Worldwide Tax News
On 17 November 2016, the opinion of Advocate General Juliane Kokott of the Court of Justice of the European Union (CJEU) was published concerning whether Belgium's Fairness Tax is compatible with both the freedom of establishment under Article 49 of the TFEU and the rules of the EU Parent-Subsidiary Directive (2011/96/EU). While the Advocate General concluded that the Fairness Tax is compatible in most aspects, it is not compatible when it subjects a company to a tax burden that exceeds the amount allowed under the Directive when that company distributes profits with respect to dividends it has received and then redistributes.
The Fairness Tax was introduced in 2013 and was first due in assessment year 2014. The tax is a separate corporate assessment of 5.15% (5% + 3% crisis surcharge) on distributed profits (dividends) that were not effectively taxed due to the application of the notional interest deduction or losses carried forward. The Fairness Tax applies to companies established in Belgium and to non-resident companies with a permanent establishment (PEs) in Belgium. For non-resident companies, the tax applies to the portion of the gross dividends distributed that corresponds to the share of the company’s total profits that were contributed by the Belgian PE.
Action was brought before the Belgian Constitutional Court to annul the articles of the law that introduced the Fairness Tax. Since the Court had doubts about the compatibility of the Fairness tax, the case was referred to the CJEU for a preliminary ruling on the following questions:
- Must Article 49 TFEU be interpreted as precluding national rules under which
- companies established in another Member State and having a Belgian permanent establishment are subject to a tax if they decide to distribute profits which are not included in the final taxable profits of the company, irrespective of whether profits have flowed from the Belgian permanent establishment to the main establishment, whereas companies established in another Member State and having a Belgian subsidiary are not subject to such a tax if they decide to distribute profits which are not included in the final taxable profits of the company, irrespective of whether or not the subsidiary has distributed a dividend;
- companies established in another Member State and having a Belgian permanent establishment are, if they retain the Belgian profits in full, subject to a tax if they decide to distribute profits which are not included in the final taxable profits of the company, whereas Belgian companies are not subject to such a tax if they retain their profits in full?
- Must Article 5 of the Parent-Subsidiary Directive be interpreted as meaning that there is withholding tax in the case where a provision of national law requires that a tax be imposed on a distribution of profits by a subsidiary to its parent company in that, in the same taxable period, dividends are distributed and the taxable profits are wholly or partly reduced by the deduction for risk capital and/or by tax losses carried forward, whereas under national law the profits would not be taxable if they remained with the subsidiary and were not distributed to the parent company?
- Must Article 4(3) of the Parent-Subsidiary Directive be interpreted as precluding national legislation under which a tax is levied on the distribution of dividends if that legislation has the effect that, in the case where a company distributes a received dividend in a year subsequent to the year in which it received that dividend itself, it is taxed on a portion of the dividend which exceeds the threshold laid down in the aforementioned Article 4(3) of the directive, whereas that is not the case if that company redistributes a dividend in the year in which it receives it?
In the Advocate General's opinion, the three questions should be answered as follows:
- Article 49 in conjunction with Article 54 TFEU is to be interpreted as not precluding legislation of a Member State which provides that
- a non-resident company with a profit-making permanent establishment in that Member State is subject to a tax under certain conditions when it distributes profits, whereas a non-resident company with a subsidiary in that Member State is not subject to such tax;
- a non-resident company with a profit-making permanent establishment in that Member State that retains in full the profits generated there is subject to a tax under certain conditions when it distribute profits, whereas a resident company is not subject to such tax when it retains profits in full;
- National legislation that subjects a company to additional taxation of revenue when it distributes profits does not constitute a withholding tax within the meaning of Article 5 of Directive 2011/96/EU.
- Article 4(3) of the directive 2011/96/EU precludes national legislation that has the effect of subjecting a company to a tax burden that exceeds the amount allowed under |P Article 4(3) when it distributes profits with respect to dividends that it has, within the scope of the directive, received and then redistributes.
Click the following link for the full text of the Advocate General's opinion.
On 17 November 2016, Hungary's Prime Minister Viktor Orbán announced that the government is planning to cut the corporate tax rate to 9% for all companies in 2017. Currently, a 10% rate applies for taxable income up to HUF 500 million with a 19% rate applying on the excess. The government is also planning to reduce the value added tax (VAT) rate on internet services from 27% to 18% in 2017 and subsequently down to 5% in 2018.
On 15 November 2016, UK HMRC published a supplementary paper on tax adjustments as part of its consultation on simplifying the corporation tax computation (previous coverage). The supplementary paper covers the most frequent adjustments that companies use and seeks input on the adjustments that would benefit from simplification.
Click the following link for the consultation page, which includes the initial report, the supplementary paper, and comprehensive and summary tables of the adjustments. The consultation ends 31 December 2016.
UN Publishes Possible Changes to Articles and Commentaries of the UN Model including New Limitation on Benefits Article
The UN has published an agenda item on possible changes to Articles and Commentaries of the UN Model Treaty to be discussed during the Thirteenth Session of the Committee of Experts on International Cooperation in Tax Matters, which will be held 5 to 8 December 2016. The possible changes are meant to address BEPS issues and include:
- A new Article 22 (Limitation on Benefits);
- The addition of new definitions of the terms "Pension Fund" and "Special Tax Regime" in Article 3 (General Definitions);
- The addition of a new sentence to Article 4 (Resident) that limits the scope of the term "Resident";
- A new rule for Article 10 (Dividends) concerning the application of the new Article 22 (Limitation on Benefits);
- New rules for Article 11 (Interest) concerning special tax regimes, notional deductions, and the new Article 22 (Limitation on Benefits);
- New rules for Article 12 (Royalties) concerning special tax regimes and the new Article 22 (Limitation on Benefits); and
- A new rule for Article 21 (Other Income) concerning guarantee fees and special tax regimes.
Click the following link for full agenda item: Base erosion and profit-shifting – possible changes to Articles and Commentaries, including a possible LOB clause.
On 20 October 2016, the Andorran parliament approved the agreement with the EU providing for the automatic exchange of tax information on financial accounts of each other’s residents. The agreement was signed on 12 February 2016 and will replace the 2004 agreement whereby Andorra agreed to put in place measures equivalent to those provided for by the EU Savings Directive. The revision of the 2004 agreement became necessary now that the EU Savings Directive has been repealed and replaced by the amended provisions of the EU Administrative Assistance Directive.
On 18 November 2016, officials from Cyprus and India signed a new income tax treaty that will replace the 1994 tax treaty between the two countries. According to a release from India's Ministry of Finance, the main differences between the old and new treaty include:
- A change to source based taxation of capital gains arising from alienation of shares, instead of residence based taxation (grandfathering clause for investments made prior to 1 April 2017);
- New provisions for assistance in the collection taxation;
- Updated provisions for the exchange of information in line with the OECD standard for information exchange;
- Expansion of the scope of permanent establishment; and
- Reduction of the withholding tax rate on royalties from 15% to 10% (India's current domestic rate).
The new treaty will enter into force after the ratification instruments are exchanged. Once in force, the Indian authorities will retrospectively rescind the classification of Cyprus as a "Notified Jurisdictional Area" as from 1 November 2013. Additional details will be published once available.
On 15 November 2016, officials from Germany and Macedonia signed a protocol to the 2006 income and capital tax treaty between the two countries. The protocol is the first to amend the treaty and will enter into force after the ratification instruments are exchanged.
Additional details will be published once available.
On 15 November 2016, the Norwegian parliament approved the bills ratifying the protocol to the 1987 income and capital tax treaty with Switzerland, the tax information exchange agreement with the United Arab Emirates, and the 2015 income tax treaty with Zambia.
The protocol to the Norway-Swiss tax treaty was signed 4 September 2015 and is the third to amend the treaty. It will enter into force once the ratification instruments are exchanged, and will generally apply from that date, although certain provisions will apply from 1 January of the year following its entry into force (previous coverage).
The tax information exchange agreement with the U.A.E. was signed 3 November 2015 and 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 from the date of its entry into force, and for other matters from 1 January of the year following its entry into force.
The tax treaty with Zambia was signed 17 December 2015. It will enter into force once the ratification instruments are exchange, and will apply from 1 January of the year following its entry into force. Once in force and effective, the new treaty will replace the 1971 tax treaty between the two countries (previous coverage).
Singapore and Canada Sign Competent Authority Agreement for Exchange of Financial Account Information
According to an update from the Inland Revenue Authority of Singapore, a competent authority agreement for the automatic exchange of financial account information was signed with Canada on 16 November 2016. Under the agreement, each country will automatically exchange information on accounts held in the respective country by tax residents of the other country based on the OECD Common Reporting Standard (CRS). The automatic exchange is to begin by September 2018 for information collected on the 2017 reporting year.
According to recent reports, the Vietnam government is planning to begin negotiations for income tax treaties with Fiji and Mauritius. Any resulting treaties would be the first of their kind between Vietnam and the respective countries, and must be finalized, signed and ratified before entering into force.