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25 April 2017 Louis Thomas
Frederic ScholtusKPMG Luxembourg Hermann Schomakers
Recent tax developmentsin hidden profit distributions
https://kpmgbrandcentral.brandwizard.net/app/asset/asset_search.aspx?catid=756&libid=2https://kpmgbrandcentral.brandwizard.net/app/asset/asset_search.aspx?catid=756&libid=2
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved
Speakers
Louis ThomasPartner, TaxKPMG Luxembourg S.C.T. +352 22 51 51 5527E. [email protected]
Frederic ScholtusAssociate Partner, TaxKPMG Luxembourg S.C.T. +352 22 51 51 5333E. [email protected]
Hermann SchomakersSenior Manager, TaxKPMG Luxembourg S.C.T. +352 22 51 51 5606E. [email protected]
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved
AGENDA:1. Income taxation
a. Corporate taxb. Individual tax
2. Recent case law
3. Tax reporting
4. Tax evasion and tax fraud
5. Practical guidance
a.k.a. “distribution cachée de bénéfices” or “verdeckte Gewinnausschüttung”Recent tax developments in hidden profit distributions
Income taxation of hidden profit distributions
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 5
Company(Luxembourg)
Corporate taxation
Shareholder(Luxembourg)
DIVIDENDWithholding taxmax. 15% WHT
To be addedto taxable income
Corporate taxation 20.33% CIT+surcharge
and 6.75%-12.60% MBT
Taxable incomemax. 45.78%
personal income tax• Interest• Rent• Salary• Indemnities• Fees• Royalties• Sales price ...
HIDDEN PROFIT DISTRIBUTION
• Renting out companyassets for free
• Debt assumption withoutcompensation
• Guarantee free of charge• Sale below market rate• …
Decreaseof net equity(Vermögens-minderung)
Averted increaseof net equity(verhinderte
Vermögensmehrung)
Advantage for shareholder
Motivated by shareholding relationship(not at arm’s length)
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 6
Company(Luxembourg)
Corporate taxation
Shareholder
• Family member• Business partner• Indirect shareholder• Ex-shareholder• Founder• Ultimate parent• Sister company• …
HIDDEN PROFIT DISTRIBUTION
Interestedperson
Withholding tax
To be added to taxable income
Taxable income
?05101517.65 %
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 7
Company(Luxembourg)
Individual tax implications – Luxembourg resident
Use of boat for free (which
renting value would be
estimated to EUR 200,000)
Luxembourg resident
Hidden profit
distribution
Dividends 200,000 EUR
Exemption -50%* - 100,000 EUR
Real expenses - 20,000 EUR
Abatement (couples filing jointly) - 3,000 EUR
Net income from investment income =77,000 EUR
Imputation withholding tax (15%) - 30,000 EUR
Tax at 45.78% (2017): 35,250 EUR
+ Dependence contributions (1.4%) + 1,078 EUR
* If Luxembourg company fully taxable
Possible risk of requalification into directors’ fees : Directors’ fees paid by a company in Luxembourg are subject to a 20% withholding tax calculated on the gross amount (or 25% of the deemed net amount)
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 8
Company(Luxembourg)
Individual tax implications – Luxembourg non-resident
Use of boat for free (which
renting value would be
estimated to EUR 200,000)
EU resident (outside Lux)
Hidden profit
distribution
Tax credit method (based on OECD-MC):
The income is taxable both in theState of source and in the State ofresidence.
The tax paid in the State of source iscredited against the tax due in theState of residence on the taxableincome concerned.
The credit is generally limited to theamount of tax due in the State ofresidence on the taxable incomeconcerned
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 9
UBO register - Update• Implementation :
• 4th Anti-Money Laundering Directive (AMLD) was adopted by the European Parliament
• The introduction of the UBO register in every Member State before June 26, 2017
• Definition of Ultimate Beneficial Owner (UBO):
• Basically a UBO is a private individual who, directly or indirectly, has more than 25% control over the legal entity by way of shares, voting rights, profit participating rights, or rights to appoint/dismiss directors
• Also applies to certain trusts
• UBO update in Luxembourg:
• Luxembourg Ministers Council has adopted on 31 March 2017 a legislative proposal on the introduction of a UBO registration
• Next step: sending of the bill to the Chamber of Representatives for further action and approval.
• UBO update for Belgium, Germany, the Netherlands and United Kingdom
Overview of recentcase law
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 11
Shareholder(Luxembourg)
Company(Luxembourg)
Ultimate ownerresident in Monaco
ServiceProvider
(Switzerland)
ChargesAmorti-sation
_Rental fees
Service fees
23
1
Cour administrative, 27 July 2016, n° 36885c
Management services
Used by ultimate owner for private purposes for free
Hiddenprofit
distribution
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 12
Cour administrative, 5 July 2016, n° 36888c
Shareholder(Luxembourg)
Grand hotel SpA(Italy)
Company(Luxembourg)
Interest-free loan
5* hotel(Italy)
Hiddenprofit
distribution
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 13
Company(Luxembourg)
Sister(Luxembourg)
Tribunal administratif, 16 Dec 2015, n° 35535 (final)
Suppliers
Trade creditors
Payment of trade creditors
Hiddenprofit
distribution
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 14
Company(Luxembourg)
Tribunal administratif, 21 Sept 2015, n° 33892 (final)
Loan
Ultimate ownerresident in Qatar
Living in the London villa from 2008-2011
without paying rent
Hiddenprofit
distribution
Villa(UK)
Tax reporting of hidden profit distributions
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 16
Company(Luxembourg)
Tax reporting
Shareholder(Luxembourg)
HIDDEN PROFIT DISTRIBUTION
Interestedperson
(ultimate parent)
The reconstruction should be done alongthe shareholding lines and may result innumerous hidden profit distributions upthe chain.
In this example, dividend WHT returns(form 900) should be filed by theCompany and by the Shareholder for thedeemed distribution to their directparent(s). Supporting legal documentationmay be attached.
The respective WHT rate should beapplied with regard to the directshareholder (0%; 5%, 10%; 15%).
Indirectshareholder
(EU)
HIDDEN PROFIT DISTRIBUTION
HIDDEN PROFIT DISTRIBUTION
Interest-free loan
HIDDEN PROFIT DISTRIBUTION
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved 17
Company(Luxembourg)
Tax reporting
Shareholder(Luxembourg)
HIDDEN PROFIT DISTRIBUTION
Interestedperson
(ultimate parent)
Interest-free loan ”Fiktionstheorie” abandoned by
Luxembourg jurisprudence (Couradministrative, 27 July 2016, n° 36855C).
Annual accounts should not be modified(e.g. no need to book interest income).
In the corporate tax return of theCompany, a profit adjustment should bedone for the hidden profit distribution asan off-balance sheet correction in lineR0060 of tax form 500.
Indirectshareholder
(EU)
HIDDEN PROFIT DISTRIBUTION
HIDDEN PROFIT DISTRIBUTION
Deemedinterest
Tax evasion andtax fraud: New regimesince 1 January 2017
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved
TAX EVASIONFraude fiscale simple
AGGRAVATED TAX EVASIONFraude fiscale aggravée
TAX FRAUDEscroquerie fiscale
obtain undue tax advantage (e.g. unjustified tax credit) cause reduction of tax revenues (e.g. not declaring items of income, deducting fictitious expenses)
for the benefit of another person or for one´s own end by fraud through intentional behavior (act or omission)
Evaded taxes exceed 25% of annual tax/reimbursement and not less than EUR 10,000; or
exceed EUR 200,000
Significant in relative terms compared with annual tax or reimbursement due; or
Signficant in absolute terms
Systematic use of fraudulent acts aimed at (i) concealing relevant facts to the tax authorities or (ii) persuading them of incorrect facts
Administrative offence Criminal act (= primary offence for anti-money-laundering purposes)
Fine between 10% and 50% of evaded taxes
Imprisonment: 1 month – 3 years Penalty: EUR 25,000 to 6 times the
evaded taxes
Imprisonment: 1 month – 5 years Penalty: EUR 25,000 to 10 times the
evaded taxes Forfeiture of certain civil rights
Tax offence Tax crimes
19
Practical guidance
© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved
1. Identify all relevant factsand circumstances
2. Analyse potentialconsequences
3. Communicate with client, advisors, stakeholders…
4. Proactive or reactive strategy?
Hiddenprofit
distribution
BEFOREPrecaution
AFTERAction
1. Identify persons who have a close relationship with shareholders
2. Document legal arrangements with interested persons and shareholders (also from a transfer pricing perspective)
Practical guidance
21
Thank you
Document Classification: KPMG Confidential
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© 2017 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.