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Approved Changes (3)

Norway-European Union

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EFTA Surveillance Authority finds that Norway's Interest Deduction Rules Infringe Freedom of Establishment under EEA Agreement

On 25 October 2016, the EFTA Authority (ESA) issued a reasoned opinion finding that the provisions on the limitation of intra-group interest deduction in the Norwegian Tax Act indirectly constitute an infringement of the freedom of establishment protected by Article 31 of the Agreement on the European Economic Area (EEA).

The current interest deduction rules provide that for total interest expenses over NOK 5 million, interest paid to an affiliated party that exceeds 25% of EBITDA is not deductible from taxable income. The rules do not distinguish between domestic or foreign affiliated lenders. However, the ESA has found that due to Norway's domestic group contributions rules, the interest deduction rules are in practice very unlikely to apply to wholly Norwegian groups of companies and will never apply to groups that are entitled to grant each other group contributions. Since the group contribution rules do not apply for cross border groups, the interest deduction rules will apply for non-residents to a greater extent.

ESA may bring the matter before the EFTA Court if Norway fails to take the measures necessary to comply with the reasoned opinion within two months.

Click the following links for the ESA press release and the reasoned opinion.

Ukraine

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Ukrainian Court Holds Contractual Penalties Paid to Non-resident Not Subject to Tax

In a recently published decision, the Ukrainian Supreme Administrative Court ruled on whether contractual penalties paid to a non-resident company are subject to withholding tax in Ukraine. The case involved a Ukrainian company that had entered into a contract with a Russian supplier for the purchase and sale of goods.

In the year concerned, the Ukrainian company was required to pay contractual penalties and arbitration fees resulting from a failure to pay the Russian supplier in full for the goods supplied. The payment was made without withholding any tax. However, while auditing the Ukrainian company for the year, the local tax authority determined that the payment was in connection with the supplier's activities in Ukraine, and therefore subject to 15% withholding tax. Since the Ukrainian company failed to act as a tax agent and withhold the tax due, the company was assessed additional corporate tax, as well as associated tax fines and penalties. The assessment was appealed and made its way to the Supreme Administrative Court.

In its decision, the Supreme Administrative court found that contractual penalties paid by a Ukrainian resident to a non-resident are not subject to tax. The Court held that contractual penalties are meant to compensate an aggrieved party to a contract for the negative consequences that noncompliance of the other party may cause. Such penalties cannot qualify as Ukrainian source income, and therefore cannot be subject to Ukrainian tax.

United States

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U.S. Social Security Fact Sheet for 2017 Published

The U.S. Social Security Administration has published a fact sheet for the 2017 Social Security rates and cap. The rate for the Social Security portion (OASDI) remains 6.20%, and the rate for the Medicare portion remains 1.45%. The taxable earnings cap for OASDI is increased from USD 118,500 to USD 127,200. No cap applies for Medicare.

Click the following link for the 2017 Social Security fact sheet.

Proposed Changes (2)

Jersey

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Jersey Budget for 2017 Lodged

On 18 October 2016, Jersey's Minister for Treasury and Resources lodged the Draft Budget for 2017. The main tax-related measures include:

  • Introducing unilateral double taxation relief on the basis of domestic legislation for companies subject to tax at 10% or 20% from 2017 (currently relief generally only granted under a tax treaty);
  • Amending the tax treaty with Guernsey to provide a clear legal basis for the tax relief granted to Jersey residents for underlying tax suffered on dividends received from Guernsey companies;
  • Amending the Income Tax Law in order to give the Comptroller the power to obtain details of the profits chargeable to tax at the rate of 0% from all companies resident in Jersey beginning with the 2016 tax year (currently only required where a Jersey resident individual ultimately owns more than 2% of the shares of the company);
  • Extending the deadline for a company to submit the information return to 31 December following the tax year in order to align it with the income tax return deadline, which was extended in the previous budget (companies not required to submit an income tax return must submit an information return); and
  • Increasing the standard personal income tax exemption thresholds to GBP 14,550 for single taxpayers and GBP 23,350 for married couple/civil partnership (higher exemption thresholds apply for those aged 65 and older).

The measures must be approved by the States Assembly and will generally apply from 1 January 2017.

Click the following link for the Draft Budget Statement 2017.

Russia

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Russia's BEPS Plans for 2017-2019

The Russian Ministry of Finance has published a proposal for its main tax plans for 2017-2019, which mainly include measures related to BEPS. The plans include:

  • Extending the scope of online B2C supplies subject to value added tax (VAT) to include supplies of goods from foreign suppliers via internet platforms in 2018 or 2019 (B2C e-service supplies are subject to VAT from 2017);
  • Signing the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which is to be open for signature in the first half of 2017;
  • Implementing the transfer pricing documentation requirements developed as part of BEPS Action 13 from 2017, including the Master file, Local file, and Country-by-Country (CbC) report, as well as the legislation for the automatic exchange of CbC reports; and
  • Beginning the automatic exchange of financial account information from 2018.

In general, the plans will  require parliamentary approval. Details of each will be published once approved.

Treaty Changes (4)

Armenia-Germany

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Update - Tax Treaty between Armenia and Germany

The income and capital tax treaty between Armenia and German was signed on 29 June 2016. The treaty is the first of its kind directly between the two countries, and once in force and effective, will replace the 1981 tax treaty between Germany and the former Soviet Union as it applies in respect of Armenia and Germany.

Taxes Covered

The treaty covers Armenian profit tax, income tax, and property tax. It covers German income tax, corporate income tax, trade tax, and capital tax.

Residence

If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be considered a resident of either State for the purpose of claiming any benefit provided by the treaty.

Withholding Tax Rates

  • Dividends - 7% if the beneficial owner is a company directly holding at least 25% of the paying company's capital; otherwise 10%
  • Interest - 5%
  • Royalties - 6%

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; and
  • Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated 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

Armenia applies the credit method for the elimination of double taxation. Germany generally applies the exemption method, including for dividends when the beneficial owner is a German company that owns at least 10% of the capital of the Armenian payer, and the payer is not tax exempt or able to deduct the dividends. However, Germany applies the credit method for dividends not qualifying for exemption, interest, royalties, capital gains from shares or interests deriving at least 50% of their value from immovable property situated in the other State, and certain other items of income in accordance with German tax law.

Entry into Force and Effect

The treaty will enter into force once the ratification instruments are exchanged and will generally apply from 1 January of the year following its entry into force. Article 26 (Assistance in the Collection of Taxes) will apply as soon as the competent authorities have so agreed by mutual agreement in accordance with Article 24 (Mutual Agreement Procedure).

The 1981 tax treaty between Germany and the former Soviet Union will cease to apply in respect of Armenia and Germany once the Armenia-Germany tax treaty is effective.

Latvia-Qatar

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Tax Treaty between Latvia and Qatar in Force

A recent update from the Latvian Ministry of Foreign Affairs has confirmed the entry into force of the income tax treaty with Qatar on 1 June 2015. The treaty, signed 26 September 2014, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Latvian enterprise income tax and personal income tax, and Qatari taxes on income.

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 projects 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 other than a partnership, otherwise 5%
  • Interest - 0% if the beneficial owner is a company other than a partnership, otherwise 5%
  • Royalties - 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 shares or of a comparable interest of any kind deriving more than 50% of their value from 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.

Limitation on Benefits

Article 28 (Limitation on Benefits) includes the provision that a resident of a Contracting State shall not receive the benefit of any reduction in or exemption from tax provided for in the tax treaty if the main purpose or one of the main purposes of such resident or a connected person was to obtain the benefits of the treaty.

Effective Date

The treaty applies from 1 January 2016.

Morocco-Tanzania

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Tax Treaty between Morocco and Tanzania under Negotiation

On 10 to 13 October 2016, officials from Morocco and Tanzania met for the first round of negotiations for 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.

Oman-Serbia

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Tax Treaty between Oman and Serbia Initialed

Officials from Oman and Serbia initialed an income and capital tax treaty following the conclusion of negotiations held 17 to 19 October 2016. The treaty will be the first of its kind between the two countries, and must be signed and ratified before entering into force.

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