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Approved Changes (5)

Greece

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Greek Circular on Withholding Tax on Fees for Technical, Management, Consulting, and Similar Services to EU/EEA States

On 18 January 2017, the Greek Public Revenue Authority published Circular 1007/2017 concerning withholding tax on payments for technical services, management services, consulting services, and other similar services. Under general rules, such payments are not subject to withholding tax when paid to a non-resident legal entity unless the services were provided through a permanent establishment in Greece; in which case the withholding tax is 20%. However, the withholding in such cases was deemed to be in violation of the EU freedom to provide services because resident companies are not subject to withholding tax on such payments. Therefore the circular provides that in the case of payments to legal entities resident in EU/EEA Member States, the withholding tax exemption will apply regardless of whether the non-resident has a permanent establishment in Greece. This exemption does not apply, however, for certain services provided to government bodies.

India

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India Publishes Final Guidelines on Determining Place of Effective Management

On 24 January 2017, India's Central Board of Direct Taxes issued Circular No. 06 of 2017, which provides final guidelines for the determination of the place of effective management (POEM) of a company. The guidelines are in relation to India's rules for the determination of residence, which were changed as part of Finance Act, 2015 and made effective 1 April 2017 by Finance Act, 2016.

Under the prior rules, residence of a company was determined based on whether the control and management of its affairs was situated wholly in India during a year. Under the new rules, the residence of a company is determined based on whether its POEM is in India during a year. The residence test based on whether a company is an Indian company remains unchanged.

Active Business Test

In determining POEM, the first step involves determining whether a company has active business outside India. A company will be considered to have active business outside India if its passive income does not exceed 50% of total income; and

  • Less than 50% of its total assets are located in India;
  • Less than 50% of its total employees are situated or resident in India; and
  • Less than 50% of its total payroll expense is incurred on its India-based employees.

For the purpose of the active business test, the passive income of a company is the aggregate of:

  • Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
  • Income by way of royalty, dividend, capital gains, interest, or rental income.

Interest income is excluded from passive income if the company is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of its country of incorporation.

Active Business Test Met

If the active business test is met, a company will be considered to have its POEM outside India, provided that a majority of the company's board meetings are held outside India. However, if on the basis of facts and circumstances it is established that the board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India, then the POEM may be considered to be in India.

Active Business Test Not Met

If the active business test is not met, the determination of POEM will be made in two stages:

  • First - identification of the person or persons who actually make the key management and commercial decisions for the conduct of the company’s business as a whole; and
  • Second - determination of where the decisions are in fact being made.

The guidelines set out several factors that will be considered in determining where the decisions are being made, including the location of regular board meetings, the location of members of executive committees (if the board has delegated authority to such committees), the location of the company's head office, and others.

In determining POEM, all relevant facts related to the management and control of the company must be considered, and no determination should be made based on isolated facts alone. The guidelines set out five examples where isolated facts do not establish POEM:

  • The fact that a foreign company is completely owned by an Indian company;
  • The fact that there exists a permanent establishment of a foreign entity in India;
  • The fact that one or some of the directors of a foreign company reside in India;
  • The fact that local management is situated in India in respect of activities carried out by a foreign company in India; and
  • The existence in India of support functions that are preparatory and auxiliary in character.

Conclusion

The guidelines conclude by reiterating that the above principles for determining the POEM are for guidance only and that no single principle will be decisive in itself. Also noted is that the principles are not to be seen with reference to any particular moment in time ("snapshot" approach), but rather over a period of time the activities are performed during the previous year. Further, if based on the facts and circumstances if it is determined that the POEM is both inside and outside India during the previous year, POEM will then be presumed to be in India if it has been mainly / predominantly in India.

Click the following link for Circular No. 06 of 2017: Guiding Principles for determination of Place of Effective Management (POEM) of a Company for additional details, including several examples.

Portugal

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Portugal Individual Income Tax Brackets for 2017

Portugal's individual income tax brackets for 2017 have been adjusted as follows:

  • up to EUR 7,091 - 14.5%
  • over EUR 7,091 up to 20,261 - 28.5%
  • over EUR 20,261 up to 40,522 - 37.0% (plus 0.88% additional surcharge)
  • over EUR 40,522 up to 80,640 - 45.0% (plus 2.75% additional surcharge)
  • over EUR 80,640 - 48.0% (plus 3.21% additional surcharge)

The main income tax rates for each bracket are unchanged, while the additional surcharge rates have been reduced overall.

Slovenia

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Slovenia Publishes FAQ on CbC Reporting

Slovenia's Ministry of Finance has published an FAQ on Country-by-Country (CbC) reporting requirements. Key points of the FAQ include:

  • Slovenia will exchange CbC reports through the Multilateral Competent Authority Agreement for the exchange of Country-by-Country reports, which Slovenia has signed and ratified (no agreement required for exchange at EU level);
  • Slovenia's CbC reporting requirements are regulated by amendments to the Tax Procedures Act, which transposed Council Directive (EU) 2016/881 (previous coverage);
  • The required content of the CbC report is in line with Action 13 and the EU rules, and for the additional information reported in Table 3, the information should be in English;
  • CbC reports are to be submitted to the Slovenian tax authority in accordance with the OECD XML schema (detailed instructions regarding the manner and forms of submission will be provided later in 2017);
  • The CbC reporting requirements apply for fiscal years beginning on or after 1 January 2016 for resident ultimate parent entities, and for fiscal years beginning on or after 1 January 2017 for non-parent constituent entities and surrogate parent entities;
  • When required, the CbC report must be filed within 12 months following the end of the fiscal year reported on;
  • The CbC reporting threshold is EUR 750 million or equivalent in local currency in the previous year;
  • Slovenian resident entities must provide notification by its tax return deadline on whether it is the ultimate parent or surrogate parent, or if neither, the identity and tax residence of the reporting entity.

Click the following links for the CbC reporting FAQ (Slovenian language) and the CbC reporting information page (Slovenian language) on the Ministry of Finance website.

United States

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U.S. Publishes Final and Temporary Regulations: Dividend Equivalents From Sources Within the United States

On 24 January 2017, U.S. IRS final and temporary regulations (TD 9815) were published in the Federal Register. TD 9815 provides guidance to nonresident alien individuals and foreign corporations that hold certain financial products providing for payments that are contingent upon or determined by reference to U.S. source dividend payments. The regulations also provide guidance to withholding agents that are responsible for withholding U.S. tax with respect to a dividend equivalent, as well as certain other parties to section 871(m) transactions and their agents. TD 9815 adopts previously proposed regulations, and makes technical amendments to prior final and temporary regulations concerning dividend equivalents (previous coverage).

Click the following link for TD 9815: Dividend Equivalents From Sources Within the United States. The regulations are effective on 19 January 2017.

Treaty Changes (5)

Albania-Iran

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Albania and Iran to Negotiate Tax Treaty

According to recent reports, officials from Albania and Iran met 14 January 2017 to discuss bilateral relations, 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.

Chile-Italy

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Tax Treaty between Chile and Italy has Entered into Force

The income tax treaty between Chile and Italy entered into force on 22 December 2016. The treaty, signed 23 October 2015, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Chilean taxes imposed under the Income Tax Act, and Italian personal income tax, corporate income tax, and regional tax on productive activities (IRAP).

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 based on its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. 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 in a Contracting State through employees or other engaged individuals when the activities continue 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 that directly holds at least 25% of the paying company's capital; otherwise 10% (the rates set in the treaty do 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 derived from loans granted by banks and insurance companies, bonds or securities that are regularly and substantially traded on a recognized securities market, and the 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%

Regarding Article 10 (Dividends), the final protocol to the treaty provides that if the FCT paid ceases to be fully creditable or the additional tax exceeds 35%, the Contracting States shall consult with each other with a view to amending the treaty in order to re-establish the balance of benefits under the treaty.

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;
  • Gains from the alienation of shares, comparable interests, or other rights if:
    • The alienator at any time during the 365-day period preceding the alienation directly or indirectly owned shares, comparable interests, or other rights representing at least 20% of the capital of a company resident in the other State; or
    • At any time during the 365-day period preceding the alienation, the shares, comparable interests, or other rights directly or indirectly derived at least 50% of their value from immovable property situated in the other State; and
  • Any other gains from the alienation of shares, comparable interests, or other rights representing the capital of a company resident in the other State, but the tax on such gains may not exceed 16%.

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.

Limitation on Benefits

Article 27 (Entitlement to Benefits) includes the provision that a benefit under the treaty will not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.

Article 27 (Entitlement to Benefits) also includes the provision that the benefits of the treaty will not apply when a resident of one Contracting State derives income from the other State and the first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third state, if:

  • The total tax paid on the income in the first mentioned State and the third state is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment; or
  • The third state does not have a tax treaty in force with the other Contracting State from which the benefits of the treaty are being claimed, unless the income attributable to the permanent establishment is included in the tax base of the enterprise in the first-mentioned Contracting State.

When the above limitation applies, the income may be taxed in accordance with the domestic law of the other Contracting State. However, any tax on affected dividend, interest, or royalty income is limited to 25% (does not limit Chile's application of the additional tax payable on dividends (35%) provided that the FCT is fully creditable in computing the amount of the additional tax).

MFN Clause

The final protocol to the treaty includes the provision that if any agreement or convention between Chile and an OECD member state enters into force after the Chile-Italy treaty enters into force and such agreement or convention provides for an exemption or lower rate of tax on interest or royalties, then such exemption or lower rate will automatically apply under the Chile-Italy treaty.

Effective Date

The treaty applies from 1 January 2017.

Latvia-Saudi Arabia

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Latvia and Saudi Arabia Conclude Tax Treaty Negotiations

The Latvian Ministry of Finance has announced that officials from Latvia and Saudi Arabia concluded negotiations with the initialing of an income and capital tax treaty on 19 January 2017. The treaty is the first of its kind between the two countries and must be signed and ratified before entering into force.

Moldova-Turkey

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Moldova and Turkey Conclude SSA Negotiations

Officials from Moldova and Turkey concluded negotiations with the initialing of a social security agreement on 19 January 2017. The agreement is the first of its kind between the two countries and must be signed and ratified before entering into force.

Tunisia-Bulgaria-Czech Rep-Morocco

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Tunisia Approves Pending SSAs with Bulgaria, the Czech Republic, and Morocco

On 17 January 2017, the Tunisian parliament approved the pending social security agreement with Bulgaria (signed 1 October 2015), the Czech Republic (signed 20 November 2015), and Morocco (signed 19 October 2015). The agreements are the first of its kind between Tunisia and the respective countries and will enter into force after the ratification instruments are exchanged.

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