Worldwide Tax News
CJEU Holds Finnish Immediate Taxation of Foreign Permanent Establishment Transfer Violates Freedom of Establishment
On 23 November 2017, a judgment was issued from the Court of Justice of the European Union (CJEU) concerning Finland's treatment of the transfer of a Finnish corporation's permanent establishment in another Member State and whether the treatment violates EU law in relation to the freedom of establishment (Article 49 TFEU) and the EU Mergers Directive (Council Directive 90/434/EEC).
The case involved a Finnish resident company that transferred a permanent establishment in Austria to an Austrian company and received in return shares in that company. As per the provisions of Article 52e of Finland's Business Income Tax Law, the Finnish company was taxed on the capital gains resulting from that operation in the year the permanent establishment was transferred. The company challenged the immediate taxation, claiming that it violated the freedom of establishment (Article 49 TFEU) since, in an equivalent national situation, taxation would not take place until the time of realization of the capital gains, that is, the disposal of the assets transferred. The case was heard by the Helsinki Administrative Court, which referred the following questions to the CJEU for a preliminary ruling:
- Does Article 49 TFEU preclude Finnish legislation under which, where a Finnish company, by way of a transfer of activity, transfers assets of a permanent establishment situated in another EU Member State to a company established in that State in return for new shares, the transfer of the assets is taxed immediately in the year of transfer, but in a corresponding national situation is not taxed until the time of realization?
- Is there indirect or direct discrimination if Finland levies tax immediately in the year of the transfer of activity before the income has been realized, and in a domestic situation not until the time of realization?
- If the answer to Questions 1 and 2 is in the affirmative, may the restriction of the right of establishment be justified on grounds such as an overriding reason of the public interest or the preservation of the national power of taxation? Does the prohibited restriction comply with the principle of proportionality?
In its judgment, the CJEU found that the difference in treatment may deter companies established in Finland from exercising an economic activity in another Member State through a permanent establishment, which is an impediment to freedom of establishment that cannot be justified. In particular, the court ruled that:
Article 49 TFEU must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which, where a resident company, in the course of a transfer of assets, transfers a non-resident permanent establishment to a company that is also non-resident, first, provides for the immediate taxation of the capital gains resulting from the transfer and, second, does not allow deferred collection of the tax, whereas in an equivalent national situation such capital gains are not taxed until the disposal of the transferred assets, in so far as that legislation does not allow the deferred collection of the tax.
Greece has published Circular No. 1173 of 10 November 2017, which lists the jurisdictions considered to have preferential tax regime status for the tax years 2016 and 2017. Inclusion in the list affects a number of tax matters, including the deductibility of expenses, the participation exemption, and the controlled foreign company regime. Preferential tax regimes are those with a corporate tax rate that is equal to or less than 50% of Greece's tax rate for legal persons/entities resident in Greece or permanent establishments in Greece.
For tax year 2016, the list includes:
Albania, Andorra, Anguilla, Bahamas, Bahrain, Belize, Bermuda, Bonaire, Bosnia and Herzegovina, British Virgin Islands, Bulgaria, Cayman Islands, Cyprus, Gibraltar, Guernsey, Ireland, Isle of Man, Jersey, Jordan, Kosovo, Liechtenstein, Macau, Macedonia, Maldives, Marshall Islands, Moldova, Monaco, Montenegro, Montserrat, Nauru, Oman, Paraguay, Qatar, San Marino, Saudi Arabia, Seychelles, Sri Lanka, St. Eustatius, Turks and Caicos Islands, United Arab Emirates, Uzbekistan, and Vanuatu.
For tax year 2017, the list is the same as above, but with the addition of Hungary.
Note - A list of non-cooperative jurisdictions for 2016, which has a similar impact and includes some of the same jurisdictions, was published earlier in the year (previous coverage).
Lebanon's Ministry of Finance recently issued two notices to clarify certain aspects of the tax rate changes introduced by Law 64 of 20 October 2017, which was published in the Official Gazette on 26 October (previous coverage).
The first notice concerns the tax on gains from property transfers, the repeal of the reduced 5% dividends withholding tax rate, and the increase of the tax on income from immovable property:
- With respect to property transfers, a 15% tax is introduced as of 27 October 2017 on gains for both individuals and legal entities that are not subject to income tax or that have enjoyed permanent, special, or exceptional exemptions from tax;
- With respect to dividends withholding tax, corporations that previously benefited from a reduced 5% withholding tax on dividends distributions must apply the standard 10% rate from 27 October 2017; and
- With respect to the tax on income from movable capital, the prior 5% rate applies up to 26 October 2017 and the new rate of 7% applies from 27 October 2017.
The second notice concerns the application of the increased corporate income tax rate. The notice provides that corporations must calculate the tax on profits realized up to 26 October 2017 at the prior 15% rate, while profits realized from 27 October 2017 must be calculated at the new 17% rate.
The Norwegian tax administration has published general English-language guidance for the submission of Country-by-Country (CbC) reports (RF-1352) via the Altinn online service. Norway's primary CbC reporting requirements apply for fiscal years beginning on or after 1 January 2016 for MNE groups meeting an NOK 6.5 billion consolidated group revenue threshold in the previous year. For secondary local filing by non-parent constituent entities, the requirements apply from 2017.
Submission via the Altinn service opened on 15 November, with the first CbC reports due by 31 December 2017 in XML format for reporting fiscal years ending 31 December 2016. Additional Norwegian-language guidance on submission is also available.
On 27 November 2017, the OECD released the mutual agreement procedure (MAP) statistics for 2016. The MAP statistics are reported by members of the Inclusive Framework on BEPS in order to measure the effects of the implementation of the minimum standard of BEPS Action 14 (Dispute Resolution). Some of the key points as provided in the announcement include:
- In comparison with the 2015 MAP statistics, both the number of MAP cases in start inventory and the number of started MAP cases have increased, which results from both an increase in the number of reporting jurisdictions and modified counting rules.
- Approximately 8,000 cases were in the inventory of the reporting jurisdictions as of 1 January 2016 and almost 25% of them were closed during 2016.
- Almost 1,500 cases started on or after 1 January 2016, and approximately 25% of them were already closed in 2016.
- Transfer pricing cases account for slightly more than half of the MAP cases in inventory.
- Transfer pricing cases take more time on average than other cases: approximately 30 months are needed for transfer pricing cases and 17 months for other cases.
- Over 85% of MAPs concluded in 2016 resolved the issue. Almost 60% of MAP cases closed were resolved with an agreement fully resolving the taxation not in accordance with the tax treaty and almost 20% of them were granted a unilateral relief while almost 5% were resolved via domestic remedy. Finally, 5% of the MAP cases closed were withdrawn by taxpayers while approximately 10% were not resolved for various reasons.
Click the following link for the MAP Statistics for 2016 webpage.
The Russian Ministry of Finance has published Letter No. 03-07-11/70530 of 27 October 2017 on the application of value added tax on the transfer of exclusive rights for the use of trademarks under a license agreement. The letter notes that under Article 146 of the Russian Tax Code, VAT applies on the sale of goods, works, and services in the territory of the Russian Federation, including the transfer of property rights, while under Article 149, the transfer of rights to certain intellectual property is exempt. This includes inventions, utility models, industrial designs, computer programs, databases, integrated microcircuit topographies, and production secrets (know-how). Because trademarks are not specifically listed as an exempt item under Article 149, the transfer of rights for trademarks under a license agreement is subject to VAT. Further, in determining the tax base for the transfer of rights to use trademarks, all income received by the taxpayer as payments in connection with the trademark rights is included.
On 27 November 2017, the United Arab Emirates Federal Tax Authority (FTA) announced the signing of the Executive Regulation for the Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT) (previous coverage). The VAT regime goes into effect on 1 January 2018, with a standard VAT rate of 5%. The Executive Regulation covers all aspects of the regime.
Click the following link for the Cabinet Decision on the Executive Regulation as published by the Ministry of Finance.
On 21 November 2017, the French National Assembly completed the first round of discussions on the Finance Bill for 2018 (previous coverage), which now goes to the Senate with amendments. Of the measure originally proposed, one change is with respect to the repeal of the rules limiting the deduction of interest expenses (the Carrez rule). Instead of repealing the rules, they will be amended to bring them in line with EU law. Other amendments include the addition of certain measures, including a tax credit for investment in qualifying start-up SMEs in the EEA, an increase in the penalties for tax fraud, and amendments to bring transfer pricing documentation requirements in line with the latest OECD guidelines. Additional details will be published once available.
The Chief Minister's Department of Jersey has launched a consultation on a draft law that would enable the creation of limited liability companies (LLCs) based on U.S. LLCs. As provided in the consultation document, the proposed Jersey LLC would combine elements of both Jersey limited companies and statutory partnerships, resulting in it having a separate legal personality without being a "body corporate". It would also be a transparent entity for tax purposes (i.e. the profits would be allocated to the members of the LLC, who would be required to pay income tax in the jurisdiction(s) in which they are tax resident), although it would have the ability to elect to be treated as a company.
Click the following link for the consultation page. The deadline to submit comments is 12 January 2018.
According to recent reports, Singapore is considering ways to expand its tax base in order to meet increasing revenue needs. One area under consideration is expanding the scope of Goods and Services Tax (GST) for e-commerce. Currently, GST registered taxpayers in Singapore are generally required to collect GST on e-commerce supplies, while digitalized goods and services from an overseas supplier are generally exempt and physical goods are only subject to GST if the value exceeds SGD 400.
On 28 November 2017, the Senate Budget Committee passed the Senate version of the Tax Cuts and Jobs Act with a vote of 12 for and 11 against. The bill can now go to the Senate floor for consideration, which is also subject to a vote, before a final floor vote to pass the bill, which may happen by the end of the week.
On 26 November 2017, Turkey published the decree for the ratification of the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters as amended by the 2010 protocol. The convention, signed by Turkey on 3 November 2011, will enter into force on the first day of the month following a three month period after the ratification instrument is deposited, and will generally apply from 1 January of the year following its entry into force.