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Approved Changes (2)

European Union-France-Luxembourg

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CJEU Holds French Prior Approval Restriction on EU Merger Directive Benefits Incompatible with EU Law

In a judgment issued 8 March 2017, the Court of Justice of the European Union (CJEU) ruled on whether the French requirement for prior approval in order to obtain the benefits under the EU Merger Directive (Directive 90/434/EEC) is compatible with EU Law, and in particular the freedom of establishment provided under Article 49 TFEU. The case involved the Luxembourg Company Euro Park Service (Euro Park), which assumed the rights and obligations of the French company SCI Cairnbulg Nanteuil (Cairnbulg).

After Cairnbulg was wound up by and for the benefit of Euro Park, Cairnbulg opted for the deferral of taxation of the capital gains relating to that company’s assets as provided under French law (implementation of the Merger Directive), but was rejected by the French tax authority on the grounds that the merging companies had not sought prior approval. As a result, Euro Park was made liable for additional tax and tax contributions together with penalties.

Under French law, prior approval is required in the case of a merger through acquisition by a company established in another Member State, including that the taxpayer must show that:

  • The operation is justified for commercial reasons;
  • The operation does not have as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance; and
  • The manner in which the operation is carried out makes it possible for the capital gains deferred for tax purposes to be taxed in the future.

Although the general conditions also apply in the case of a national merger, the prior approval does not.

After the appeals process made its way to the French Council of State, a request for a preliminary ruling was made with the CJEU. In its judgment, the CJEU found that the differing treatment of cross-border mergers and national mergers under French law constitutes an infringement on the freedom of establishment that cannot be justified.

Click the following link for the full text of the judgment.

Taiwan

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Taiwan Clarifies Tax Treatment of Interest and Penalties

Taiwan's Ministry of Finance has published a release clarifying the deductibility of interest on late payments and other tax-related penalties. According to the release, interest on outstanding tax payments due may be categorized as an expense, while the penalties for late payments, late returns, incorrect returns, etc. may not be categorized as an expense.

Interest on late payments begins to accrue 30 days after the date the payment was due based on the one-year time deposit interest rate of the postal savings bank of Taiwan. Penalties for tax-related offenses include a late payment surcharge of 1% every two days the payment is late (maximum 15%/30 days), a late return penalty of up to 20% of the tax due (capped at TWD 90,000), and incorrect or fraudulent return penalties of up to 200% of any underpaid tax.

Proposed Changes (2)

Puerto Rico-United States

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Puerto Rico's Oversight Board Approves Revised Fiscal Plan

On 13 March 2017, the Financial Oversight and Management Board for Puerto Rico approved a revised version of the U.S. territory's fiscal plan to address its major debt issues. The initial version of the plan (previous coverage) was rejected by the board as being overly optimistic and failing to adequately stabilize the government's finances. Although the revised plan has not been released, it reportedly includes additional cuts in pension-spending and government employee benefits, increased taxes on tobacco, and adjustments to the property tax assessment process to increase collections. The revenue measures in the initial plan are reportedly maintained, including corporate tax reform measures, tax compliance improvements, and increased fees. Details for the implementation of the plan are to be delivered to the board by 30 April 2017.

Russia

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Russian Legislation being Drafted to Impose VAT on Foreign Online Retailers

According to an announcement from the Russian Federal Antimonopoly Service, draft legislation is being prepared to impose value added tax (VAT) on goods sold by foreign online retailers to Russian consumers. Imposing VAT on foreign suppliers of e-services is already effective from 2017. The plan to also bring foreign online retailers within the scope of VAT is included as part of the government's tax plans for 2017-2019 (previous coverage) and is to be finalized in the coming months.

Treaty Changes (3)

Czech Rep-Cameroon

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Czech Republic to Sign Tax Treaty with Cameroon

On 8 March 2017, the Czech government authorized the signature of a draft income tax treaty with Cameroon. The treaty will be the first of its kind between the two countries and must be signed and ratified before entering into force. Additional details will be published once available.

Panama-Vietnam

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Tax Treaty between Panama and Vietnam has Entered into Force

The income tax treaty between Panama and Vietnam entered into force on 14 February 2017. The treaty, signed 30 August 2016, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Panamanian tax on natural persons and tax on legal persons. It covers Vietnamese personal income tax and business income tax.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted if 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 6 months within any 12-month period.

Withholding Tax Rates

  • Dividends -
    • 5% if the beneficial owner has directly or indirectly contributed at least 50% of the paying company's capital;
    • 7% if the beneficial owner has directly or indirectly contributed between ** 25% and 50% of the paying company's capital;
    • otherwise 12.5%
  • Interest - 10%
  • Royalties - 10%
  • Payments for professional, consultancy, technical, management, and other similar services -7.5%

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 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 in the capital of a company, or of an interest in a partnership, trust, or estate, the property of which directly or indirectly consists principally (more than 50%) of immovable property situated in the other State; and
  • Gains from the alienation of shares, other than the above, in a company that is resident of 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

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

Effective Date

The treaty applies from 1 January 2018.

Ukraine-Luxembourg

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Ukraine Ratifies Pending Tax Treaty and Protocol with Luxembourg

According to an announcement published by the Ukraine parliament, the pending income and capital tax treaty with Luxembourg and amending protocol were ratified on 14 March 2017. The treaty, signed 6 September 1997, is the first of its kind between the two countries. The amending protocol was signed 30 September 2016.

Taxes Covered

The treaty covers Luxembourg income tax on individuals, corporation tax, tax on fees of directors of companies, capital tax, and communal trade tax. It covers Ukrainian tax on profits of enterprises and individual income tax.

Service PE

The amending protocol adds the provision that a permanent establishment will be deemed constituted if 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 6 months within any 12-month period

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 20% of the paying company's capital; otherwise 15% (the amending protocol deleted a provision allowing for an exemption if the beneficial owner held at least 50% of the paying company's capital for at least 3 years and the investment is at least USD 1 million)
  • Interest - 5% for interest paid on any loans of whatever kind granted by a bank or any other financial institution, including investment banks and saving banks, and insurance companies; otherwise 10% (the amending protocol changed the rate for bank loans from 2% to 5%)
  • Royalties - 5% for royalties paid for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for information (know-how) concerning industrial, commercial or scientific experience; 10% for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting)

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 or interest in a partnership deriving the greater part of their value directly or indirectly from immovable property situated in the other State (exemption for shares quoted on an approved stock exchange); and
  • 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 other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Ukraine applies the credit method for the elimination of double taxation. Luxembourg generally applies the exemption method, but will apply the credit method in respect of income covered by Articles 10 (Dividends), 11 (Interest), and 12 (Royalties). However, Luxembourg will exempt dividends received by a Luxembourg resident company if the resident company has directly held, since the beginning of its accounting year, at least 10% of the paying company's capital and the paying company is subject to an income tax in Ukraine corresponding to the Luxembourg corporation tax.

Protocol

Aside from the amendments regarding Service PEs and withholding tax on dividends and interest, the amending protocol also makes the following main changes:

  • Article 26 (Exchange of Information) is replaced to bring it in line with the OECD standard for information exchange; and
  • Article 28 (Exclusion of Certain Companies) is deleted and the following Articles are renumbered accordingly (Article 28 excluded holding companies within the meaning of special Luxembourg laws from the application of the treaty).

The protocol will enter into force and apply on the same dates as the treaty.

Entry into Force and Effect

The treaty, as amended by the protocol, will enter into force once the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force.

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