and athletes, municipal income tax and net wealth tax.

Service PE

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

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company holding at least 10% of the voting power or voting shares of the paying company; otherwise 10%
  • Interest - 0%
  • Royalties - 5% for royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment; otherwise 7%

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, other than mentioned above, that form part of a participation of at least 25% in a company resident in the other State (exemption if listed on a stock exchange of either Contracting 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 respect of dividend income, Sweden applies the exemption method in accordance with Swedish law.

Non-Discrimination

The treaty does not include non-discrimination provisions.

Limitation on Benefits

Article 28 (Miscellaneous Provisions) includes that nothing in the treaty will affect the application of domestic anti-evasion/avoidance provisions concerning the limitation of expenses and any deductions arising from transactions between enterprises of a Contracting State and enterprises of the other State, if the main purpose or one of the main purposes of the creation of such enterprises or of the transactions undertaken between them, was to obtain the benefits under the treaty that would not otherwise be available.

Article 28 also includes that any exemption or reduction of tax provided by the treaty will not apply to the income of a company that is a resident of a Contracting State:

  • That derive income primarily from other states:
    • from banking, shipping, financing or insurance activities, or
    • from being the headquarters, co-ordination centre or similar entity providing administrative services or other support to a group of companies which carry on business primarily in other states; and
  • The income from such activities bears a significantly lower tax under the laws of that State than income from similar activities carried out within that State.

Dividends paid by such companies will also not qualify for an exemption or reduction of tax provided by the treaty.

Effective Date

The treaty applies from 1 January 2017.

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