EDITORIAL

Welcome to the October issue of International TAX INSIGHT, a quarterly publication highlighting important cross border tax developments which may affect those doing business in global locations.

In this quarter’s issue we feature news of tax developments in Bangladesh, the Channel Islands, China, the European Union (EU), Germany, Greece, Israel, Lithuania, Spain and Turkey.

In each case, the information given is intended as a brief overview and may not cover all circumstances. Readers should seek professional advice on their own particular situation before taking any action. Baker Tilly International member firms worldwide will be pleased to advise further. To locate your nearest firm, please see the Worldwide Directory at www.bakertillyinternational.com.

Bill Hogan

Director of taxation, Baker Tilly International

 

 

BANGLADESH

Tax Incentives for Power Generation Companies

The government has announced significant tax concessions for private power generation companies. Provided they commence operations by June 2012 and comply with the conditions of the country’s official private sector power generation policy, they will be exempt from tax on their profits for a period of 15 years from the commencement of production.

There will be no restrictions on the payment of dividends or on the repatriation of capital at the conclusion of the project. Capital gains from any disposals of shares in such companies will not be taxed in Bangladesh.

Concessions will extend also to foreign companies which provide finance or other facilities to power generation companies in the country. Loan interest, royalties, and technical assistance fees can all be paid free of withholding taxes.

As a final element in the incentive package, expatriates who move to Bangladesh to work in private power generation companies will be exempt from personal income tax there for the first three years of their stay.

 

CHINA

Potential Loss of Tax Relief

Corporate groups which are financing subsidiaries in China with a mix of equity and debt should take note of a recent ruling from the State Administration of Taxation which could have the effect of restricting tax relief for the interest paid on loans, whether this is intra-group or to external lenders.

The ruling is aimed at groups which have not yet subscribed to their Chinese subsidiary the full registered capital.

In these circumstances there will be a proportionate restriction on the extent to which loan interest paid will qualify for tax relief.

The non-deductible element will be calculated as A x [ B/C ], where A is the loan interest paid in the year, B is the unpaid registered capital, and C is the amount of the registered capital.

 

EU

Investment Funds Can Claim Back Withholding Taxes

In a landmark ruling, the European Court of Justice has opened the way for investment funds and pension funds established in the European Union to claim back from governments throughout the region the withholding taxes which the governments have previously imposed at source on the funds investment income.

The ruling has been given in a case brought before the ECJ by a Finnish company, Aberdeen Property Fininvest Alpha Oy, against the government of Finland. Aberdeen proposed to pay a dividend to its parent, an open-ended investment company in Luxembourg, and asked the Finnish Central Tax Commission whether withholding tax should be deducted. Normally a dividend from a subsidiary to its parent within the EU would be exempt from withholding tax under the EU’s Parent – Subsidiary Directive, but the constitution of the Luxembourg company took it outside the terms of the Directive. The Commission replied that withholding tax should be deducted, notwithstanding that a comparable dividend to a Finnish investment company would not have been subject to withholding tax under the domestic law of Finland.

Aberdeen appealed to the Supreme Administrative Court in Finland against the Commission’s decision, claiming that in discriminating against dividends paid abroad as compared with dividends paid domestically the imposition of a withholding tax breached Articles 43 and 56 of the EC Treaty, dealing respectively with the rights of freedom of establishment and to the free movement of capital. The Finnish defence was that the characteristics of an investment company in Finland are different from those of an open-ended investment company in Luxembourg so there was no discrimination. The Supreme Administrative Court referred the dispute to the ECJ, where Aberdeen’s appeal has been upheld. Where a member state chooses to exempt domestic companies on dividends received it cannot impose withholding taxes on dividends paid to companies in other member states.

The ruling is of considerable significance to EU investment funds and pension funds since their investments are generally of a portfolio nature with percentage share stakes which are too low to qualify them for exemption from dividend withholding taxes under the Parent – Subsidiary Directive. The decision in the Aberdeen case, reference C-303/07, is binding on all member states, They are not permitted now to tax dividends paid abroad if they do not tax dividends paid domestically.

The decision should have retrospective effect, and investment funds and pension funds in the EU, and by extension in the European Economic Area, are beginning to formulate multiple claims against governments for the refund of withholding taxes illegally levied in the past. Some governments are already paying up. There is some urgency in the need for funds to submit their claims. Governments are likely to claim that their statutes of limitations apply, with the result that past years will progressively drop out of account.

 

GREECE

Introduction of Thin Capitalisation Rules

Greece has introduced thin capitalisation rules for the first time and companies with subsidiaries or associated companies in Greece should review their financing models for them and check that they will not as a result suffer any restrictions on tax relief for intra-group loan interest payments.

The law now defines the maximum acceptable ratio of loan capital to share capital to be 3 to 1. Loan capital includes the grant of credit facilities. To the extent that the ratio exceeds 3 to 1 the interest paid will be proportionately ineligible for tax relief. The ratio is to be determined as an average across the fiscal year.

The restriction will not apply to leasing companies.

Companies are deemed to be associated if one participates significantly in the share capital or the management of the other, or if a third company participates significantly in the share capital or the management of both of them.

The new thin capitalisation rules form part of a package of measures by which Greece has also updated its transfer pricing regulations to comply more fully with the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the EU’s Code of Conduct on Transfer Pricing Documentation for Associated Enterprises.

 

TURKEY

New Transfer Pricing Legislation

Turkey has brought in new transfer pricing legislation which gives the tax authority the power to impute additional taxable profits to Turkish companies if transactions with related entities abroad are carried out at other than arm’s length prices.

The country has had transfer pricing rules previously, but they have lacked certainty, and cases brought to court have rarely been successfully prosecuted. The new legislation however is based on the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and it is expected to be a much more effective tool in policing the pricing policies of multinationals with operations in Turkey.

 

 

 

 

 

 

Companies in Turkey must file an annual one page transfer pricing report with their tax returns, listing the foreign entities with which they are related, the total value of their transactions with each of them, and the transfer pricing methodology which was used. They must also maintain documentation which sets out how prices for intra-group transactions in goods and services were arrived at, with supporting evidence that the prices are on an arm’s length basis.

Now would be a good time for corporate groups with subsidiaries in Turkey to review their trading relationships with them and to ensure that they are not at risk of imputations of additional taxable profits there.

 

CHANNEL ISLANDS – JERSEY

A New Type of Entity

The Foundations (Jersey) Law 2009 came into force on 17 July 2009, following approval from the United Kingdom Privy Council, with the result that foundations can now be formed on the island.

Foundations have some of the characteristics of both companies and trusts, giving them considerable flexibility. They are already proving attractive to people based in civil law countries, where the principles of foundations are understood and accepted but the concept of trusts is less well known. There are more than 70 pure civil law jurisdictions located around the world.

A foundation will be governed by a charter which must be available for public inspection, though the name of the founder need not be publicly known. The charter will state the name of the foundation, its intended duration, the funds with which it is initially endowed, and its objects. Foundations can be formed for any purpose other than the holding of Jersey real estate.

A foundation is administered by a council, and the names and addresses of the first council members must be given in the charter. Council members act in accordance with the regulations which are drawn up for the governance of the foundation, and these remain private. At least one council member must be an entity registered with the Jersey Financial Services Commission as authorised to carry on trust business.

A foundation must have a guardian, who is responsible for ensuring that the council members carry out their duties properly. The founder can act as the guardian, as can the council member authorised to carry on trust business.

Foundations must pay an application fee and annual fees to the Jersey Financial Services Commission. They are taxed at 0% on their income, provided there are no Jersey resident beneficiaries.

This new type of entity made available by Jersey’s financial services industry can be used both for charitable and for non-charitable purposes. Some global charities are expected to restructure and to operate in future through a Jersey foundation. Some individuals, particularly those from civil law jurisdictions, are likely to find that a foundation is a suitable medium for their private wealth management and their succession planning.

Prospective founders must make an application to the Companies Registry and  they can do that only through an authorised intermediary. Baker Tilly Channel Islands, through their trust and company management division Osiris Management Services, are authorised to act in this capacity.

 

GERMANY

Temporary Relief from Interest Restrictions

 

Since the fiscal year 2008 there has been a restriction in force in Germany on the extent to which interest payments qualify for tax relief. The basic rule is that net interest expense (interest paid less interest received) is deductible for tax purposes only up to an amount equivalent to 30% of EBITDA (earnings before interest, tax, depreciation and amortisation). The rule, which replaced the former thin capitalisation regulations, is designed to prevent multinational groups from financing their German subsidiaries with excessive debt compared with share capital and thus moving taxable profits out of the country by means of interest payments.

 

In order to provide some relief for small and medium sized enterprises the rule has not applied where the net interest expense of a business does not exceed €1m in a year.

 

A modification law has now been passed which increases this exemption threshold to net interest expense of €3m a year. This is in response to the recession and it represents a significant relaxation of the restriction as originally formulated. As a result, many businesses will now obtain materially increased tax relief for their loan interest payments.

 

The amendment is retrospective to 2008, but it will apply only for 2008 and 2009. The threshold will revert to net interest expense of €1m from 2010.

 

 

ISRAEL

Corporate Tax Rate Reductions

In a move which is expected to significantly boost inward investment in coming years, the Israeli parliament, the Knesset, has passed legislation to the effect that the rate of corporate income tax, currently 26%, will reduce by 1% a year from now until 2015, and then by 2% in 2016 to reach a record low in that year of just 18%.

The scheduled rates of corporate income tax are as follows:

 

 

LITHUANIA

Withholding Tax Partially Abolished

Companies in Lithuania paying interest to foreign companies are currently required to deduct withholding tax of 10% and account for it to the tax authority. From 1 January 2010 this requirement is abolished with regard to interest paid to recipients in the European Economic Area (EEA) and to recipients in countries with which Lithuania has a double tax treaty.

The EEA comprises the 27 countries of the EU plus Iceland, Liechtenstein and Norway.

 

SPAIN

Refunds of Excess Tax Paid

Individuals resident in the EU who sold real estate in Spain prior to 2007 may have been charged too much tax on any capital gain that they made and in consequence they may wish to consider claiming a refund.

Prior to that time non-residents of Spain were taxed at 35% on capital gains from the sale of real estate in Spain, while residents were taxed at only 15% provided they had owned the property for at least a year.

The EU took action against the government of Spain on the grounds that this rate differential constituted discrimination against EU citizens living outside of Spain and owning assets there. In particular, it claimed that it breached the EU principles of the free movement of capital and the free movement of workers. In response to the action, the government changed the law with effect from 1 January 2007 such that both residents and non-residents are now taxed at 18% on gains from the sale of real estate.

Until recently it was unclear whether EU citizens who paid the higher rate prior to 2007 could obtain a partial refund, but a Spanish territorial court has now ruled that this is indeed the case and the decision is expected to be ratified by the Supreme Court.

EU citizens in this situation should, therefore, consider making a claim. Court decisions in Spain are applicable only to those who file a claim rather than generally, so there will be no automatic refund in the absence of a claim. If a claim is denied, an appeal can be made to the Administrative Court.

It is not yet known whether the statute of limitations will be imposed on claims. If that occurs it will be in relation only to sales in 2005 and 2006 that partial refunds can be obtained.

 

Suspension of Double Tax Treaty with Germany

On 21 July 2009 the German government unilaterally suspended the country’s double tax treaty with Turkey, claiming that the treaty, signed in 1985, is no longer suitable for the modern business environment. Germany has been urging Turkey to renegotiate the treaty to bring it into line with the OECD’s model double tax treaty, and talks to that effect are now expected to commence. In the meantime, however, there is no valid treaty between the two countries.

This development will have serious repercussions for bilateral trading relations between Germany and Turkey, who are major trading partners. German companies constitute an estimated 17% of foreign investors in Turkey. These German companies will now need advice on how the suspension of the treaty will affect the tax position of their business interests in Turkey.