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Approved Changes (2)

Russia

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Russia Enacts Law Amending Thin Capitalization Rules

On 8 March 2015, Russia enacted Federal Law No. 32-FZ, which amends the country's thin capitalization rules. Although a previous draft had included a new definition for controlled debt extending the rules to foreign interdependent parties (affiliates), the changes as enacted do not included the extension and the basic concept of a controlled transaction remains the same. In addition, the exemption for third-party banks as included in the previous draft is also removed from the final law. The main changes to the thin capitalization rules as enacted are as follows.

The interest rates limits introduced in December 2014 for transactions where one party to a transaction is a bank and the transaction is recognized as controlled for transfer pricing purposes will now cover all transactions recognized as controlled. Based on the change:

  • The lender may recognize the actual interest receivable as taxable income if it exceeds the interest calculated at the lower rate threshold (see below), and
  • The borrower may deduct the actual interest payable if it is lower than interest calculated at the higher rate threshold (see below)

The thresholds depend on the currency of the debt. For ruble debt obligations, the law changes the base rate to the key rate of the Central Bank of Russia (CBR) instead of the refinancing rate. The rate thresholds applicable from 1 January 2015, unless otherwise indicated, are as follows:

  • Rubles 2015: Lower Rate = 75% of the CBR rate | Higher Rate = 180% of the CBR rate
  • Rubles 2016 and after: Lower Rate = 75% of the CBR rate | Higher Rate = 125% of the CBR rate
  • Euros (€): Lower Rate = EURIBOR(€) + 4 percentage points | Higher Rate = EURIBOR(€) + 7 percentage points
  • Chinese yuan (CNY): Lower Rate = SHIBOR(CNY) + 4 percentage points | Higher Rate = SHIBOR(CNY) + 7 percentage points
  • British pounds (GBP): Lower Rate = LIBOR(GBP) + 4 percentage points | Higher Rate = LIBOR(GBP) + 7 Percentage points
  • Swiss francs (CHF): Lower Rate = LIBOR(CHF) + 2 percentage points | Higher Rate = LIBOR(CHF) + 5 Percentage points      
  • Japanese yen (JPY): Lower Rate = LIBOR(JPY) + 2 percentage points | Higher Rate = LIBOR(JPY) + 5 Percentage points      
  • Other currency: Lower Rate = LIBOR(USD) + 4 percentage points | Higher Rate = LIBOR(USD) + 7 Percentage points

For Ruble debt obligations that originate from controlled transactions between Russian resident companies, the upper and lower thresholds are 0% and 180% of the CBR rate for 2015, and as above for 2016.

The law also changes the calculation of the maximum interest expense for the period from 1July 2014 through 31 December 2015 for debt obligations created prior to 1 October 2014. The rules are as follows:

  • For determining the ruble value for controlled debt denominated in foreign currency, the calculation should be based on the Central Bank exchange rate on the last accounting date of the relevant accounting period, but no higher than the official ruble exchange rate established by the Central Bank on 1 July 1 2014
  • The amount of equity capital should be determined without taking into account any exchange rate differences resulting from changes in official Central Bank exchange rates after 1 July 2014
  • A special cap of 3.5 times the Central Bank's refinancing rate is introduced for deductible interest accrued on ruble debt obligations in December 2015

The law was published and entered into force on 9 March 2015, with retroactive effect from 1 January 2015.

United Kingdom

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UK Finance Bill 2015 Introduced into Parliament

On 24 March 2015, Finance Bill 2015 was introduced into the UK Parliament. The Bill includes changes announced in Budget 2014, Autumn Statement 2014 and Budget 2015. One of the key measures of the Bill is the legislation for the introduction of the new Diverted Profits Tax (DPT), including further details of its application.

Profits will be deemed to be diverted and subject to the 25% DPT from 1 April 2015 when:

  • A foreign company has artificially avoided having a permanent establishment in the UK, or
  • A UK or foreign company uses entities or transactions that lack economic substance in order to create a tax advantage

The two main changes made from the original draft legislation for DPT are in regard to the notification requirements and the scope of the avoided permanent establishment (PE) rules. Under the draft legislation, a company would have to notify HMRC within three months of the end of an accounting period if it was reasonable for the company to assume that diverted profits might arise for that period. While the three month timing requirement is kept, under the revised final legislation there is no requirement to notify HMRC if:

  • HMRC has confirmed there is no requirement to notify,
  • It is reasonable for the company to assume that no DPT will apply - but if the assumption is made based on the possibility of a future transfer pricing adjustment, the company must still notify the HMRC, or
  • It is reasonable for the company to assume that it has already provided sufficient information to HMRC in order to decide whether to give a preliminary notice for that period and that HMRC has examined that information

In addition, if a company has notified HMRC, subsequent notifications are not required if there is no change in the circumstances in regard to whether or not DPT may arise.

While the notification requirements have been narrowed, the scope of the avoided PE rules has been expanded in the final legislation to also include sales to non-UK customers that are related to UK business activities, and the sale of land and buildings.

Other key measures of the Bill include:

  • Giving HM Treasury the power to make regulations to introduce country-by-country reporting
  • Setting the corporation tax rate to 20% from 1 April 2015
  • Reducing the petroleum revenue tax from 50% to 35%
  • Increasing R&D Tax Credits
  • Increasing the bank levy
  • Limiting the utilization of loss carryforwards by banks for losses accruing prior to April 2015
  • Increasing the 20% individual income tax bracket and the basic personal allowance

Finance Bill 2015 is expected to be adopted by Parliament before 30 March 2015 (the date the current Parliament will be dissolved).

Click the following links for Finance Bill 2015 as introduced into Parliament, and the Explanatory Notes published by HM Treasury.

Treaty Changes (3)

Belgium-Isle Of Man

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Belgium Approves Tax Treaty with the Isle of Man

On 13 March 2015, the Belgian government approved for ratification the pending income tax treaty with the Isle of Man. The treaty, signed 16 July 2009, is the first of its kind between the two jurisdictions.

Taxes Covered

The treaty covers Belgian individual income tax, corporate income tax, income tax on legal entities, and income tax on nonresidents. It covers Isle of Man taxes on income and profits.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for an uninterrupted period of at least 12 months, or the beneficial owner is a pension fund and such dividends are not derived from the carrying on of a business by the pension fund or through an associated enterprise; otherwise 15%
  • Interest - 0% for interest paid in respect of a loan or credit extended by one enterprise to another, interest on a loan or credit extended by the government of a Contracting Party to promote exports, and interest paid to a pension fund; otherwise 10%
  • Royalties - 0%
  • Capital Gains - generally exempt, except for gains from the alienation of immovable property and gains from the alienation of movable property forming part of the business property of a permanent establishment

Double Taxation Relief

Belgium generally applies the exemption method. However, if the amount of tax in the Isle of Man is less than 10% of the net amount of the income, Belgium will instead reduce to a third the Belgian tax which is proportionally relating to that income, calculated as if that income were income from Belgian sources. The same applies for dividends if the income out of which the dividends are paid is not taxed at a rate of at least 10%.

For interest and royalties, Belgium applies the credit method.

The Isle of Man generally applies the credit method for the elimination of double taxation. However, the exemption method is applied for dividends if a company resident in the Isle of Man directly holds, for an uninterrupted period of at least 12 months, at least 10% of the capital of Belgian company paying the dividends.

Entry into Force and Effect

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

Belgium-Seychelles

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Belgium Approves Tax Treaty with Seychelles

On 13 March 2015, the Belgian government approved for ratification the pending income tax treaty with Seychelles. The treaty, signed 27 April 2006, is the first of its kind between the two countries. A protocol to the treaty, signed 14 July 2009, was also approved for ratification.

Taxes Covered

The treaty covers Belgian individual income tax, corporate income tax, income tax on legal entities, income tax on nonresidents, and the supplementary crisis contribution. It covers Seychelles business tax.

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 6 months within any 12 month period.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has directly held at least 25% of the paying company's capital for an uninterrupted period of at least 12 months, 5% if the beneficial owner is a company directly holding at least 10% of the paying company's capital, otherwise 15%
  • Interest - 5% for interest paid on commercial debt-claims resulting from deferred payments for goods, merchandise or services supplied by an enterprise, otherwise 10%
  • Royalties - 5%
  • Capital Gains - generally exempt, except for gains from the alienation of immovable property and gains from the alienation of movable property forming part of the business property of a permanent establishment

Double Taxation Relief

Belgium generally applies the exemption method. However, if the amount of Seychelles tax is less than 15% of the net amount of the income, Belgium will instead reduce to a half the Belgian tax which is proportionally relating to that income, calculated as if that income were income from Belgian sources.

For dividends, Belgium will generally apply the exemption method, but will apply the credit method if the dividends are included in a company's aggregate income for Belgian tax purposes and are not exempted.

For interest and royalties, Belgium applies the credit method.

Seychelles applies the credit method for the elimination of double taxation.

Limitation on Benefits

Article 27 Limitation on Benefits includes the provision that the benefits of the treaty will not apply for a resident of a Contracting State if the main purpose or one of the main purposes of such resident or connected person was to obtain the benefits of the treaty.

2009 Protocol

The protocol to the treaty signed in 2009 amends Article 24 Exchange of Information.

Entry into Force and Effect

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

Chile-United Kingdom

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SSA between Chile and the UK to Enter into Force

The social security agreement between Chile and the United Kingdom will enter into force 1 June 2015. The agreement, signed 13 March 2012, is the first of its kind between the two countries and generally applies from the date of its entry into force.

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