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International Tax NewsEdition 23December 2014/January 2015
WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.
We hope that you will find this publication helpful, and look forward to your comments.
Shi-Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: [email protected]
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In this issue
Administration & case law EU LawTax legislation TreatiesProposed legislative changes
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Tax Legislation
Axel Smits Pascal JanssensBrussels AntwerpT: +32 (0)3 2593120E: [email protected]
T: +32 (0)3 2593119E: [email protected]
Tax LegislationBelgium
New government announces tax plans/reporting obligation for payments to tax havens
New government announces tax plansOn October 9, 2014, the new Belgian government announced new tax measures in its coalition agreement.
The coalition agreed, amongst others, on the following items:
• A ‘look-through’ tax on legal arrangements such as trusts and foundations, which would be charged on the income of a low-tax entity or trust payable to a Belgian resident shareholder or beneficiary even if the income is not distributed to the individual.
• A restriction of the scope of the catch-all provision to the cases targeted initially, as mentioned in the circular in this respect (i.e. only payments for services are targeted and a de minimus rule for the first tranche of 38,000 euros (EUR) will be taken into account).
• Important changes to the secret commissions tax (i.e. the tax at a current rate of 309% which is due in case certain payments made are not correctly reported on forms), which could have a positive impact on Belgian tax payers. The tax would become a tax of last resort in case the beneficiary cannot be taxed (i.e. non-disclosure or late disclosure of the beneficiary’s identity that prevents effective taxation of the beneficiary) and would no longer be punitive as the rate would decrease to 103% for individual tax payers and 51.5% for companies (including additional crisis tax). Failure to report would be sanctioned with administrative fines.
Reporting obligation for payments to tax havensAs of January 1, 2010, companies subject to Belgian corporate income tax (CIT) or Belgian non-resident CIT are obligated to declare direct or indirect payments (in cash or in kind) exceeding EUR 100,000 to recipients established in so-called ‘tax havens’. Payments that are not reported in the tax return are not deductible.
Reported payments are only deductible if the taxpayer can prove that the payment was made for an ‘actual and genuine’ transaction and was not aimed at artificially avoiding tax.
For purposes of the reporting obligation, a tax haven country is, apart from a standard list of countries compiled by the Belgian government, also defined as a state that, for the whole taxable period during which the payment was made, is considered by the Organisation for Economic Co-operation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes (‘the Global Forum’) as a state that has not substantially or effectively applied the OECD exchange of information standard (‘OECD blacklist’).
PwC observation:New government announces tax plans: Even though these proposed measures have not yet been introduced as a draft bill in the Parliament, we invite clients with activities in Belgium to already discuss the content of these new measures in more detail in order to anticipate on how this could affect their business going forward.
Reporting obligation for payments to tax havens: The above mentioned reporting obligation applies for payments made by Belgian companies to countries on the OECD blacklist. Hence, companies that are subject to Belgian (non-resident) corporate income tax should carefully monitor the OECD blacklist in order to comply with this new reporting requirement.
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Slovakia
Changes to Slovak Income Tax Act from 2015
The Slovak Parliament passed on October 30, 2014 an amendment to the Income Tax Act which will be effective from January 1, 2015. It is generally expected that the amendment will become law when it is signed by the President and published in the Collection of Laws in the coming weeks.
The amendment includes, inter alia, the following measures:
• Introduction of thin capitalisation rules which disallow interest and other financing charges on any debt funding between related parties in excess of 25% of adjusted Earnings before interest, taxes, depreciation, and amortisation (EBITDA). The thin capitalisation rules will also apply to cash-pooling or back-to-back financing arrangements.
• Revision of the rules governing the ‘source of income’. In contrast to 2014, fees for services will only be taxable in Slovakia (subject to any double tax treaty [DTT] relief) if the services are performed in Slovakia or through a Slovak permanent establishment (PE).
• Certain service charges, e.g. commissions, advisory, and legal fees, will only be tax deductible after being paid. In addition, other restrictions may apply such as 35% withholding tax (WHT), which will continue to apply on service fees paid to a non-treaty jurisdiction.
• Taxpayers involved in research and development (R&D) will be entitled to a R&D super deduction of at least 25% of actual qualifying costs incurred.
The amendment also introduces a number of other changes such as the tax depreciation rules and the extension of transfer pricing rules to domestic transactions.
Radoslav KratkyBratislavaT: +421259350569E: [email protected]
PwC observation:The new rules are generally expected to increase the tax cost for businesses in 2015. However, Slovakia’s tax system remains attractive in its key features and continues to provide for various tax structuring opportunities.
Tax Legislation
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Spain
Spanish tax reform enters into force on January 1, 2015
On November 28, 2014, the Spanish Official Gazette published (i) a new Corporate Income Tax (CIT) Law (Law No. 27) and (ii) Law No. 26 which amends the current Non-Resident Income Tax Law. Both laws will enter into force on January 1, 2015 and will be applicable to tax periods commencing on or after that date.
Among others, the main amendments in these two taxes would be the following:
• The CIT rate will be reduced from 30% to 28% in 2015 and to 25% in 2016 and onwards (also applicable to permanent establishments [PEs]).
• The requirements for the participation exemption, which is also extended to Spanish-resident subsidiaries, are simplified.
• Anti-hybrid transactions rules are introduced (in the form of non-deductible expenses and non-exempted dividends).
• The annual offset of net operating losses would be limited to the 70% of the company’s taxable base (1 million euros [EUR] could be offset in any case).
• The scope of the tax consolidation is enlarged to include horizontal consolidation and dependent companies held through a non-resident company.
• The withholding tax (WHT) rate on dividends, interest, capital gains, and branch profit tax will be reduced to 20% in 2015 and 19% in 2016, whilst other income generated by non-residents would be taxed at a 24% rate (except for European Union [EU] taxpayers, in which case the 24% would be substituted by 20% in 2015 and 19% as of 2016).
• The anti-abuse clause of the Parent-Subsidiary Directive is simplified and now it must be proved that the EU shareholder was incorporated for valid economic and substantive business reasons.
Ramon Mullerat Carlos ConchaMadrid MadridT: +34915685534E: [email protected]
T: +34915684365E: [email protected]
PwC observation:Multinationals should consider the impact of the amendments in their existing or future investments in Spain.
Elaine HsiehTaipeiT: +886 2 27295809E: [email protected]
Taiwan
Bill to amend the date of entry into force of the CFC rules to January 2015
The Ministry of Finance (MOF) reiterates that the tax amortisation for non-patented intangible assets is not allowed under Taiwanese tax law.
Due to the booming of the technology industry, many companies purchased non-patented technology in order to reduce development costs and risks. Since non-patented technology was not registered as a patent with the competent authority, it does not have a useful life as provided under the Patent Act and thus is not eligible for amortisation under Article 60 of the Income Tax Act (ITA) or Tax Ruling No. 32167.
PwC observation:Since tax amortisation of non-patented intangible assets is not allowed, when a company claims amortisation for its intangible assets, the company should pay more attention to examine if the acquired intangible assets are qualified for tax deduction.
Tax Legislation
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Daniel Garcia Eliana Sartori Diego TognazzoloUruguay Uruguay UruguayT: +59825182828E: [email protected]
T: +59825182828E: [email protected]
T: +59825182828E: [email protected]
Uruguay
Tax benefits for Shared Service Centres (SSC) activities
Uruguayan tax authorities have issued the Decree N° 251/014 that promotes under the Law N° 16,906 (Investment Law) activities carried out by shared service centres (SSC), granting relevant tax benefits under certain conditions.
For these purposes, SSC is defined as a subsidiary of a multinational group that provides to its related parties exclusively advisory and data processing services, used exclusively outside Uruguay.
Advisory services: shall be considered as those services rendered with regard to activities performed, property located or rights economically used outside Uruguay, including technical services rendered in the fields of management, technical, administration or advice of any kind, as well as consulting, translation, engineering projects, design, architecture, technical assistance, audit, and training services.
Data processing services: refer exclusively to those services related to data that corresponds to activities performed, property located, or rights economically used outside Uruguay.
Tax benefits granted include the exemption of:
• Corporate income tax (CIT) of 90% of the income derived from the promoted activities, for five or ten fiscal years, counted from the following fiscal year-end in which the inclusion of the project as promoted activity is requested to the Executive Power.
• Net wealth tax (NWT) on the assets involved in these activities, since the fiscal year-end in which the referred request is filed until the end of the CIT exemption period aforementioned. These assets will be considered taxable assets for the calculation of deductible liabilities for determination of the NWT taxable basis (effective exemption).
To have access to the five year-end tax benefits, SSC must comply simultaneously with the following conditions:
• Generation of at least 150 new direct qualified jobs at the end of the first three year-ends, jobs that must be preserved until the end of the fifth year-end. At least 75% of the new jobs must correspond to Uruguayan (natural or legal) citizens (the Executive Power may allow temporary reductions of this threshold).
• Implementation of a training plan with a minimum budget of ‘Unidades Indexadas’ 10 million (approximately 1,200,000 United States Dollars [USD]) for the Uruguayan citizen employees during the whole first three year-ends.
• Applicability only for new projects, i.e. projects that start rendering services since the effective date of the present decree.
The tax exemption period will be extended to ten years when (i) the minimum number of jobs exceeds 300 at the end of the first five year-ends and remains high until the end of the exemption period, and (ii) the referred training expense exceeds twice the aforementioned amount in the course of the first six year-ends.
CIT exemption will also be applicable when promoted services are rendered to related resident entities, provided they do not exceed 5% of the total amount of services rendered during such period. In this case, these services will not be included in the CIT exemption.
The granting of referred tax exemptions generates withholding tax (WHT) benefits on payments (or credits) made abroad, such as interests and technical services, allowing to make payments free from WHT or with reduced tax rate (under certain conditions).
It must be noted that the provision of these advisory and data processing services are not subject to value-added tax (VAT), and a tax credit for VAT included in the acquisition of goods & services (input VAT) connected to the costs of the services rendered is granted.
Finally, it is required to submit to a Public Office (‘Comisión de Aplicación’ or COMAP) an expense breakdown of the training plan and the commitment of the goals of generating qualified jobs. In addition, the beneficiary must submit to COMAP on an annual basis necessary documentation to verify the compliance of the commitments assumed.
In case of non-compliance with the assumed commitments by the beneficiary, the decree foresees the loss of benefits, having to reassess taxes unduly exempted and pay the corresponding fines and surcharges.
PwC observation:In the frame of the promotion of Uruguay as an attractive location for investments, this new tax benefit encourages multinational companies to set up SSC in the country. This makes Uruguay an attractive location for such activities.
Tax Legislation
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Proposed Legislative Changes
Proposed legislative changesFrance
Proposed change in the French tax group regime
In its ‘Papillon’ decision of November 27, 2008 (C-418/07), the European Court of Justice (ECJ) had already ruled that a national legislation, which prohibits tax consolidation of a French parent company and its French lower-tier subsidiaries, if those subsidiaries are held indirectly through an intermediary company resident in another Member State, is incompatible with the freedom of establishment. Pursuant to this decision, the French tax consolidation regime was amended and provides that French sub-subsidiary, held through a foreign subsidiary, can be part of a French tax consolidation (Law No. 2009-1674).
More recently, the Court extended its approach to the case of sister companies by a common parent company established in another Member State. This was made through two decisions dated June 12, 2014 (C-39/13 and C-41/13) - both to the Dutch tax group regime.
Pursuant to this decision, the French tax consolidation regime had to be amended in order to allow horizontal structures to form a French tax consolidation group. Section 30 of the Draft Amended Finance Bill for 2014 aims at adapting the French tax consolidation regime accordingly. Therefore, the Draft Amending Finance Bill for 2014 (currently under discussion) will define the conditions to set up a French tax consolidation group between horizontal structures, and its effects.
The current version of the text provides with the following (section 30 of the Draft):
Eligibility requirements: French sister companies directly or indirectly held by a non-French company wishing to form a French tax consolidation group should comply with several conditions. The parent company should be located in a Member State of the European Union (EU), or in Iceland, Liechtenstein, or Norway. Moreover,
i. the EU parent must hold 95% or more of the French subsidiaries,
ii. the French subsidiaries and the EU parent company are required to have the same fiscal year-end,
iii. the EU parent company must be subject to corporate income tax (CIT) (or equivalent tax) without any exemption and
iv. the EU parent company should not be held for more than 95% by another CIT-liable EU company (or Iceland, Liechtenstein, or Norway).
Compliance requirements: Compliance requirements to set up a horizontal tax consolidation group must include an option letter from the foreign parent company as well as an agreement from the foreign subsidiaries if any.
Head of the French tax consolidation group: The draft proposal currently provides that the head of this horizontal tax group would be one of the eligible French subsidiaries (and not the foreign head company).
Application of the tax consolidation regime: The Draft Finance Amending Bill provides for an application of the specific rules that may apply under the French tax consolidation regime: neutralisations and de-neutralisation of certain intragroup transactions/transactions with the foreign parent company, so-called
‘Charasse amendment’ regarding certain financial expenses, tax treatment of intragroup restructurings.
Renaud Jouffroy Emmanuelle VerasParis MarseilleT: +33 1 56 57 42 29E: [email protected]
T: +33 4 91 99 30 36E: [email protected]
PwC observation:The proposed provisions would apply to fiscal years ended as from December 31, 2014 onwards. Eligible horizontal structures who wish to apply the French tax consolidation regime for previous fiscal years should file a claim for refund. Due to French statute of limitations, claims would be available for financial years 2011 and following provided that the filing occurs before December 31, 2014 (for financial year 2011).
The choice of the subsidiary elected as the head of the tax group is quite strategic since the French tax impacts attached thereto may be substantial notably in case of an exit of the consolidation group (tax losses arising from group companies during the tax consolidation period are kept by the head company once the subsidiaries leave the group) or in respect of intragroup reorganisations.
Moreover, please note that current vertical tax consolidation may be revised so that horizontal tax consolidations are set up instead (for instance between two French sister companies which are currently heads of French tax groups). Potential de-neutralisation costs should however be anticipated due to the ceasing of the existing tax group even if they would be (partly) mitigated (new Section 223, L 6 , f of the French Tax Code).
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Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
Hong Kong
The Bill on the proposed stamp duty waiver for transactions in all exchange traded funds
The Hong Kong Special Administrative Region (HKSAR) government gazetted the Stamp Duty (Amendment) Bill 2014 on December 5, 2014.
The Bill seeks to waive stamp duty payable on the transfers of shares or units of all exchange traded funds (ETFs) as proposed in the 2014/15 Budget delivered in February this year. The Bill has to be scrutinised and approved by the Legislative Council before being enacted into law.
PwC observation:Since 2010, the HKSAR government has granted stamp duty concession in the trading of ETFs with their registers of holders maintained in Hong Kong that tracks indices comprising not more than 40% in Hong Kong stocks. With the Bill, the stamp duty waiver will be extended to cover all ETFs irrespective of their underlying portfolios and dates of listing. The Bill represents another step taken by the HKSAR government in promoting the development, management, and trading of ETFs in Hong Kong and strengthening Hong Kong’s role as an international financial centre.
Proposed Legislative Changes
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Denis HarringtonDublinT: +353 1 792 8629E: [email protected]
Ireland
Proposed Legislative Changes
Following the Budget announcements by the Irish Minister for Finance (MOF) on October 14, the 2014 Finance Bill was published on October 23, 2014.
Following the recent Base Erosion and Profit Shifting (BEPS) announcements by the Organisation for Economic Co-operation and Development (OECD) in September, the Minister has made what is expected to be the final unilateral action by Ireland with the amendment of the tax residence rules. At an Irish parliamentary debate on the release of the BEPS papers, the Minister stated that ‘the OECD BEPS project offers more opportunities for Ireland than risks’. This mirrored the sentiment of a Department of Finance report in October 2014 on the BEPS project which re-affirmed that Ireland’s Foreign Direct Investment (FDI) policy is ‘centred on substance and as such is well positioned to compete in the global FDI market for any investment relocating as a result of the BEPS process’. In addition, the Department of Finance report also highlighted that ‘Ireland is not mentioned in the interim report on harmful tax practices and on that level there should not be an immediate impact on Ireland from this report’.
Corporate tax residence reformPreviously, Irish incorporated companies were automatically Irish tax resident subject to two exceptions. Whereas ‘treaty exception’ on the one hand applies where an Irish company is considered tax resident in another jurisdiction under the terms of an Irish double tax treaty (DTT), the ‘trading exception’ is applicable if a company which is listed (or is part of a listed group) or which is controlled by treaty residents either carries on a trade in Ireland or is related to a company which carries on a trade in Ireland. In this case, the company’s tax residence will be determined under the ‘management and control’ test.
The Finance Bill introduces amendments to the corporate tax residence rules to phase out the so called ‘Double Irish’ structure. In order to ensure alignment with the treatment of company residence in DTTs, the treaty exception to the incorporation rule remains. This provides that if, under the provisions of a DTT, an Irish incorporated company is tax resident in another territory, the company will not be regarded as Irish tax resident. The Finance Bill removes the trading exception, with the amendments having effect from January 1, 2015 for companies incorporated on or after that date. For companies incorporated prior to the end of 2014, these amendments will only apply after December 31, 2020.
The amendments also clarify that a non-Irish incorporated company that is managed and controlled in Ireland will continue to be regarded as Irish tax resident.
This means that all of the current corporate tax residence provisions contained in the legislation (including the ‘Stateless’ provisions introduced in last year’s Finance Bill and applying to pre-existing companies from January 1, 2015) will continue to apply to companies incorporated before January 1, 2015 until December 31, 2020.
Intellectual property (IP) tax regimeThe Finance Bill introduced a number of enhancements to the existing regime for capital allowances (tax depreciation) on intangible assets. Firstly, the definition of specified intangible asset is extended to include customer lists. However, the acquisition of a customer list will only qualify to the extent that it is acquired otherwise than as part of the transfer of a business as a going concern. While a welcome addition, this provision could limit its applicability and disappointingly is not as wide as announced by the Minister in the Budget.
Secondly, the 80% restriction on the combined capital allowances and related interest expense that can be claimed for intangible asset acquisitions in any one accounting period is removed such that 100% of the acquisition cost and related interest expense will be deductible. This means that trading profits from qualifying IP related activities and exploitation in any one year can be sheltered in full (with carry forward of any excess capital allowances and interest to later years), which is a significant enhancement to the current regime.
However, it should be noted that, as is the case at present, it is not possible for a company to use the combined Intellectual property (IP) capital allowances and related interest expense to create or increase a loss for tax purposes. The above changes will have effect for accounting periods beginning on or after January 1, 2015.
Finally, an amendment has been introduced in relation to transfers of intangible assets between connected companies which applies to transfers occurring on or after October 23, 2014. The amendment provides that a balancing charge (recapture of allowances) shall not be made where the event, which would normally give rise to a recapture, takes place more than five years after the beginning of the accounting period of the company in which the asset was first provided. There is a further amendment in this provision which also states that if the IP which is disposed of after five years, is ultimately acquired by a connected Irish company as part of the scheme then the unclaimed allowances on the IP at the time of disposal is deemed to be the cost of the IP for the purpose of calculating further allowances. In essence the carry forward unused IP allowances can be transferred into the connected company which acquires the IP.
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Proposed Legislative Changes
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Research and development (R&D) tax credit enhancementsFurther enhancements to Ireland’s existing R&D tax credit regime were announced which is recognised as one of the leading R&D incentive regimes globally.
Currently, Ireland’s 25% (refundable) R&D tax credit applies to incremental expenditure with reference to expenditure incurred in a fixed base period of 2003. This base year limitation is being removed from January 1, 2015 with the result being that future R&D tax credits will be calculated entirely on the R&D spend. Although this does not impact new investors without a ‘base year’, this is a positive development for multinationals that are well established in Ireland.
Special Assignee Relief Programme (SARP)Ireland’s SARP regime was first introduced in 2009 to attract executives from abroad to work in Ireland by offering an effective 30% reduction on income tax on salaries within a certain threshold. The programme is being extended until the end of 2017 and the upper salary threshold is being removed. In addition, the requirement to have been employed abroad by the employer before moving to Ireland has been reduced to six months from 12 months.
PwC observation:From a corporation tax perspective, the key legislative proposals relate to Ireland’s corporate tax residence and IP amortisation rules and are broadly in line with expectations. The amendments to the corporate tax residence rules will be on a transitional basis and this, together with the proposed enhancements to our IP regime, should provide certainty to existing and new FDI investors and help ensure that Ireland remains competitive as a FDI location.
As anticipated, there is no further detail on Ireland’s proposed ‘Knowledge Development Box’ regime announced in the Budget. This will involve a consultation process in 2015 with draft legislation expected in next year’s Finance Bill with a proposed effective date of January 1, 2016 (subject to European Union [EU] approval).
Proposed Legislative Changes
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Paul LauSingaporeT: +65 6236 3388E: [email protected]
Singapore
Proposed amendments to the Income Tax Act
The Income Tax (Amendment) Bill 2014 was published on October 7, 2014.
In addition, the Ministry of Finance (MOF) issued a press statement on September 24, 2014 providing a summary of its responses to public feedback received on the draft Bill, which was published for public consultation in July 2014.
In particular, the Annex provides the MOF’s policy reasons for accepting or rejecting suggestions relating to the following:
• Introducing changes to the Productivity and Innovation Credit (PIC) scheme and implementing the PIC+ scheme.
• Putting in place measures to curb abuses of the PIC scheme.
• Granting tax deduction for expenses incurred to comply with statutory and regulatory requirements.
• Extending Section 19B Writing-Down Allowance (WDA) for Intellectual Property Rights by five years and clarifying the type of ‘information that has commercial value’ that would be eligible for WDA.
• Refining the Designated Unit Trust Scheme.
• Allowing Supplementary Retirement Scheme (SRS) members who qualify for the 50% tax concession to withdraw their SRS investments without liquidation of such investments.
• Enabling the ratification of the Convention on Mutual Administrative Assistance in Tax Matters.
PwC observation:The Income Tax (Amendment) Act 2014 was subsequently gazetted on November 27, 2014. No significant changes to the Bill were noted.
Proposed Legislative Changes
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United Kingdom
UK Autumn Statement
The UK Chancellor of the Exchequer delivered his Autumn Statement to Parliament on December 3, 2014.
Draft clauses for consultation and inclusion in Finance Bill 2015 were published on December 10, 2014.
The main announcements which impact international tax structuring includes the following:
• Introduction of a new Diverted Profits Tax (DPT) from April 1, 2015. The government’s stated main objective is to counteract arrangements that would otherwise erode the UK tax base. DPT will apply in two situations. The first is where a foreign company avoids a UK permanent establishment (PE). The second situation is where a UK company or a foreign company with a UK-taxable presence creates a tax advantage by using transactions or entities that lack economic substance. The DPT will apply at a rate of 25% on the diverted profits and will be payable within 30 days after the issue of a charging notice by Her Majesty’s Revenue & Customs (HMRC). HMRC has also published Guidance on the new tax.
• Publication of a consultation document on the implementation of rules to counter hybrid mismatch arrangements proposed under Action 2 of the Organisation for Economic Co-operation and Development (OECD)/Group 20 (G20) Base Erosion and Profit Shifting (BEPS) Action Plan. The government has decided to introduce new legislation to give effect to the OECD recommendations, rather than amend the existing anti-arbitrage legislation. The new legislation will apply to payments made on or after January 1, 2017 and will counteract hybrid mismatches by aligning the tax outcome of a payment made by an entity or under an instrument to the tax outcome in the counterparty jurisdiction. The consultation will run until February 11, 2015.
• Partial repeal of the late paid interest rules which apply where the lender and borrower are connected, and those where a party to a loan has a major interest in another, in order to counteract perceived abuse of the late paid interest rules. The rules currently require interest paid more than 12 months after the end of the accounting period in which it accrues to be tax relieved when the interest is paid rather than when it accrues. The repeals will have effect in respect of new loans entered into on or after December 3, 2014. For loans entered into before December 3, 2014, the repeals will have effect in respect of interest accruing or discounts arising on or after January 1, 2016, unless material changes (including a change of lender) are made to the loan between December 3, 2014 and December 31, 2015, in which case the repeal will be effective from the date of the change.
• Introduction of legislation enabling the implementation in the UK of the OECD model for country-by-country reporting. The new rules will require multinational enterprises to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity in a country.
• The government has confirmed its willingness to grant corporation tax rate setting powers to the Northern Ireland Assembly, provided that certain conditions can be met.
• All requirements relating to the location of a consortium ‘link company’ (a company that is both a member of a group and a member of a consortium) for group relief purposes will be removed with effect for accounting periods beginning on or after December 10, 2014. Previously a link company was required to be either in the UK or the European Economic Area (EEA).
• From April 6, 2015 all returns made to shareholders through special purpose share schemes, commonly known as ‘B share schemes’, will be taxed as dividends.
• Changes to the Companies Act to prohibit capital reductions of companies in takeover situations using a scheme of arrangement in which a company can be acquired without a 0.5% stamp duty charge. The change is intended to ensure that purchasers pay 0.5% stamp duty on company takeovers.
David J Burn Chloe PatersonManchester LondonT: +44 (0)161 247 4046E: [email protected]
T: +44 (0)20 7213 8359E: [email protected]
PwC observation:There was a lot in this Autumn Statement (there are over 550 pages of draft legislation and explanatory notes), and only the key announcements which are likely to impact on multinationals have been listed above. Many of the measures targeting multinationals appear consistent with the OECD/G20 thinking on BEPS. However, whilst the UK is working with the international community in some areas (e.g. country by country reporting), in other areas (e.g. the new DPT) the UK has decided to take unilateral action.
With respect to the new DPT, the UK, like most other countries, has always drawn a distinction between ‘trading in’ the UK and ‘trading with’ the UK. The first is taxable here; the second has not been. The internet age has meant that multinationals could make significant profits from sales to the UK without ever being regarded as ‘trading in’ the UK. These new rules change that and deem such companies to be trading in the UK. The new rules are complex (running to 28 pages) and will be difficult to operate where there are double tax treaty (DTT) obligations and interactions with the taxation of the same profits in the companies’ home countries. There are lots of conditions in the rules so at this point it is hard to say how many companies will be affected. For such detailed legislation to come ahead of the OECDs reforms is surprising, although the overall theme is consistent.
The consultation document on implementation of hybrid mismatch rules indicates that the UK legislation will closely follow the OECD proposals. There will not be any transitional rules, so groups have just over two years to bring their financing arrangements into line with the new rules.
Devolution of corporation tax rate-setting powers to Northern Ireland could result in Northern Ireland having a lower rate of corporation tax than the rest of the UK. While that future rate remains uncertain, a rate of 12.5% would achieve parity with the main Republic of Ireland corporation tax rate.
Proposed Legislative Changes
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Administration & Case Law
Administration and case lawBrazil
Rectification of the Normative Instruction dealing with Swiss privileged tax regimes
On October 17, 2014, the Brazilian Federal Revenue Authorities (RFB) published a rectification in relation to Normative Instruction 1,474/2014 (NI 1,474/2014) published on June 20, 2014. The rectification establishes that NI 1,474/2014 should take effect from June 20, 2014 rather than January 1, 2014 as set out in NI 1,474/2014.
By way of background, NI 1,474/2014 provided that certain Swiss tax regimes should be considered ‘privileged tax regimes’ for Brazilian tax purposes and also cancelled Switzerland’s suspended status as a tax haven. Further, it removed the Hungarian offshore Korlátolt Felelõsségû Társaság (KFT) regimes from its list of privileged tax regimes.
When Brazilian taxpayers deal with parties subject to a privileged tax regime, some important considerations include the application of transfer pricing rules regardless of whether the foreign party is related to the Brazilian entity, as well as more restrictive thin capitalisation and payment deductibility rules.
NI 1,474 amended Normative Instruction No. 1,037/2010 (NI 1,037) which set out a list of ‘tax havens’ and ‘privileged tax regimes’ for Brazilian tax purposes. Specifically, in relation to Switzerland, NI 1,474 provides that the following regimes should be considered as privileged tax regimes:
• regimes applicable to a Swiss entity incorporated as a holding company, domiciliary company, auxiliary company, mixed company, and/or administrative company whose tax treatment results in a corporate income tax (CIT) rate of lower than 20% (on a combined basis) under federal, cantonal, and municipal legislation, and
• regimes applicable to other entities whose tax treatment, as a result of application of rulings issued by local tax authorities, results in a CIT rate of lower than 20% (on a combined basis), under federal, cantonal, and municipal legislation.
Switzerland was originally considered a ‘tax haven’ jurisdiction for Brazilian tax purposes in the ‘black list’ detailed in NI 1,037. Its inclusion in the black list was then suspended and, as a result of NI 1,474 was cancelled. Therefore, while Switzerland may not be considered a tax haven jurisdiction, it is still necessary to consider whether the particular regime applicable to the Swiss entity falls within the definition of privileged tax regime.
Durval Portela Philippe Jeffrey Mark ConomySão Paulo São Paulo São PauloT: +55 11 3674 2582E: [email protected]
T: +55 11 3674 2271E: [email protected]
T: +55 11 3674 2519E: [email protected]
PwC observation:Taxpayers potentially impacted by NI 1,474/2014 should consider whether the rectification is relevant for their particular circumstances (i.e. for transactions and activities conducted between January 1, 2014 and June 20, 2014).
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Brazil
Tax rulings released dealing with Tax on Financial Operations in Brazil
On September 12, 2014 and September 26, 2014, the Brazilian Federal Revenue Authorities (RFB) issued Tax Ruling No. 248/2014 and 261/2014 respectively, providing guidance in relation to the application of Tax on Financial Operations (IOF) on extensions, renewals, or modifications to foreign loans and also on the capitalisation of debt.
In relation to Tax Ruling No. 248/2014, the RFB determined that the extension, renewal, or modification in the terms of foreign loans represents a taxable event for IOF purposes. Therefore, where the minimum average term (currently 180 days) is not observed at the moment this event occurs, IOF should be imposed at the rate of 6% of the principal amount (plus the applicable interest and penalties). Further, the extension, renewal, or modification should be viewed as a deemed simultaneous outflow and inflow of funds for regulatory purposes (e.g. updates to the Brazilian Central Bank registrations are likely to be required).
According to Tax Ruling No. 261/2014, the RFB confirmed that the capitalisation of foreign debts will also constitute a taxable event and IOF should therefore be levied at a rate of 6% on the inflow of the original debt where the capitalisation of the loan occurs before the minimum average term, along with the applicable interest and penalties.
Further, the ruling confirmed that IOF of 0.38% shall not be levied on the actual conversion of debt into equity, where in past there had been some uncertainty in the market as to whether this transaction could be viewed as a simultaneous deemed out-flow and in-flow of funds (i.e. out-flow of loan principal and corresponding in-flow of capital) that should attract IOF.
PwC observation:Taxpayers contemplating capitalising foreign debts and/or amending the terms of foreign loan agreements with Brazilian parties should consider the potential impacts of these rulings on their proposed transactions.
Durval Portela Philippe Jeffrey Paulo VellanoSão Paulo São Paulo São PauloT: +55 11 3674 2582E: [email protected]
T: +55 11 3674 2271E: [email protected]
T: +55 11 3674 2977E: [email protected]
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Brazil
Normative Instruction released providing for regulation of the Brazilian controlled foreign corporation rules
On December 8, 2014, Brazilian Federal Revenue Authorities (RFB) published Normative Instruction (NI) 1,520/2014, regulating the controlled foreign corporation (CFC) rules introduced by Law No. 12,973/2014.
This article provides a summary of some of the key issues considered by NI 1,520/2014.
Sub-account recognition and registrationPursuant to Law No. 12,973/2014, Brazilian parent companies are required to maintain sub-accounts in which changes in the value of their foreign investments, corresponding to profits or losses of directly and/or indirectly controlled subsidiaries should be recognised in proportion to the Brazilian parent company’s participation. NI 1,520/2014 confirms that the variation must be booked in sub-accounts for each direct or indirect controlled company.
NI 1,520/2014 also confirms that the results of the directly or indirectly held CFC should not contain income earned by another entity over which the Brazilian entity continues to have direct or indirect control. Further, NI 1,520/2014 provides guidance in relation to how the sub-accounts for CFCs should be valued from an accounting perspective, including in circumstances where cash is distributed.
ConsolidationNI 1,520/2014 confirmed that the Brazilian parent company should only be able to consolidate results until the end of 2022, where certain conditions set out in Law No. 12,973/2014 are satisfied.
Broadly, these include:
• the subsidiary is located in a jurisdiction that has a tax treaty or a specific information exchange agreement in place (or electronically provides its financial statements)
• the subsidiary satisfies the ‘active income’ test (i.e. having active income of equal to or greater than 80% of total income), and
• the subsidiary is not located in tax haven, sub-taxation jurisdiction (i.e. jurisdiction in which the nominal rate is less than 20%) or subject to a privileged tax regime or controlled directly/indirectly by such an entity.
NI 1,520/2014 provides that although the choice to consolidate their profits and losses is irrevocable for each calendar year, the Brazilian parent company may elect which of its CFCs it wishes to consolidate. The Brazilian taxpayer may only consolidate results of its CFCs once per calendar year.
Availability of positive results earned abroadNI 1,520/2014 confirmed that profits of branches, affiliates, or controlled subsidiaries located abroad should be included in the calculation of the Brazilian entity’s taxable income on 31 December of the calendar year in which the profits are made available to the Brazilian entity. The timing for when profits are considered to be made available to the Brazilian entity will generally depend on the classification of the particular CFC (i.e. as an affiliate or a controlled subsidiary). Broadly speaking with controlled subsidiaries being taxed on an accruals basis while affiliates that satisfy certain conditions may be eligible for CFC taxation on a cash basis.
For controlled subsidiaries, the profits to be included in the Brazilian entity’s taxable income should be determined based on the controlled subsidiary’s local corporate legislation. Absent rules regulating the preparation of financial statements in the relevant country, the results to be included in the Brazilian entity’s taxable income should be calculated based on the general accounting principles adopted in Brazil.
In addition to the general rules in respect of when profits are made available, NI 1,520/2014 provides specific guidance around when profits will be considered to be made available in certain circumstances such a closure or liquidation of the Brazilian company that holds foreign branches, affiliates and/or controlled subsidiaries, closure of a foreign branch, affiliate and/or controlled subsidiary, merger or sale of a foreign branch, affiliate, and/or controlled subsidiary.
Taxation of profits earned by affiliatesAs noted above, Law No. 12,973/2014 provides for distinct tax treatment in respect foreign affiliates. For affiliates, NI 1,520/2014 confirms that profits will only be considered available to the Brazilian parent company when credited, paid or in other specific circumstances defined by the legislation. Therefore, the profits earned by the foreign affiliate should generally only be taxable in Brazil on 31 December of the year in which they were actually distributed to the Brazilian entity, provided that the affiliate satisfies certain conditions outlined in the new legislation.
LossesNI 1,520/2014 confirmed that losses (including accumulated losses prior to January 1, 2015) of the directly or indirectly controlled foreign subsidiary may be used to offset future profits of the same entity provided that they are disclosed and recorded appropriately.
Durval Portela Philippe Jeffrey Mark ConomySão Paulo São Paulo São PauloT: +55 11 3674 2582E: [email protected]
T: +55 11 3674 2271E: [email protected]
T: +55 11 3674 2519E: [email protected]
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Deductibility of transfer Pricing and thin capitalisation adjustmentsNI 1,520/2014 confirmed that transfer pricing and thin capitalisation adjustments made in relation to the Brazilian entity’s dealings with its foreign branches, affiliates treated as controlled subsidiaries or controlled subsidiaries may be deducted for corporate income tax (CIT) purposes where these adjusted amounts are reflected in the Brazilian entity’s taxable basis for corporate income purposes and the tax has been paid in Brazil on these adjustments.
Foreign tax offsetsFurthermore, the aforementioned NI confirmed that a deduction may be taken for income tax paid abroad by a foreign controlled subsidiary, in proportion to the Brazilian entity’s participation, up to the amount of tax payable in Brazil in relation to the foreign income. Withholding tax (WHT) is specifically included in the deductible tax paid abroad. For affiliates eligible to apply the CFC rules on a cash basis, the foreign tax offset should be limited to the WHT paid on the dividends included in the Brazilian parent company’s taxable income.
Presumed creditLaw 12,973/2014 provides that until calendar year 2022, Brazilian parent companies may deduct up to 9% as a presumed/deemed credit on a CFC’s positive results where the CFC is engaged in the manufacture of food/beverage products and the construction of building/infrastructure projects and certain other conditions are satisfied. Law No. 12,973/2014 provided that the list could be extended to include additional activities.
On September 29, 2014, Ministry of Finance (MOF) issued Ordinance 427/2014 extending the list of activities eligible for the credit to include: manufacturing, mineral extraction and exploitation (under public concession contracts), of public assets located in the country of residence of the CFC entity.
On November 14, 2014, Law No. 13,043/2014 extended the list again to include ‘other general industries’. However, it should be noted that the latest inclusion set forth in Law No. 13,043/2014 has not been considered in NI 1,520/2014.
Deferral of tax paymentsWhere certain conditions are satisfied, taxpayers may be eligible to defer the payment of taxes in relation to their CFCs in proportion to the profits distributed in subsequent years. In such circumstances, a deemed distribution of 12.5% of the positive results will occur in the following year with the remaining balance deemed to be distributed in the eighth year following the assessment (if not previously distributed). Deferred tax payments should be subject to interest at London Inter Bank Offered Rate (LIBOR).
Other measuresNI 1,520/2014 also sets out the ancillary filing obligations and specific forms that will need to be completed to comply with Law No. 12,973/2014.
PwC observation:NI 1,520/2014 provides guidance to taxpayers navigating some of the practical aspects of the new Brazilian CFC rules. Brazilian taxpayers that have CFCs should review their procedures in light of the NI to determine how they may be impacted by the new regulations.
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Paul LauSingaporeT: +65 6236 3388E: [email protected]
Singapore
IRAS updates
Recent updates from the Singapore tax authorities (IRAS) include:Survey on publishing advance rulings: On September 8, 2014, the IRAS published the results of the survey conducted in February/March 2014.
In order to protect the confidentiality of taxpayers’ identities and business arrangements, the IRAS will not be publishing advance rulings, but will incorporate scenarios from certain advance rulings into the relevant circulars.
• Deduction for statutory and regulatory expenses: The IRAS issued a circular entitled ‘Deduction for Statutory and Regulatory Expenses’ on September 12, 2014. The circular explains the rationale and scope of tax deduction for qualifying statutory and regulatory expenses incurred from the basis period for the Year of Assessment (YA) 2014 onwards. The Income Tax Act has been amended to provide for this deduction.
• Productivity and Innovation Credit: On September 19, 2014, the IRAS issued a revised circular on the Productivity and Innovation Credit (PIC) scheme. The circular has been amended to reflect the extension of the scheme for another three years, and to provide details of enhancements to the scheme which are applicable to small and medium sized enterprises (SMEs) (known as the ‘PIC+ scheme’).
Other amendments include:• Cash payout option - The qualifying period for determining if the
‘Three local employees condition’ has been met is extended from one to three months with effect from the YA 2016.
• Centralised hiring arrangements - individuals employed under this arrangement are recognised as employees for PIC claim with effect from YA 2014.
• Introduction of anti-abuse measures.
In addition, the IRAS has updated its website to include new examples of IT and automation equipment qualifying for PIC for the landscaping industry.
The Maritime and Port Authority of Singapore also announced on October 15, 2014 that PIC benefits would be available for expenditure incurred by bunker suppliers and bunker craft operators in adopting mass flow meters with effect from YA 2015.
• Research and development (R&D):On October 30, 2014, the IRAS issued a revised circular on the R&D tax measures. The circular incorporates a new Annex G: Application software R&D projects to provide taxpayers with guidance on how to ascertain whether their application software projects qualify for the R&D tax measures.
PwC observation:The publishing of advance rulings, albeit with sensitive information removed to protect taxpayers’ confidentiality, would have paved the way for greater transparency in tax administration. It is hoped that the IRAS will reconsider its position at an opportune time in the future, should such practices by other tax authorities become the international norm.
The legislative intent behind the deduction for statutory and regulatory expenses is to promote voluntary compliance with statutory and regulatory requirements, including those of other jurisdictions. Although the certainty provided by this deduction should be welcomed by taxpayers, it may be argued that deduction for most of such expenses should already be available under current rules.
The revisions to the PIC circular mainly reflect changes proposed in the 2014 Budget. The measures to curb PIC abuse reflects the serious view which the IRAS takes towards taxpayers who attempt to make false PIC claims.
Adoption of mass flow metres is mandatory for bunkering marine fuel oil in the Port of Singapore from January 1, 2017, and the PIC benefits will help the industry make the transition.
Ascertaining whether application software R&D projects qualify as R&D for tax purposes is difficult and frequently the subject of much uncertainty. It is hoped that the guidance provided will make it easier for taxpayers to determine if their projects are qualifying R&D projects.
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EU Law
EU LawFrance
5% lump sum cost and expenses share on dividends distributions arising from 95%-held EU companies
On July 29, 2014, the administrative Court of Appeal of Versailles lodged a request for a preliminary ruling towards the European Court of Justice (‘ECJ’ hereafter) with respect to the 5% cost and expenses share that is taxed in France on dividends distributions arising from 95%-held European Union (EU) subsidiaries, in view of determining whether this taxation could be considered as a restriction to the EU freedom of establishment (Groupe Steria SCA v Ministry of Finance and Public Accounts, Case C-386/14 and Versailles Administrative Court of Appeal decision n°12VE03691, Sté Groupe Steria).
Indeed, while within a French tax consolidated group, dividend distributions from group subsidiaries are fully tax exempt (except for distributions made by new member subsidiaries during their first year of tax consolidation), whereas the maximum exemption only amounts to 95% otherwise (i.e. out of a French tax group), hence there is a taxation of a 5% lump sum cost and expenses share in application of the parent subsidiary regime (participation exemption mechanism).
In addition, the French tax consolidation regime is only available for French companies and not for companies established in another Member State of the EU, even though said companies would theoretically meet all the conditions required to be part of a French tax consolidated group should they have been established in France.
In that respect, a 5% lump sum cost and expenses share is taxed under the participation exemption regime for dividends distributions arising from subsidiaries located in another Member State of the EU while dividends distributed by a French subsidiary which is placed in the same situation than the EU subsidiary but, being a French company, is member of the same French tax group as its parent company, are fully exempt.
According to the administrative Court of Appeal of Versailles, this situation could be interpreted as a restriction to the EU freedom of establishment. In this context, the request that was lodged by the administrative Court of Appeal is the following:
‘ Must Article 43 EC (now Article 49 TFEU) on freedom of establishment be interpreted as precluding the rules governing the French tax-integration regime from granting a tax-integrated parent company neutralization as regards the add-back of the proportion of costs and expenses, fixed at 5% of the net amount of the dividends received by it from tax-integrated resident companies only, when such a right is refused to it under those rules as regards the dividends distributed to it from its subsidiaries established in another Member State, which had they been resident would have been eligible in practice, if they so elected?’
It should be noted that the ECJ already ruled that the Dutch fiscal unity regime (which is very similar to the French group taxation regime) is not in breach of the freedom of establishment under EU Law insofar as it allows a parent company to set up a tax consolidated group with a resident subsidiary but it denies the setting up of such a tax group with a non-resident subsidiary which is not taxable in the same member state as the parent company (decision X Holding BV, February 25, 2010 case C-337/08).
However, a potential breach of the EU freedom of establishment might still be characterised should a specific tax advantage be granted to member companies of a tax consolidated group only, while such an advantage is not inherent to the tax consolidation regime itself and where the actual objective would be to limit the application of this advantage to domestic situations. Limiting this tax advantage to tax consolidated groups would be used as a way to prevent non-domestic companies from said benefit and could thus be contrary to EU freedom of establishment.
Renaud Jouffroy Emmanuelle VerasParis MarseilleT: +33 1 56 57 42 29E: [email protected]
T: +33 4 91 99 30 36E: [email protected]
PwC observation:The outcome of the administrative Court of appeal’s request seems rather uncertain for now based on existing European tax case law. However, while the decision of the ECJ is pending, French parent companies which received dividends from 95%-held EU subsidiaries should introduce a claim (before 31 December 2014) in order to preserve their legal rights and request the repayment of the 5% lump sum cost and expenses share on said dividends distributions made during 2011, 2012, and 2013. Potential refund is however subject to the decision of the ECJ and to the decision of the administrative Court of Appeal that will follow.
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Treaties
TreatiesSpain
Protocol to the Spain - Canada Double Tax Treaty signed
The first protocol to amend the double tax treaty (DTT) between Spain and Canada was signed on November 18, 2014 and will enter into force 30 days after both countries exchange ratification instruments.
The main amendments are:
• A reduced 5% withholding tax (WHT) rate on dividends is introduced if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the paying entity, maintaining the current 15% for all other cases.
• The branch profit tax will be reduced to 5% as opposed to the current 15%.
• Interest taxation is capped to 0% for unrelated parties and to 10% for related parties, as opposed to the current 15%.
• A specific anti-treaty shopping clause is introduced following Base Erosion and Profit Shifting (BEPS) trends: the treaty would not be applicable to those entities whose beneficial or ultimate owners were resident in another state when the tax liability was considered lower than the one that would have been triggered if the beneficial or ultimate owners were resident in the same state.
Ramon Mullerat Luis Antonio GonzalezVienna MadridT: +34915685534E: [email protected]
T: +34915685528E: [email protected]
Kara Ann Selby Maria LopesToronto TorontoT: +1 416 869 2372E: [email protected]
T: +1 416 365 2793E: [email protected]
PwC observation:Multinationals with presence in Spain and Canada should revisit their structures in view of this Protocol.
Canada
Canada-Brunei TIEA signed
The Agreement between the government of Canada and the government of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam for the exchange of Information (EOI) on Tax Matters was signed on May 9, 2013 and entered into force on December 26, 2014.
PwC observation:Canada’s exemption system will apply to the net earnings from an active business carried on in Brunei by a controlled foreign corporation (CFC) resident in that jurisdiction for taxation years beginning on or after December 26, 2014.
China
China and Liechtenstein signed tax information exchange agreement (TIEA)
China and Liechtenstein signed a Tax Information Exchange Agreement (TIEA) and an accompanying protocol on January 27, 2014. The TIEA is expected to facilitate the exchange of tax information between the two countries.
The TIEA is now under internal legal procedures of each country respectively and would take effect in respect of taxable years beginning on or after the date of entry into force.
Matthew MuiChinaT: +86 (10) 6533 3028E: [email protected]
PwC observation:Chinese tax authorities have always been dedicated to enhancing the taxation transparency and information exchange mechanism. So far, China has signed TIEA’s with ten jurisdictions including that with Liechtenstein.
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Matthew MuiChinaT: +86 (10) 6533 3028E: [email protected]
China
China and Russia signed new double taxation treaty (DTT)
On October 13, 2014, China and Russia signed a new DTT and an accompanying protocol. The new DTT embodies the new trends in the development of international tax treaty.
Compared with the China-Russia DTT signed in 1994 (1994 DTT), the new DTT contains the following key changes:
• The time threshold for constituting a service permanent establishment (PE) is changed from 18 months within any period to 183 days within any 12 month period.
• Withholding tax (WHT) rate on dividends, interest, and royalties is reduced from 10% to 5%, 5% and 6% respectively.
• Under the 1994 DTT, the source country can tax capital gains on the transfer of shares of a non-property rich company in that source country if the transferor owns 25% or more of the shares. The new DTT gives the exclusive taxing right to the resident country of the transferor.
• A stand-alone limitation of benefits (LoB) article enforced to tackle treaty shopping is added, which follows the example provision in the Commentary of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. This is the most comprehensive LoB article in any China’s tax treaties so far.
• As proper diplomatic procedures have not been completed in 2014 the new DTT would likely apply to income derived on or after January 1, 2016.
PwC observation:Compared with the tax treaties China has signed with other jurisdictions, the new DTT with Russia generally allocates more tax to the resident countries. It is a sign that the two Brazil, Russia, India, China, and South Africa (BRICS) countries are encouraging investment and business from each other. Also the new DTT has introduced many anti-treaty abuse mechanisms, relevant taxpayers are suggested to take them into consideration when assessing their eligibility for treaty benefits.
Treaties
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Cyprus
Cyprus and Iceland sign a double tax treaty
On November 13, 2014 Cyprus and Iceland signed the first ever double tax treaty (DTT) between the two countries.
Before the treaty can take effect it must undergo certain legal formalities in Cyprus and Iceland, and between the two countries. Since these formalities have been completed at December 22, 2014 the treaty is effective as of January 1, 2015. However, based on the typical duration of such legal processes we would expect a later effective start date for the treaty.
Under the treaty there is no withholding tax (WHT) on interest. The rates of WHT on dividends and royalties are set out below:
Dividends:• 5% of the gross amount of the dividends if the beneficial owner is
a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends and
• 10% of the gross amount of the dividends in all other cases.
Royalties:• 5% of the gross amount of the royalty.
Irrespective of the above WHT rates on dividend and royalty payments, Cyprus does not apply WHT on dividend payments to non-Cyprus tax residents at all times, and only applies WHT on royalties payment to non-Cyprus tax residents for rights used within Cyprus, as per the provisions of the local tax legislation.
Under the treaty Cyprus retains the exclusive taxing right on disposals of shares in Icelandic companies except in the following cases:
• when the disposed-of shares derive more than 50% of their value directly or indirectly from immovable property situated in Iceland or
• the disposal of shares is made by an individual who was a resident of Iceland in the course of the last five years preceding the disposal.
Stelios Violaris Nicos ChimaridesNicosia NicosiaT: +357 22555300E: [email protected]
T: +357 22555270E: [email protected]
PwC observation:The signing of this treaty will enhance economic relations between Cyprus and Iceland and further illustrates the Cyprus government’s continuing commitment to expand Cyprus’ DTT network.
Hong Kong
Hong Kong and the United Arab Emirates signed a double tax treaty
Hong Kong signed a double tax treaty (DTT) with the United Arab Emirates (UAE) on December 11, 2014, bringing the number of DTT signed by Hong Kong to 31.
As Hong Kong does not currently impose any withholding tax (WHT) on dividends and interest and the WHT rate on royalties paid to non-residents under the Hong Kong domestic law (i.e. 4.95%) is lower than that specified in the Hong Kong-UAE DTT (i.e. 5%), the major benefits under the DTT for UAE resident companies investing in Hong Kong will be the potential tax exemption for
i. business profits derived from Hong Kong provided that there is not a permanent establishment (PE) in Hong Kong and
ii. trading gains derived from Hong Kong from disposal of shares.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
PwC observation:The Hong Kong-UAE DTT has not yet entered into force as ratification procedures by both sides are still pending.
Treaties
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Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
Hong Kong
Hong Kong-South Africa double tax treaty signed
Hong Kong recently signed a double tax treaty (DTT) with South Africa, bringing the number of treaties signed by Hong Kong to 32.
As Hong Kong does not currently levy any withholding tax (WHT) on dividends and interest paid to non-resident companies and the WHT rate on royalties under the Hong Kong domestic law (4.95%) is lower than that under the Hong Kong-South Africa DTT (5%), the major benefit of the DTT for South African resident corporations investing in Hong Kong will be the protection against Hong Kong profits tax exposure as long as their business activities carried out in Hong Kong do not create a permanent establishment (PE) in Hong Kong. On the other hand, potential benefits for Hong Kong resident companies investing into South Africa under the Hong Kong-South Africa DTT include: (i) the reduced treaty WHT rates on dividends, interest, and royalties, (ii) elimination of the WHT for service fees derived from South Africa as far as the provision of services does not create a PE in South Africa, and (iii) possible tax exemption for gains derived from disposal of shares in a property holding company provided that certain conditions are met.
PwC observation:The Hong Kong-South Africa DTT has not yet entered into force as ratification procedures are still pending in both countries. Once the DTT is legally effective, it would become more attractive for South African resident companies to invest in Hong Kong.
Fergus WT WongHong KongT: +852 2289 5818E: [email protected]
Hong Kong
Hong Kong and the US signed an IGA for FATCA purposes
Further to the inter-governmental agreement (IGA) substantially agreed in May 2014, Hong Kong and the US formally signed a Model 2 IGA on November 13, 2014 to facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong.
Under the Model 2 IGA, Hong Kong financial institutions will report the information collected directly to the US Internal Revenue Services (IRS). The first reporting by financial institutions in Hong Kong is expected to take place in March 2015.
PwC observation:The Hong Kong-US IGA will reduce the reporting burden and facilitate compliance with FATCA by financial institutions in Hong Kong. Exemptions of certain financial institutions and products that present low risks of tax evasion by US taxpayers are available under the IGA.
Ireland
Treaties
The new Botswana-Ireland tax treaty was signed on June 10, 2014. This treaty provides for a 5% withholding tax (WHT) on dividends, a 7.5% WHT on interest and 5% WHT on royalties in respect to the use of or the right to use industrial, commercial, or scientific equipment.
A 7.5% WHT applies in respect of other royalties.
A new agreement with Ethiopia was signed on November 3, 2014 which is not yet in effect, the text of the treaty will be available shortly. Protocols to the existing agreements with Belgium, Denmark, and Luxembourg were signed on April 15, 2014, July 22, 2014, and May 27, 2014 respectively. The legal procedures to bring these protocols into force are now being followed.
PwC observation:These recent ratifications signal Ireland’s commitment to expanding and strengthening its double taxation treaty (DTT) network. Ireland has signed comprehensive DTTs with 72 countries, 68 of which are now in effect and negotiations are ongoing with other territories at this time.
Denis HarringtonDublinT: +353 1 792 8629E: [email protected]
Treaties
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Design Services 28949 (01/15).
