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Approved Changes (3)

Czech Rep

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Czech Senate Passes Amendment Concerning Hybrid Mismatches under the Parent-Subsidiary Directive

The Czech Senate (upper house of parliament) has reportedly passed legislation implementing the amendment to the EU Parent-Subsidiary Directive concerning hybrid mismatch arrangements. Under the new rule, the participation exemption provided for dividends will be denied if a dividend received is tax deductible for the distributing subsidiary in its country of residence. The legislation has already been passed by the Chamber of Deputies (lower house), and must now be signed by the president and published in the Official Gazette before entering into force. Once in force, it will apply from the first day of the following month.

Israel

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Israel Adopts Virtual PE Concept Based on a Significant Digital Presence

On 11 April 2016, the Israeli Tax Authority (ITA) issued Circular No. 4/2016, which sets out the ITA's position on the attribution of income to a permanent establishment in Israel derived from the supply of digital services (Virtual PE).The circular is the official version of the draft circular issued in April 2015. While related to the work done on Action 1 (Addressing the Tax Challenges of the Digital Economy) of the OECD BEPS Project, the ITA has decided to adopt the concept of a significant economic presence to determine if a PE exists, which is a concept that was not included in the final BEPS Project recommendations.

Significant Digital Presence

The ITA may determine that a foreign supplier has a significant digital presence in Israel based on the following:

  • The foreign supplier has a significant number of contracts for online (internet-based) services with Israeli customers;
  • The foreign suppliers online services are highly used by Israeli customers;
  • The foreign supplier's website has been adapted for use by Israeli customers in terms of language, currency, etc.;
  • A high volume of web traffic between Israel and the foreign supplier's website/services; and
  • Other factors

Determination as to whether a significant digital presence exists will be made on a cases-by-case basis and will involve consultation with the ITA. For this purpose, the ITA is authorized to demand information from foreign digital suppliers and related companies in Israel.

Resident of Treaty and Non-Treaty Countries

The circular distinguishes between foreign suppliers resident in jurisdictions with which Israel has entered into a tax treaty and those with which Israel has not.

With regard to treaty countries, the ITA has taken the position that a PE may exist when it is determined that a significant digital presence exists and the foreign supplier conducts activities in Israel itself, or through representatives or agents, even if the activities are limited to that of a preparatory or auxiliary nature. In such cases, the PE will be taxed in accordance with the relevant treaty.

With regard to non-treaty countries, the ITA has taken the position that a PE may exist based solely on the determination that a significant digital presence exists, even if there is no physical presence in Israel. In such cases, the PE would be taxed under Israeli domestic law.

Value Added Tax (VAT) Implications

Foreign suppliers that are deemed to have a significant digital presence and PE will need to register for VAT and appoint an Israeli representative. For foreign suppliers that are not deemed to have a PE in Israel, VAT registration may soon be needed anyway under new VAT requirements for digital service providers proposed in March 2016 (previous coverage).

Turkey

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Turkey Sets Rate for Notional Interest Deduction on Capital Increases

On 7 April 2016, the Turkish Revenue Administration issued Corporate Tax Circular No. 40, which sets the rate for the notional interest deduction for 2015 at 14.6%. The law introducing the notional interest deduction was enacted in April 2015, and applies from 1 July 2015. Under the rules, companies are allowed a deduction of up to 50% of their deemed interest expense on cash capital increases registered with the Turkish Trade Registry. However, companies operating in the insurance, finance and banking sectors are not eligible for the deduction.

In determining the deduction, the rate is to be applied from the date of the cash capital increase until the end of the financial year. Any unused deduction may be carried forward indefinitely.

Proposed Changes (3)

Russia

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Russia Issues Draft CbC Reporting Legislation

On 8 April 2016, Russia's Ministry of Finance issued draft legislation for the implementation of Country-by-Country reporting requirements in line with the guidelines developed as part of Action 13 of the OECD BEPS Project. Key aspects of the draft requirements are as follows.

Entities Required to Submit CbC Reports

The ultimate parent entity of an MNE group that is resident in Russia must file a CbC report for the reporting fiscal year if the consolidated annual group revenue in the previous year meets or exceeds RUB 50 billion.

If the ultimate parent of the group is not resident in Russia, a constituent entity of the group in Russia must file a CbC report for the reporting fiscal year if the group revenue threshold is met, and:

  • The ultimate parent is not required to file in its jurisdiction of residence;
  • The parent entity's jurisdiction of residence does not have the required agreements in place with Russia for the automatic exchange of CbC reports; or
  • There has been a systemic failure for the automatic exchange of CbC reports with the parent entity's jurisdiction of residence, and the Russian tax authorities have notified the constituent entity of the failure.

In cases where a Russian constituent entity is required to file due to a systemic failure, the notice given to the constituent entity by the Russian tax authority will include a submission deadline, which is to be no less than three months from the notification.

The requirement for a constituent entity to file a CbC report as above will not apply, however, if a surrogate parent entity in another jurisdiction has been designated by the group, and:

  • A CbC report meeting the Russian requirements has been submitted in the jurisdiction of the surrogate;
  • The required agreements are in place for the automatic exchange of CbC reports between the surrogate jurisdiction and Russia;
  • The jurisdiction of the surrogate has not notified the Russian tax authorities of a systemic failure for exchange.

Content of the CbC Report

The information required in the CbC report is in line with the Action 13 guidelines, and includes:

  • The following for each jurisdiction on an aggregated basis:
    • Total amount of income (revenue) for transactions, including transactions between related parties, and between independent parties;
    • Amount of profit (loss) before tax;
    • Amount of corporate income tax paid;
    • Amount of corporate income tax accrued;
    • Stated share capital;
    • Amount of retained profit;
    • Number of employees; and
    • Value of tangible assets (excluding cash and cash equivalents); and
  • Identification of each member of the group, including the jurisdiction of establishment, jurisdiction of tax residence, and principal activities.

Notice of Participation in an MNE Group

All constituent entities resident in Russia are required to provide a notice of participation in an MNE group to the Russian tax authorities by 20 September of each year in electronic form. The notification must include:

  • Details of the constituent entity;
  • Details of the ultimate parent entity of the group;
  • Details of the surrogate parent entity of the group, if any;
  • Details of the document confirming the authorization of the surrogate parent to submit a CbC report on behalf of the group, if any; and
  • The date of the end of the fiscal period for which the MNE group's consolidated financial statements are prepared.

Failure to provide the notice or providing incorrect information will result in a penalty of up to RUB 50,000 (penalty not applicable for 2017-2019).

CbC Reporting Deadline

When required, the CbC report must be submitted within 12 months following the end of the fiscal year concerned in electronic form. Failing to submit a CbC report when required or submitting incorrect information will result in a penalty of up to RUB 100,000 (penalty not applicable for 2017-2019).

Entry into Force

The draft legislation includes an entry into force date of 1 January 2017, with the CbC reporting requirements applying for fiscal year beginning on or after that date. Russia will also allow for voluntary submission for earlier periods.

Click the following link for the draft CbC legislation (Russian).

Sweden

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Sweden to Adopt Automatic Exchange of Information on Tax Rulings

The Swedish government has presented proposed legislation to parliament that would allow for the automatic exchange of advance tax rulings. The proposed automatic exchange is in accordance with the directive for the mandatory automatic exchange of information between EU Member States on advance cross-border tax rulings and advance pricing agreements as adopted by the EU Council on 8 December 2015 (previous coverage). If approved, the automatic exchange will apply from 1 January 2017, and will include the exchange of certain rulings still in effect as of 1 January 2014 and all rulings issued after that date.

United States

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U.S. IRS Notice for a Public Hearing on CbC Reporting Regulations

On 18 April 2016, a notice of a public hearing on Country-by-Country (CbC) reporting from the U.S. IRS was published in the Federal Register. The public hearing will be held 13 May 2016, and concerns the notice of proposed rulemaking (REG-109822-15) for CbC reporting regulations that was published in the Federal Register in December 2015 (previous coverage) and is to be finalized by the end of June 2016.

Click the following link for the public hearing notice for additional information.

Treaty Changes (3)

Belarus-Armenia

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Belarus to Sign Protocol to the Tax Treaty with Armenia

On 11 April 2016, the Belarusian government approved the signing of a protocol to the 2000 income tax treaty with Armenia. The protocol will be the first to amend the treaty, and must be signed and ratified before entering into force.

Iceland-Untd A Emirates

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TIEA between Iceland and the U.A.E. Signed

On 12 April 2016, officials from Iceland and the United Arab Emirates signed a tax information exchange agreement. The agreement is the first of its kind between the two countries, and will enter into force after the ratification instruments are exchanged.

Nigeria-Qatar

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Update - Tax Treaty between Nigeria and Qatar

The income tax treaty between Nigeria and Qatar was signed on 28 February 2016. The treaty is the first of its kind between the two countries.

Taxes Covered

The treaty covers Qatari taxes on income, and the following Nigerian taxes:

  • Personal income tax;
  • Companies income tax,
  • Petroleum profits tax;
  • Capital gains tax;
  • Tertiary education tax; and
  • Information technology levy

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 6 months within any 12-month period.

Withholding Tax Rates

  • Dividends - 7.5%
  • Interest - 7.5%
  • Royalties - 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; 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

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

Entry into Force and Effect

The treaty will enter into force 60 days following the exchange of the ratification instruments, and will apply from 1 January of the year following its entry into force.

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