Worldwide Tax News
On 21 December 2015, the Brazilian Revenue Service published Executive Declaratory Act No. 3/2015, which repeals the exclusion of Dutch holding companies without sufficient economic substance from Brazil's grey list. Dutch holding companies without sufficient economic substance were originally included in the 2010 Brazilian grey list, but subsequently excluded following a request by the Dutch government to review the inclusion. With the repeal of that exclusion, a number of tax issues that apply for grey-listed jurisdictions/regimes are triggered, including CFC, thin capitalization and transfer pricing rules, non-deductibility of certain expenses, and increased withholding taxes.
According to Receita Federal, the repeal of the exclusion was caused by the failure of the Dutch authorities to explain and justify certain aspects of Dutch tax legislation. The change is effective the date the Executive Declaratory Act was published.
Cyprus Adopts Tax Reform Measures Concerning Dividends Exemption Restrictions, Tax Loss Utilization, Transfer Pricing Adjustments and Others
On 10 December 2015, the Cyprus House of Representatives adopted a number of tax reform measures proposed earlier in the year, several of which apply retroactively. One of the reform measures, a notional interest deduction, was already approved earlier (previous coverage).
The main measures are summarized as follows.
Changes are made based on amendments to the EU Parent-Subsidiary Directive concerning hybrid mismatches and anti-abuse.
Cyprus companies receiving dividends from non-residents will no longer be eligible for the dividend tax exemption if the dividends paid are deductible for the non-resident payer (hybrid mismatch). In addition, no tax exemption will apply for any dividends received under an arrangement that was put into place with the main purpose of obtaining a tax advantage.
As a result of the change, the rate of tax for non-exempt dividends is 12.5% and dividends derived from hybrid instruments will no longer be subject to the special contribution for defense.
The changes apply from 1 January 2016.
Foreign exchanges gains/losses, whether realized or not, are no longer taxable/deductible for most taxpayers for the computation of taxable profit. However, the new treatment does not apply for active forex traders. Such companies instead have the option to make an irrevocable election to be subject to tax on a realized basis with unrealized gain/losses not considered. The election must be made when submitting the 2015 tax return.
This new treatment applies retroactively from 1 January 2015.
The increased annual depreciation allowance of 20% for plant and machinery and 7% for industrial buildings and hotels is extended for assets acquired through the end of 2016 (originally applied for assets acquired in 2012 through 2014).
In order to comply with EU standards, Cyprus residents are allowed to utilize losses of a group company that is resident in another EU Member State, with the condition that such company has no possibility to utilize, carry forward or surrender the losses in its State of residence or in a State where an intermediary holding company is resident. The use of qualifying losses is subject to standard Cyprus loss rules.
This change applies retroactively from 1 January 2015.
An anti-avoidance rule is introduced that allows the tax authority to recharacterize corporate reorganizations and reject the tax neutral treatment available for reorganizations if it is shown that the main purpose was the deferral, reduction or avoidance of tax. The tax authorities are also allowed to impose conditions on the number of shares issued in a reorganization and set a minimum holding period for the shares up to three years.
The new rules apply from 1 January 2016.
A new rule is introduced that requires the tax authorities to make a corresponding adjustment (reduction) to the tax base of a group member involved in a transaction when a transfer pricing adjustment (increase) is made to the tax base of the other group member involved in the transaction.
This rule applies retroactively from 1 January 2015.
A 5% withholding tax is introduced for payments for services rendered by non-residents in connection with the exploration or exploitation of the seabed, subsoil, or their natural resources, in addition to the installation and exploitation of pipelines and other installations on the soil, seabed, or sea surface. The withholding tax does not apply if the non-resident has a permanent establishment in Cyprus.
The withholding tax applies from 1 January 2016.
On 10 December 2015, the Lithuanian parliament adopted legislation that harmonizes the deadlines for tax payments and tax returns to fall on the 15th day of the relevant months.
Changes made to deadlines for advance corporate tax payments and returns are as follows:
- If calculating advance corporate income tax payments based on the previous year's results, the deadlines are:
- The 15th day of the third month of the first quarter of the relevant tax year for the first return; and
- The 15th day of the third month of the third quarter of the relevant tax year for the second return.
- If calculating the advance corporate tax payments based on forecasted results, only one return is required and the deadline is the 15th day of the third month of the first quarter of the relevant tax year.
- Regardless of the method used to calculate the advance corporate tax payments, the payments are due by the 15th day of the third month of each quarter.
Annual corporate tax returns and payment must be made by the 15th day of the reporting month (6th month following the end of the tax year).
For other taxes, including withholding tax on dividends, environmental pollution tax, hydrocarbon resources tax, and others, the deadline for periodic payment and return filing is the 15th day of the month following the relevant period. The deadline for relevant annual returns and payments is the 15th day of the relevant reporting month.
The changes generally apply from 1 January 2016.
According to a recent announcement from Portugal's Secretary of State for Fiscal Affairs, the 3.5% surcharge on individual income will be reduced progressively for individuals with annual income of EUR 80,000 or less in 2016. The surcharge rates will be as follows:
- over EUR 7,000 up to 20,000 - 1.0%
- over EUR 20,000 up to 40,000 - 1.75%
- over EUR 40,000 up to 80,000 - 3.0%
- over EUR 80,000 - 3.5%
Currently, an exemption applies for individuals earning up to EUR 7,000. This exemption is expected, although not confirmed, to increase to EUR 7,420 in 2016 based on an increase in the minimum monthly wage. The government is also expected to further reduce the surcharge in 2017, including a reduction in the top 3.5% rate.
Russia Issues Guidance on Determination of Related Parties, Control of Foreign Entities, and Place of Effective Management
The Russian Federal Tax Service (FTS) recently published Guidance Letter ED-4-13/20767, which covers a number issues concerning the determination of related parties, control of foreign entities, and place of effective management.
According to the guidance, in determining whether parties are related for transfer pricing purposes the FTS will evaluate the level of influence one party may have on the other through:
- A participation in the capital of the other;
- An agreement concluded between the parties; or
- Other means where one may influence the other.
When considering the level of influence, the FTS will consider not only direct influence, but also indirect influence and influence from multiple related parties.
Regarding legal entities, the guidance states that parties will be deemed related in the following cases:
- Two legal entities are deemed related if one party has a stake of more than 25% in the capital of the other;
- A legal entity and a person acting as its sole executive body are deemed related;
- Multiple legal entities are deemed related:
- If a third party has a stake of more than 25% in the capital of each entity;
- If their sole executive body or no less than 50% of the members of their collective executive body, board of directors, or supervisory board is appointed or elected by a decision of the same person;
- If the same person acts as the sole executive body;
- If the same individuals (including their related parties) constitute at least 50% of the members of the entities' executive body, board of directors, or supervisory board; and
- If in a chain, the direct stake of each preceding entity in each successive entity exceeds 50%.
The total participation stake of one legal entity held in another includes the sum of the percentages of both direct and indirect participation stakes in the voting shares or in the capital of the other entity. If the exact percentage cannot be determined, the stake is determined in proportion to the number of participants in the other entity.
The guidance states that the exercise of control will be determined by the FTS based on the exertion, or ability to exert, decisive influence over a foreign entity's decisions concerning the distribution of its after-tax profits through:
- Direct or indirect participation in the foreign entity;
- Participation in a contract providing for the management of the foreign entity; or
- Other aspects of existing relationships among the relevant entity or entities.
A Russian resident will be considered a controlling person of a foreign entity if:
- It has a participation stake of more than 25% in the foreign entity; or
- It has a participation stake of more than 10% in the foreign entity and the aggregate stake of Russian tax residents' in the foreign entity exceeds 50%.
The above conditions can also be used to determine whether a foreign entity controls another entity.
Under the Russian Tax Code, foreign entities are considered Russian tax residents if their place of effective management is in Russia (subject to the provisions of applicable tax treaties). According to the guidance, a foreign entity will be deemed to have its place of effective management in Russia if meeting either of the following conditions:
- The entity's executive body regularly carries out its company-related activities from Russia, with an exception provided if such activities are carried out in Russia on a significantly smaller scale than those carried out outside Russia; or
- The entity's key officials (persons overseeing, and assuming liability for, the planning, management, and control of the entity's activities) perform their management activities predominantly in Russia.
The above conditions can also be used to determine the place of effective management of Russian legal entities.
The social security agreement between Albania and Belgium will enter into force on 1 January 2016. The agreement, signed 9 December 2013, is the first of its kind between the two countries and generally applies from the date of its entry into force.
On 28 December 2015, the income and capital tax treaty between Luxembourg and Singapore entered into force. The treaty, signed 9 October 2013, replaces the 1993 income and capital tax treaty between the two countries.
The treaty covers Luxembourg income tax on individuals, corporation tax, capital tax and the communal trade tax. It covers Singapore income tax.
The treaty includes the provision that a permanent establishment will be deemed constituted if an enterprise from one Contracting State furnishes services in the other State through employees or other engaged personnel for the same or connected project for a period or periods aggregating more than 365 days within any 15-month period.
- Dividends - 0%
- Interest - 0%
- Royalties - 7%
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; 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.
Singapore applies the credit method for the elimination of double taxation while Luxembourg generally applies the exemption method. However, in the case of income covered by Articles 12 (Royalties) and 17 (Artistes and Sportspersons income), and other items of income not dealt with in the treaty, Luxembourg generally applies the credit method.
The tax treaty applies in Luxembourg from 1 January 2016. It applies in Singapore in respect of withholding taxes from 1 January 2016 and for other taxes from 1 January 2017.
Article 26 (Exchange of Information) applies in both countries from the date of its entry into force for requests concerning tax periods beginning on or after 1 January 2016.
The provisions of the 1993 income and capital gains treaty between Luxembourg and Singapore will terminate and cease to have effect for the relevant taxes on the dates the new treaty applies. However, the provisions of Article 23 (1)(c) concerning a 10% sparing credit provided by Luxembourg for dividend, royalty and interest income received from Singapore that has been exempted or subject to reduced tax in Singapore will continue to apply for 5 years from the date the new treaty is effective.
On 21 December 2015, the Saudi Cabinet approved the signing of a protocol to the 2006 income and capital tax treaty with Austria. The protocol will be the first to amend the treaty, and must be finalized, signed and ratified before entering into force.
Additional details of the protocol will be published once available.