CEE Traveler 1/2018

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI)

entered into force on 1 July 2018, following Slovenia depositing the fifth ratification instrument on 22 March 2018. Earlier, the following jurisdictions deposited their instruments of ratification with the OECD: Republic of Austria, the Isle of Man, Jersey, and Poland.

For Serbia and Sweden, respectively the sixth and seventh jurisdiction deposited their instruments of ratification with OECD in June 2018, MLI will enter into force on 1 October 2018.

The entry into force of the MLI for double tax treaty Parties (as defined) determines when its provisions come into effect for the treaties between them. Different dates potentially apply for withholding taxes, other taxes, mutual agreement procedures to resolve disputes, and the use of arbitration to resolve disputes, where territories have chosen to apply arbitration.

Our review includes recent amendments to tax legislation in various CEE countries, selected EU members, China and United States. 

 

OECD

Multilateral Instrument to Modify Bilateral Tax Treaties

The entry into force of the MLI for double tax treaty Parties (as defined) determines when its provisions come into effect for the treaties between them. Different dates potentially apply for withholding taxes, other taxes, mutual agreement procedures to resolve disputes, and the use of arbitration to resolve disputes, where territories have chosen to apply arbitration.

We expect a significant number of the current 78 signatories to ratify the MLI and lodge the instrument of ratification with the OECD in time for many provisions to be in effect from 1 January 2019. 

For bilateral treaties this broadly relates to:

  • withholding tax events arising from 1 January 2019 where the parties have both fully ratified before 1 October 2018
  • other taxes for accounting periods beginning on or after 1 January 2019 under the Austria-Slovenia, Austria-Poland and Slovenia-Poland treaties (or other treaties in the unlikely situation in which the parties fully ratify before 1 October 2018 and agree to 1 January 2019 rather than the agreed default period)
  • mutual agreement procedures where the latest party to ratify does so in September 2018 (so it could be earlier than 1 January 2019 where both parties ratify before 1 September 2018), and
  • arbitration cases, where both parties opt in and the latest party to ratify does so in September 2018 (soit could be earlier than 1 January 2019 where both parties ratify before 1 September 2018).

Alternative effective dates will apply to many provisions and circumstances, and careful scrutiny will be necessary of the various defaults and options.

 


CEE countries

Bulgaria

Implementation of the country-by country (“CbC”) reporting requirements in Bulgaria

In line with Action 13 of the OECD Base Erosion and Profit Shifting initiative, the amended Tax and Social Security Procedures Code (“TSSPC”) introduces new rules related to the mandatory CbC reporting by multinational enterprise groups (“MNE Group”) with consolidated group revenue exceeding EUR 750 million.

The following entities have the obligation to submit CbC reports to the National Revenue Agency (NRA): 

  • an ultimate parent company of a MNE Group, that is a tax resident in Bulgaria, if the consolidated group revenue exceeds BGN 100 million in the year preceding the reporting fiscal year;
  • a Bulgarian subsidiary or a permanent establishment of a MNE Group, with consolidated group revenue exceeding BGN 1,466,872,500 in the year preceding the reporting fiscal year when: 
    • the Bulgarian tax administration does not have an available mechanism to receive the CbC reports, filed by the ultimate parent entity of the MNE Group or another designated reporting group entity; or 
    • the MNE Group has appointed the Bulgarian subsidiary/permanent establishment to submit a CbC report on behalf of the group (i.e. to act as a surrogate parent company) or on behalf of all EU group members, subject to the requirements envisaged in the law. 

Failure to submit CbC reports will entail an administrative penalty between BGN 100 thousand and BGN 200 thousand for first violation, and between BGN 200 thousand and BGN 300 thousand for subsequent violations. Reporting of false or misleading information will entail penalty in the amount of BGN 50 thousand to BGN 150 thousand for the first violation and BGN 100 thousand to BGN 250 thousand for subsequent violations. Failure to fulfill the notification requirements will entail a penalty between BGN 50 thousand and BGN 150 thousand for the first violation, and between BGN 100 thousand and BGN 200 thousand for subsequent violations.

Czech Republic

Country-by-Country reporting (“CbCR”)

- the Act on international cooperation in tax administration has been approved. 

The new regulations oblige the Czech member entity to submit:

1. Notification

  • This obligation is compulsory for all Czech entities which are part of a multinational group reporting annual consolidated revenues of over EUR 750 million.
  • In the Notification, it is necessary to specify the ultimate parent entity of this group and further the entity which will submit the CbCR for this group.
  • The Notification needs to be submitted only once. If a different entity will be submitting the CbCR for the group, the Czech entity is obliged to report this change to the tax administrator within 15 days.

2. Country-by-Country Report

  • The obligation to submit the CbCR applies for the Czech ultimate parent entities which are part of a multinational group reporting annual consolidated revenues of over EUR 750 million.
  • The report needs to be submitted within twelve months after the close of the relevant fiscal year of the multinational group. 
  • The CbCR must be submitted for every fiscal year.

The tax administrator may levy an administrative fine for breaking the obligation within the notification process:

  • to a Czech member entity of a multinational group – up to CZK 600 thousand, and
  • to the Czech ultimate parent entity of a multinational group or the Czech surrogate parent entity (for the purpose of filing the CbCR) of a multinational group – up to CZK 1.5 million.

Hungary

New rules on transfer pricing documentation 

Decree No. 32/2017 (X. 18.) of the Minister for National Economy on the documentation requirement related to the determination of the arm’s-length price (“the Decree”) was promulgated on 18 October 2017, replacing Decree No. 22/2009. (X. 16.) of the Minister of Finance. As a general rule, the new provisions will first apply to transfer pricing documentation relating to tax liabilities for the tax year starting in 2018. At the taxpayer’s discretion, the new rules may also be applied to transfer pricing documentation relating to tax liabilities for the 2017 tax year, provided that the due date of the documentation is not earlier than the date on which the Decree enters into force.

Companies subject to the transfer pricing documentation obligation have to prepare a set of documents consisting of a master file and a local file (it will no longer be possible to opt for the standalone documentation). The content of this documentation will be significantly extended, as it will be essentially the same as what is set out in BEPS Action 13, adopted by the OECD on 5 October 2015. 

The master file contains, among other things, a description of the group, its legal and ownership structure, financial and tax position, and specific information related to the group’s intangible assets and financial activities. This is where the group’s unilateral Advance Pricing Agreements (APAs) in force and key supply chains are described. 

The local file includes a description of the local subsidiary’s activities, business strategy, related transactions, and financial information. Copies of APAs and advance tax rulings issued by foreign tax authorities that concern the local company’s documented transactions must also be enclosed to the local file. The above-mentioned documentation consisting of a master file and a local file will be supplemented with a country-by-country report1, in line with the three-tiered approach to transfer pricing documentation described in Action 13.

The new regulations also include the tax authority’s recent practice, which means that if there is no change in the activities, new database searches must be conducted every three years, while in the interim period financial updates are required annually. The new rules also stipulate that database searches must be documented in a way that makes them reproducible (traceable) or if this is not possible, they must be completely documented

Low value-adding services

The previous decree provided for the possibility to prepare simplified documentation for the services listed in the annex to the decree, but as several conditions had to be met, few taxpayers were able to make use of this opportunity. For the purposes of this provision, a markup between 3% and 10% qualified as an arm’s-length mark-up. According to the new Decree, a mark-up between 3% and 7% will now qualify as an arm’s-length mark-up used for the supply of services.

Latvia

European Commission objects to Latvia’s request for reverse charge VAT

Under article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, Latvia requested that the Council should permit Latvia, in derogation from article 193 of the directive, to apply reverse-charge VAT on domestic supplies of consumer electronics and household electrical appliances. 

By making the customer responsible for paying VAT to the government, Latvia wants to fight VAT fraud detected in the distribution of consumer electronics and household electrical appliances. Latvia has adopted reverse-charge VAT on supplies of such goods from 1 January 2018. On 12 January 2018 the Commission refused to give Latvia such a derogation.

Lithuania

The draft Law amending CIT was adopted and came into force as of 1 January 2018

1. Extension of the tax exemption for the sale of shares 

The new Law reduced the percentage of shares (from 25% to 10%) required to be held before the sale in order for the transaction to be tax exempt, i.e. the capital gains from the sale of shares would be tax exempt if more than 10% of the voting shares were held for more than 2 years (in some cases - 3 years). 

2. Extension of the investment project relief 

The validity of investment project relief was extended. Moreover, the companies are allowed to reduce the taxable profit of 2018 and later periods by 100% of the costs of fixed assets incurred up to year 2023 if certain requirements are met. The provision on informing the Tax Authority about the intention to reduce the taxable profit due to an ongoing investment project in order to reduce the administrative burden of the taxpayers was waived. 

3. Additional CIT relief for entities carrying out R&D activities 

Additional CIT relief for entities investing in scientific research and experimental development (hereinafter - R&D) was implemented. It is also suggested to apply a reduced CIT rate of 5% on the profit (calculated according to the formula provided in the draft Law) from the usage, sale or any other transfer into ownership of intangible assets if: 

  • income from the usage of intangible assets was earned and all the related expenses were incurred only by the producer of such assets; 
  • the intangible assets would be computer programs protected by the copyrights or other intangible assets protected by patents or other additional protection certificates issued by the European Patent Commission or EEA or DTT countries. 

4. Adjustments of the restrictions on representation expenses 

According to the new provision, for the year 2018 or later periods not 75%, but only 50% of the representation expenses would be recognized as deductible expenses. In addition, deductible representation expenses shall not exceed the 2% of the entity’s income during the tax period. The provision on expenses that cannot be attributed to the representation costs has also been amended leaving only the gambling costs as not qualifying for the representation expenses. In some cases, hunting, fishing or golf costs might be treated as representation expenses. 

5. Extension of the tax relief for the companies established in free economic zones (FEZ)

Companies registered in FEZ and meeting certain criteria may be released from CIT payment for the first 10 years of activities (currently - 6 years) and for the next 6 years (currently – 10 years) would be enabled to pay CIT at the standard rate reduced by 50%. 

Trademark registration system more suitable to an e-environment 

The draft Trademark Law is introduced with the purpose to transpose Directive (EU) 2015/2436 into the Lithuanian legal system. In addition to establishment of rules amending procedure of trademark registration, the draft law aims to abolish the requirement to present the trademark graphically upon registration allowing registration of untraditional trademarks. This should improve protection of trademarks in an e-environment. Moreover, protection of geographic references, names of plant species, traditional products and definitions guaranteed is intended to be strengthened.

Poland

The draft Law amending CIT was adopted and came into force as of 1 January 2018

Below we present the most notable changes.

Introduction of “revenue baskets” - separation of income / loss sourced from capital transactions from other income / loss sources

Taxpayers have to recognize revenues and costs related to each „basket” separately. There is no possibility to set-off income derived from one “basket” with loss borne in the other “basket”. Income in both baskets is taxed at 19% CIT. The capital basket include, i.e.:

  • royalties, license fees and similar rights.
  • dividends,
  • sale of shares,
  • sale of receivables other than related to operational activity,
  • redemption of shares,
  • liquidation of companies and distribution of liquidation proceeds,
  • mergers and divisions of companies,
  • in-kind contributions,

Accordingly:

  • lack of possibility to set-off income derived from one “basket” with loss borne in the other “basket”;
  • carried forward losses in one “basket” may be utilized over the period of 5 consecutive years solely to set-off taxable income from the same “basket”. No more than 50% of the loss to be utilized in a single tax year.

Moreover, costs allocated to each basket are not restricted to costs directly related to revenues from this basket. As an example, interest on loan financing acquisition of shares is likely to be allocated to „capital gains” basket (alongside with the purchase price for share itself).

In case of banks, financial and credit institutions and brokerage houses all profits should be regarded as profits from one basket (due to specific nature of operations basket separation should not apply).

Limitation of costs deductibility from certain intangible services and royalties

Costs from related parties including advisory, management, data processing, marketing, market research, insurance, guarantees, royalties, transfer of risk connected with bad loan receivables (e.g. via insurance, derivatives, guarantees) will be limited to 5% of tax EBITDA.

Restrictions affect the excess of the above costs over the threshold of PLN 3 m and would apply to the extent that: [the value of costs] exceeds 5% * [(taxable revenues –interest revenues) – (tax deductible costs –depreciation of fixed assets and intangibles –interest cost)].

Excluded from the above are accounting, legal and recruitment services and all services covered with advance pricing agreements (APA), as well as costs of intangible services directly related to production of goods / provision of services. Limit will apply if the excess is over PLN 3m (ca. EUR 750k).

Applicability of restrictions excluded with relations to, ie. to accounting, legal and recruitment services, costs being further re-invoiced to other entities,

Costs exceeding the above limits and –accordingly –excluded from tax deductible costs in a given year may be carried forward to 5 subsequent years.

Limitation of financial costs deductibility

Deductibility restrictions are applicable both to internal and external financing costs (not only interest). Deductibility limit for the excess of financing costs over financing revenue is set at 30% of tax EBITDA. Limit applies if the excess is over PLN 3m (ca. EUR 750k).

“Minimum income tax level” for taxpayers holding substantial real estate that has initial value over PLN 10m

„Minimum tax” is payable monthly at 0,035% of excess of the initial value of the building over PLN 10m (0, 42 % annually). Consequently, tax is due regardless of the level of actual income derived by taxpayer. This minimum tax is off-set-able against CIT, if CIT is higher.

New CFC Rules

There is a change of criteria for qualifying a foreign company as subject to CFC (change of shareholding levels from 25% to 50%, focus on effective tax rate as opposed to nominal tax rate). Broadening a catalogue of revenue deemed as „passive” for the purpose of CFC rules as well as change of the „passive income” ratio from 50% to 33%.

Change of rules regarding CIT tax groups

There is a decrease of a minimal revenue to income ratio of the tax group from 3% to 2%. Tax group will lose the status of taxpayer retroactively (from the date of registration as a tax group) in case of breach of certain conditions and companies forming tax group will be obliged to reconcile for CIT purposes as independent taxpayers retroactively for past years. Group members are obliged to set intra-group transaction terms at arm’s length. However, there is no formal obligation to prepare statutory TP documentation for such transactions.

Further changes in CIT deductibility rules:

Deductibility of interest from debt-push-down structures is excluded. Deductible of costs in sale & lease-back transactions is limited at the level of prior revenues. One-off write-down for fixed assets of small value possible for assets worth up to PLN 10k (previously PLN 3,5k).

New regulations regarding cryptocurrency

Poland has recently affirmed that cryptocurrency trading is completely legal in the country in an official announcement published on June 6. The government is currently focused on the development of regulatory framework for the market to prevent it from risks sometimes associated with crypto, such as money laundering, tax evasion, and terrorist financing.

The Polish Financial Oversight Commission (KNF) sought to clarify the status of cryptocurrencies and crypto trading, “recognizing the emerging legal doubts related to the functioning of exchanges and exchange offices.” Moreover, KNF is planning to introduce a regulatory system for Bitcoin and altcoins that will be officially launched on July 13, 2018.

Tax relief for research and development (R&D) - new and more attractive rules in 2018.

A few key issues from the R&D point of view:

  • The R&D tax relief enables for qualifying the projects that are currently in progress – e.g. projects that started in the past years;
  • The R&D tax relief does not require keeping the record with respect to the projects, but with respect to the types of costs only;
  • The result of the research conducted does not matter;
  • The act does not limit the commercialization methods and the utilization of the R&D works results. Those can therefore be used in the company’s own activities, as well as can be distributed to the other entities in the group, or to the external entities;
  • The benefits will also be available to enterprises who during a tax year operate in the Special Economic Zone on the basis of a permit, in relation to eligible costs which do not constitute operating costs covered by this permit.

Below we present updated costs qualified for deduction:

  1. Remuneration and employee contributions in the part financed by the payer, as well as those related to services resulting from task specific contracts and contracts of mandate, if those charges and contributions are related to the employees conducting research and development activities.
  2. Acquisition of materials and raw materials directly related to the research and development activities.
  3. Acquisition of specialized equipment other than fixed assets, in particular laboratory vessels, utensils and measuring equipment.
  4. Use of the research equipment utilized exclusively in the research and development activities, on condition that the use of such an equipment is not a subject of the contract with an entity related to the taxpayer.
  5. Expertise, opinions, advisory and equivalent services, acquisition of R&D results performed by the scientific units, based on the contract with a research unit, for the purpose of the research and development activities.
  6. Depreciation of fixed assets and intangible assets used in the research and development activities, excluding the cars, buildings and properties being a separate possession Costs of obtaining patent rights for an invention, protection rights for utility model, registration of the industrial design incurred on, for example, preparation of the application documentation, conduct of the proceedings by the Patent Office or the related periodic fees.
Minimum tax in relation to commercial real property – important changes for real estate market

On 9th April 2018 the Government Legislation Centre has published bill covering changes to the so-called minimum tax. Minimum tax will apply to all buildings subject to lease regardless of their type. Therefore, in our view, the minimum tax will also apply to hotels and warehouses. Tax treatment of premises separated in a building (legally separate condominium units) is still not clear, however the arguments to treat them as not subject to tax seem to be weaker than under current rules. In any case, the building should still be classified as fixed asset in order to be subject to minimum tax.

Proposed amendment includes change in reference to PLN 10m exemption threshold i.e. the threshold will be applicable to the taxpayer regardless of the number of buildings owned (single exempt amount for the taxpayer for whole portfolio of buildings held by the taxpayer). Furthermore, this amount is shared with related parties in certain cases.

Proposed changes include introduction of provisions regarding refund of minimum tax allowing the taxpayer to apply to the tax authority for a refund of the excess minimum tax (i.e. excess of minimum tax in a given year over "regular" CIT liability). The minimum tax shall be reimbursed if the tax authority confirms that there were no irregularities in the amount of "regular" CIT liability (in particular debt financing costs of the acquisition or construction of the building were in line with market conditions). This change would retroactively apply to the minimum tax for 2018.

In principle, the changes regarding the minimum tax enter into force on January 1, 2019 except the amendments regarding vacant areas, regulations on refund of minimum tax and exclusion for retail and service building used for own needs as it was indicated above. Moreover, the taxpayers whose tax year is different than calendar year, will apply the existing regulations until the end of the tax year started before January 1, 2019 and ending after this day.

 

Romania

Romanian National Agency for Fiscal Administration approves country-by-country report (CbC) and CbC notification templates

The Romanian Government passed in June 2017 Emergency Ordinance no. 42/2017 to align the Romanian Fiscal Procedure Code and local legislation with the provisions of Directive (EU) 2016/881 dated 25 May 2016.

The new legislation is mainly in line with the EU Directive, but some additional clarifications are provided, such as regarding the penalty regime and the specific provisions regarding filing requirements and content of the CbC report. 

VAT split payment system, mandatory from 1 January 2018

Ordinance 23/2017 on the VAT split payment system was published on 31 August 2017. The Romanian Government has adopted the necessary legislation in order to establish a system for the VAT split payment. This system is mandatory from 1 January 2018 for invoices issued and advances as of 1 January 2018. 

The normative framework provides for specific contraventions and sanctions for non-compliance with the obligations set out in its contents, as follows:

  • If the errors were not corrected within seven working days, a penalty of 0.06% per day of VAT value, but not for more than 30 days, will be applied;
  • After a period of 30 days, a fine representing 10% / 50% of the amount of VAT is applicable for acts such as: payment of VAT due to the supplier from an account other than its own VAT account, erroneous VAT payment into an account other than the supplier's VAT account, etc.
Fiscal Code Amendments

Law 72/2018 amending the Fiscal Code, regarding corporate income tax, personal income tax, social contributions and value added tax, has been published on 23 March 2018. Below we summarize major changes in:

Corporate income tax

  • Net losses arising following assignment of receivables, as the difference between the assignment price and the value of the assigned receivable, are deductible up to 30%.
  • For banks, 70% of the difference between the value of the assigned receivable and the assignment price is taxed as an item similar to revenues, under certain conditions.

Personal income tax and social contributions

  • The amendments align the fiscal treatment of medical services in the form of subscription with that of voluntary health insurance premiums.

Value added tax

  • The VAT registration threshold for residents increased from EUR 65,000 to EUR 88,500.
Intention to rent out property is sufficient in order to deduct input VAT

The ruling of the Court of Justice of the EU (“Court”) in case C-672/16 confirmed that real estate owners have a VAT deduction right for property purchases even if the property is not rented out immediately, as long as the owner is able to demonstrate in an objective manner the intention to rent it out.

This Decision reiterates that real estate companies are entitled to maintain their right to deduct input VAT for purchases of immovable property, based on their intention to rent them out as taxed, as long as they initiate actions in this respect, proven in an objective manner, regardless of results.

This decision does not only apply to the real estate market, but also to any line of business whose specifics may involve (1) a time gap between the date of purchase of goods / services and the date of their use in a taxable activity or (2) the failure to use them at all in such an activity, for objective reasons.

 

Russia

Implementation of three-tier transfer pricing documentation 

Federal Law No. 340-FZ of November 27, 2017, “On Amending Part one of the Tax Code of the Russian Federation in Connection with the Implementation of the Common Reporting Standard and documentation on Multinational Enterprises” came into force from the day of its official publication on 27 November 2017. 

This law obliges members of Multinational groups of companies (MNCs) with a total income (revenue) over RUB 50 billion under consolidated financial statements for the previous financial year to submit three-tier documentation to tax authorities, including a Country-by-Country (CbC) report, global and national documentation, as well as a notification on their membership in an MNC. 

The Russian Federal Tax Service (“FTS”) explains how and when an entity’s debts can be collected from its officers 

In January 2018, FTS provided lower-level tax authorities with clarifications on how to enforce the Russian Constitutional Court’s (“RCC”) resolution. The FTS addressed a number of key aspects regarding collecting damages from an entity’s officers from a wider perspective than the RCC did. Issues addressed by RCC Resolution No. 39-П of 8 December 20173 The RCC confirmed that corporate officers can be subject to the collection of tax arrears and interest (but not penalties) charged to a corporate taxpayer.

The resolution also referred to circumstances in which officers may not be subject to the collection of damages, such as when underpaid taxes are collected from other persons involved in the entity’s business. Furthermore, when determining the amount to be compensated, the court can consider an individual’s proprietary position, their enrichment as a result of the tax crime, the extent of their guilt, the ability to determine the legal entity’s behaviour and other significant circumstances.

Key considerations of the FTS Letter - according to the FTS, an entity’s officers can be subject to paying tax debts in some ambiguous cases, with the burden of proof being on the individual. The RCC explained that an individual is not liable for paying for damages caused against public-law entities as a result of tax crimes if the chance to collect tax debts from the taxpayer and/or the persons involved in its business remains. However, the FTS did not specify the actions to be taken to support the fact that the persons in question are unable to compensate for damages.

Life before and after Article 54.1 of the Russian Tax Code

Article 54.1 of the Russian Tax Code (RTC), which regulates matters related to good faith on the part of taxpayers, does not apply to disputes that arose as a result of tax audits initiated by tax authorities before 19 August 2017. Four separate court rulings have been provided to support this conclusion.

Thin capitalisation

Thin capitalisation rules stipulate that interest paid abroad are taxed as dividends in certain circumstances. The Russian Supreme Court („RSC) allows to consider a loan, whose interest was re-qualified as dividends for tax purposes, as a capital contribution. On 6 March and 5 April 2018, the Judicial Chamber of the RSC issued two important rulings focused on treaty criteria regarding application of reduced tax rates on dividend payments. Both cases were filed for re-trial.

Currently, the RSC allows to qualify loans from companies having no participation in the borrower’s capital at all as capital contributions. It stated that the absence of formal shareholding agreements between a borrower and lender may not serve as grounds for depriving a foreign party of the right to apply the reduced tax rate on income received

Tax amnesty - proposed amendments to the Russian Tax Code 

The second stage of the capital amnesty takes place from 1 March 2018 and will continue until 28 February 2019. Those who wanted to declare their foreign assets but failed to do so in due time currently have a second chance. It is proposed: 

  • To provide tax exemption on assets declared during the second stage of amnesty except for taxes payable on the profits and/or property of CFCs declared;
  • To determine that when declaring participation in a foreign company or filing CFC notices during the second stage of the amnesty, such notices will not be considered filed in violation of the established deadlines;
  • To provide Personal Income Tax (PIT) exemptions on income received upon the liquidation of a CFC in case the liquidation was completed before 1 March 2019. 9 Exemptions will cover both cash and property received after 1 January 2016, which means that the controlling parties that liquidated their CFCs in 2016 and 2017, received liquidation payments and paid the respective taxes will now be able to get the taxes back;
  • To establish the procedure for determining expenses when calculating PIT upon a declarant’s sale of property and property rights received earlier from a nominee holder. This procedure will be similar to the procedure for determining expenses in case of the tax-free receipt of property from a liquidated CFC (the expenses will include the lesser of the two values: either the confirmed book cost or market value at the date of the receipt) 
  • To extend the period during which a CFC may not be considered a Russian tax resident10 until 1 March 2019
  • To extend the period during which the income and expenses of a liquidated CFC will not include income and expenses from the sales of securities and property rights to its controlling party until 1 March 2019.

 

Slovakia

As of 1 January 2018, all legal entities are obliged to communicate with the tax authorities electronically

All VAT payers and tax representatives of tax entities are already obliged to file documents and communication with tax authorities electronically. As of 1 January 2018, an amendment of the Tax Administration Act extends electronic communication with tax authorities to all legal entities that are registered in the Slovak Commercial Register and from 1 July 2018 it will also be extended to natural persons – entrepreneurs.

Legal entities that have not been yet communicated with the Tax Office electronically, should therefore register on the website www.financnasprava.sk

and request for authorization for electronic submission.

Cancellation of the minimum amount of VAT base for application of local reverse-charge for agricultural crops and metals

The amendment revokes the minimum VAT base of EUR 5,000 for shifting VAT liability to a recipient (VAT payer) for agricultural crops and metals and metal semi-finished products.

Introduction of Exit Tax

 This regulation is intended to ensure that the economic value of gains made in Slovakia is also taxed here, specifically when taxpayers transfer property, tax residence, or business activities outside of Slovakia and, from the legal point of view, assets or (a part of) a business are not being sold.

The tax will apply where taxpayers (Slovak tax residents and non-residents with a permanent establishment in Slovakia) transfer outside of Slovakia:

  • Individual property (transfer carried out by a tax resident from their headquarters in Slovakia to a permanent establishment in another country, or by a tax non-resident from their permanent establishment in Slovakia to their headquarters or permanent establishment in another country);
  • Business activities (transfer carried out by a Slovak tax resident to another country, or by a tax non-resident from their permanent establishment in Slovakia to another country); or
  • Tax residence (tax resident is no longer a Slovak tax resident).

The tax will be calculated by applying a 21% tax rate to a specific positive tax base, which is determined as follows:

  • When transferring individual property, its fair (market) price at the exit time will be considered as income and its tax value will be regarded as an expense;
  • When transferring business activities, the fair (market) price of assets and liabilities transferred at the exit time will be considered as income and the specific tax base will be calculated as when selling a business or part thereof.

The exit tax will either be paid in one instalment in the period for filing the tax return, or, upon request, in five annual instalments if it is a transfer to EU or EEA member states. In all other cases, the tax will be payable in one instalment in the period for filing the tax return. When paying the tax in instalments, the taxpayer will also pay interest on the outstanding instalments.

The new regulation about the exit tax also addresses the valuation of assets and liabilities for Slovak tax purposes where a Slovak tax non-resident becomes a tax resident in Slovakia.

The exit tax is applicable for tax periods commencing on or after 1 January 2018.

Introducing a notification obligation when selling an immovable property

If a company decides to apply the taxation of a supply of a building, or part thereof, including the supply of building land, where such supply may be VAT exempt under the VAT law, such a company will be required to notify the customer in writing of its decision on taxation by the deadline for issuing an invoice.

 

Ukraine

Changes to the Tax Code – 2018

The Law of Ukraine “On changes to the Tax Code of Ukraine and certain legislative acts of Ukraine regarding maintenance of balance of budget revenues in 2018” # 2245-VIII dated 7 December 2017, introduces changes to corporate profit taxes, transfer pricing rules, land and real estate taxes with effect from January 1, 2018. Below we summarize major changes:

  • The deadline for submitting a year-end CPT return is extended from 40 to 60 calendar days after year end. The tax authorities have clarified that this rule applies to 2017 corporate profit tax (“CPT”) returns.
  • Taxpayers under the simplified tax regime are no longer required to make advance CPT payments on the distribution of dividends. Recipients of such dividends can no longer reduce tax base to the amount of such dividends.
  • Taxpayers under the simplified tax regime that distribute passive income to a non-resident or its designated entity (except to the nonresident’s permanent establishment in Ukraine) are obliged to withhold withholding tax (WHT) at the moment of such payments.
  • The decreased WHT rate on payment of interest under Eurobonds issued before 31 December 2016 may be applied if the interest is paid to residents of low-tax jurisdictions. 
  • Interest payable under a syndicated loan through the organising bank, can be subject to a reduced WHT rates, under the double tax treaties between Ukraine and country of residence of each participating bank. 
  • Fees for purchase of copies of software programs for further resale should not be treated as royalties for tax purposes. 
  • The deductibility of payments to non-resident entities established under certain legal forms is limited to 70% of the amount. These forms are set forth by the respective Order of the Cabinet of Ministers of Ukraine.
  • Permanent establishments of non-residents are subject to TP rules.

The new law introduces additional criteria for the related parties: 

  • A legal entity is considered related to another legal entity, if the ultimate beneficial owner (controller) of such legal entities is one and the same individual; 
  • Powers of a single executive body of such legal entities are exercised by the same individual;
  • An individual is considered related to a legal entity if the individual is the ultimate beneficial owner (controller) of the legal entity;
  • The chain of legal entities is considered related if shares owned by each entity in the next legal entity in the chain is 20% and more. 

If an individual is recognized as being related to other individuals then all such individuals are deemed to be interrelated.

On 21st February 2018 procedure of paying import VAT in instalments came into effect 

The order regulates the VAT installment payment procedure on imports of certain equipment to be used by importers in their own production process for the period of up to 2 years. This option is laid out in the Tax Code of Ukraine and will be available for use until January 1, 2020.

In order to take advantage of the installment option a taxpayer should obtain a permit after submitting to the customs agency a documentation package that includes an application on the approved form, business plan, conclusions of state agencies, expert institutions, technical and other documents. The first installment will be due during customs clearance of the equipment and the remaining VAT due amount to be secured with financial/bank guarantee or the equipment used as the collateral. 

The remaining VAT amount should be paid monthly. The importer is then required to report monthly to the State Fiscal Service confirming the status of the equipment as being used in its own production process.

Protocol amending Ukraine-Netherlands Tax Treaty (further – “Protocol”) was signed on 12 March 2018. 

The Ukrainian and Dutch Parliaments should ratify the Protocol. If it happens before 31 December 2018, taxpayers will be able to apply new withholding tax (further – “WHT”) rates starting from 1 January 2019. Specifically, the Protocol introduces the following WHT rates:

  • applicable to dividend payments:
    • 5%, if the 20% ownership threshold is met,
    • 15% in all other cases;
  • 5% applicable to interest payments;
  • applicable to royalty payments:
    • 5%, if royalties are paid for the use of patents, trade marks, know-how, etc., 
    • 10%, if royalties are paid for the use of copyright of literary or scientific work, cinematograph films or tapes, etc.
Ukraine and Qatar signed Double Tax Treaty for the avoidance of double taxation and prevention of fiscal evasion between two countries (further – “U-Q DTT”). 

In order for the U-Q DTT to enter into force the Ukrainian and Qatari Parliaments should ratify it and then exchange the ratification letters. If the U-Q DTT enters into force before 31 December 2018, the taxpayers engaged in transactions with residents of Qatar will be able to apply reduced WHT rates and enjoy other benefits of the DTT starting from 1 January 2019. Specifically, the U-Q DTT introduces the following WHT rates:

  • applicable to dividend payments:
    • 5%, if the 10% ownership threshold is met;
    • 0% in other cases. 
  • applicable to interest payments:
    • 5%, if the loan is granted by a bank or any other financial institution or if interest is related to the sale of equipment on credit;
    • 10% in other cases;
  • applicable to royalty payments:
    • 5%, if royalties are paid for the use of copyright of scientific work, patent, trade mark, secret formula, process or information concerning industrial, commercial or scientific experience; 
    • 10% in other cases.
Order on suspension of VAT invoice registration entered into force

In accordance with the Order, VAT invoices/adjusting VAT invoices (further – VAT invoices) are not subject to monitoring (i.e. suspension) if: 

  • such VAT invoices are not provided to customers and/or issued for VAT exempt supplies;
  • the monthly volume of supplies is less than UAH 500 ths. and the Chief Executive Officer of such taxpayer holds similar position in fewer than 3 operational tax paying entities;
  • the ratio of paid taxes (excluding import VAT), duties and Unified Social Contribution in the amount of supplies for the last 12 months exceeds 3%; and total VAT amount per VAT invoices registered in the reporting month does not exceed by more than 40% the largest monthly VAT amount for the last 12 months. 

Registration of VAT invoices that match the risk assessment criteria will be suspended. However, in cases when taxpayers with positive tax history file VAT invoices that match the criteria for risk transactions, no suspension action will be taken.

 

European Union

EU summary

 
Commission announces new guidelines to improve withholding tax procedure 

On 11 December 2017 the European Commission put forward new guidelines on withholding taxes to help Member States reduce costs and simplify procedures for cross-border investors in the EU. The recommendations, developed alongside national experts, form part of the EU’s Capital Markets Union Action Plan and should improve the system for investors and Member States alike. In particular, the Code of Conduct – which is envisaged to apply on cross-border dividend, interest and royalty income – aims to reduce the challenges faced by smaller investors when doing business crossborder. It should result in quick, simplified and standardized procedures for refunding withholding taxes where appropriate. Implementation of the Code of Conduct is voluntary for Member States. It provides a snapshot of the problems faced by cross-border investors and explains how more efficient tax procedures can be put in place. 

The Code outlines a range of practical ways for Member States to address key issues, including: 

  • Submit refund claims or apply for relief: 
    • Possibility of beneficial owners, nonresident financial institutions and other representatives to submit refund claims or apply for relief. For instance, beneficial owners, including those with a low value portfolio, are able to claim refund or apply for relief on their own behalf, without any intermediary; non-resident intermediaries are allowed to claim refund and apply for relief on behalf of their clients in a non-discriminatory manner. 
  • Efficient and user-friendly digital WHT procedures: 
    • Digitalisation of the reclaim process. Digitalisation can be defined as the adoption or increase in use of digital or computer technology by an organization. It takes time, demands resources and can be carried out with various degrees of maturity (in the case of WHT processes, it can range from using emails and /or publishing forms online to full online processes). 
  • Efficient internal IT systems: 
    • Tax administrations to use IT systems for efficiently processing reclaims and refunds, as well as, when applicable, a relief at source system. 
  • Effective reliefs and provision of refunds in a short period: 
    • Provide relief and refunds in an appropriate period of time and normally within 6 months of receipt of a fully documented and valid claim for refund or application for relief by the relevant tax authority. 
  • User-friendly forms and user-friendly documentation requirements: 
    • The tax administrations should make the forms for the submission of refund claims or application for relief as user-friendly as possible. In addition, tax administrations should provide clear requirements in relation to which supporting documents taxpayers have to provide in order to substantiate their claims for refund or applications for relief vis à vis tax administrations Document requirements are published online in at least one language customary to the sphere of international finance. Documents requested are relevant and necessary. 
  • Set up a single point of contact: 
    • Tax administrations should have a single point of contact for all aspects concerning the WHT procedures. The single point of contact should be easily found, i.e. on the website of the tax administration. 
  • Relief at source: 
    • Carrying out relief at source requires the assumption of important responsibilities and obligations by financial intermediaries which can be held liable for failures to comply with their obligations. As set out in the Capital Markets Union Action Plan, the European Commission encourages Member States to adopt systems of relief-at-source from withholding taxes and to put in place better refund procedures. The Commission went on to note that whereas some of the suggestions may be carried out relatively quickly and cheaply, others may take longer and involve substantial investments, in particular when it comes to IT systems.
Implementation of amendments to the European Commission’s Directive 2006/112/EC which aims to transform VAT system. 

The proposal marks down the initial part of the first legislative phase in order to move from the transitional system to a definitive VAT system with the underlying principle of taxation in the country of destination. 

Since the transition to a definitive system is to be carried out in stages and will take years, then the proposal of the European Commission suggests several short-term improvements to the current system of VAT (so called “quick solutions”). In addition, the legal basis of the definitive system is defined. Member States must adopt and publish the laws, regulations and administrative provisions necessary for the implementation of the amendments by January 1, 2019 at the latest. Below we summarize major changes:

A new concept of a certified taxable person will be introduced

Pursuant to Article 13a of the directive, obtaining a status of a certified taxable person will be based on unified criteria which will be valid throughout the European Union. The criteria for being considered a certified taxable person will automatically be fulfilled in case of persons who have been granted the status of an authorized economic operator for customs simplifications

Simplifying and harmonizing the taxation of call-off stock schemes

Call-off stock is the transfer of goods to another Member State without the transfer of ownership and with the aim of constituting a stock for an already known customer. Transporting goods from an EU Member State of departure to an EU warehouse of a certified client will no longer be considered an intra-Community supply. It will no longer be necessary for the seller to register for VAT purposes in every Member State where it has placed goods under the call-off stock arrangement.

One supply in a chain transaction can be zero-rated

A chain transaction is defined and should be understood as successive supplies of the same good which result in a single intra-Community transport of those goods. It should be noted that both the vendor and the intermediary must be certified taxable persons to make use of this provision. 

The transport is ascribed to the supply between the vendor and intermediary if the intermediary notifies the supplier about the Member State of arrival of the goods and the intermediary operator is identified for VAT purposes in a Member State other than that in which the dispatch or transport of the goods begins. Such a situation is a zero rated intra-Community supply for the vendor. Where any of the conditions are not met, the intra-Community transport shall be ascribed to the supply made by the intermediary operator to the customer and that supply is subject to zero rate. 

One-Stop Shop system vs taxation in a Member State of destination

The supplier of goods and services to a Member State of destination will be liable for the payment of the VAT unless the acquirer is a certified taxable person. Where the person liable for VAT is not established in the Member State where the tax is due, he will be able to file his return and settle payment obligations via a so-called One-Stop Shop system.

European Commission (EC) proposes new rules on the taxation of the digital economy 

On 21 March 2018, the EC published its EU digital tax package on the taxation of the digital economy. 

1. The draft Directive on the corporate taxation of a significant digital presence - a (long-term) comprehensive solution within the corporate tax systems of the Member States. The EC proposes that the Directive should apply per 1 January 2020. 

It lays down rules for establishing a taxable nexus in case of a non-physical commercial presence of a digital business (“significant digital presence”). More specifically, a digital platform shall constitute a significant digital presence if one or more of the following criteria are met:

  • the proportion of total revenues obtained in that tax period and resulting from the supply of those digital services to users located in that Member State in that tax period exceeds EUR 7,000,000;
  • the number of users of one or more of those digital services who are located in that Member State in that tax period exceeds 100,000; 
  • the number of business contracts for the supply of any such digital service that are concluded in that tax period by users located in that Member State exceeds 3,000. 

The economically significant activities performed by the significant digital presence through a digital platform, include, inter alia, the following activities: 

  • the collection, storage, processing, analysis, deployment and sale of user-level data or display of user-generated content;
  • the sale of online advertising space;
  • the making available of third-party created content on a digital marketplace.

The proposed Directive shall apply to all taxpayers that are subject to corporate tax in one or more Member States and to entities resident for tax purposes in a non-EU jurisdiction, in respect of their significant digital presence in a Member State. 

It shall not apply if an entity is resident for tax purposes in a non-EU jurisdiction that has a double tax convention (DTC) in force with the Member State in which there is a significant digital presence unless i) that DTC includes similar provisions on a significant digital presence and the attribution of profits thereto to those of the draft Directive, and ii) those provisions are in force. 

2. The draft Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services - a targeted (short-term) solution 

It introduces a Digital Services Tax (DST) at EU level at a rate of 3% on gross revenue (net of VAT and other similar taxes) derived in the EU by the following activities (save for certain exceptions):

  • the placing on a digital interface of advertising targeted at users of that interface; 
  • the making available to users of a multi-sided digital interface which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users; 
  • the transmission of data collected about users and generated from users' activities on digital interfaces. 

Revenues resulting from the provision of a service mentioned above by an entity belonging to a consolidated group for financial accounting purposes to another entity in that same group shall not qualify as taxable revenues. Moreover, if an entity belonging to a consolidated group for financial accounting purposes provides a service mentioned above and the revenues resulting from the provision of that service are obtained by another entity in the group, those revenues shall be deemed to have been obtained by the entity providing the service.

Only entities with both total annual worldwide (i.e. not only within the EU) revenue above EUR 750 million and total annual taxable digital revenues in the EU above EUR 50 million would be subject to the DST, irrespective of whether they are established in a Member State or in a non-EU jurisdiction.

Furthermore, the proposed Directive sets out rules with regard to the place of taxation of the DST which is based on the location of the users of the taxable service. It is also proposed to establish a simplification mechanism in the form of a One-Stop-Shop for taxable persons with DST liability in one or more Member States.

EU finance ministers agree on mandatory disclosure for intermediaries (DAC6) 

On 13 March 2018, the ECOFIN Council, composed of the EU-28 Finance Ministers, reached political agreement on a Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements in order to disclose potentially aggressive tax planning arrangements (also commonly referred to as DAC6). 

Commission launches compliance check to assess VAT-refunds in all Member States 

On 15 February 2018 the European Commission launched a compliance check to assess whether VAT refunds to businesses in EU Member States are made quickly enough and are in line with current EU law and with case law of the European Court of Justice. A lack of access to a simple and fast VAT refund procedure can have a major impact on cash flows and on the competitiveness of businesses. This is especially true for the smallest companies who cannot afford to go through long and burdensome procedures to get the VAT they are owed back from the State. 

Over the next months, tax provisions in each Member State will be scrutinised to ensure that refund procedures allow businesses to quickly and easily recover VAT credits both in their own country and in other EU countries. The study will examine, for example, the length of time it takes to complete procedures in each country and any unnecessary hurdles in the system which can create financial risks for business. 

This exercise forms part of the Commission’s efforts towards a Single VAT area where administrative burdens for business, in particular micro-businesses and SMEs, will be drastically reduced.

Automatic exchange of financial accounts information as of 30 September 2018: preliminary list of participating countries

The Ministry of Finance published a circular on 2 February 2018 with a preliminary list of countries participating in the automatic exchange of information in the period to 30 September 2018. The final list should be available by the end of June 2018. 

Reporting financial institutions are obliged to provide the relevant information by 31 July 2018. According to the Act, the automatic exchange will involve the following countries: 

  • EU Member States; 
  • Third Countries which have signed the mutual agreement of 29 October 2014; 
  • Third Countries which have signed an agreement with the EU; 
  • Third Countries which have signed a bilateral agreement with Germany.

 

Belgium

Circular letter on exit taxation 

On September 11, 2017, the Belgian tax administration published a circular letter on the practical aspects of the amended exit tax provisions. These provisions have been in force since December 8, 2016. They are largely in line with EU ATAD requirements on exit taxation. 

Companies and individuals that terminate their Belgian entity’s activities in Belgium may either pay the Belgian exit tax immediately or spread it over a five-year period (in case the assets of the Belgian entity remain in an entity established in another EU Member State or an EEA Member State with which Belgium concluded an agreement on mutual assistance in the recovery of taxes). 

The circular letter explains the procedural aspects of claiming a spread payment of the exit tax charge and provides that, in order to opt for deferral of the exit tax liability. The taxpayer must make a formal request within two months from receipt of the tax assessment and must annually file a form, listing the transferred assets to determine whether the benefit of the spread payment can still be applied. 

The Belgian Tax Authorities could require a guarantee, but only if there is a real risk of non-recovery of the outstanding balance. No late payment interest is due if the five annual instalments are paid in time. The circular also lists a number of situations that trigger an immediate payment of the unpaid tax charge (e.g., when the assets are sold). In 2020, the Belgian exit tax provisions will be fully implemented and aligned with the ATAD provisions.

France

French finance bill introduces flat rate withholding for investment income

The finance bill for 2018 introduced a number of changes that promise to impact mobile employees and their employers.  Most notably: 

  • a flat tax rate applicable to investment income, levied at source by payors
  • the wealth tax is replaced by a tax on real estate property
  • the dwelling tax applicable to a principal residence will gradually decrease 
  • income tax rates are indexed to the inflation rate and increased by 1%
  • the worker’s premium awarded to low-income earners will be gradually re-evaluated by 80 € per month.

The bill was enacted in December 2017 – changes generally apply as of January 2018 with a few provisions applying to 2017 income.  Mobility programs should consider the potential impact to equalization costs for mobile employees working or residing in France

Germany

Limited taxpayers: withholding tax on cross-border licensing of software 

The Federal Finance Ministry published the long-awaited circular on its intended application of the rules (Section 50a Income Tax Act) applying to limited taxpayers and withholding tax on cross-border licensing of software and databanks. 

The Federal Finance Ministry circular provides a detailed evaluation of software and databank licences supplied by non-resident providers to resident customers and the potentially resultant limited liability to German tax under Section 50a (1) No. 3 Income Tax Act (“ITA”) by way of withholding. The limited liability to German tax arises where income is realised from licensing rights, which are exploited in a domestic branch or other establishment. 

The German tax liability arises where the user is given extensive rights to (economically) exploit the software (this could for example be the right to duplicate, to adapt, to disseminate or to publish) and that this exploitation occurs in a domestic branch or other establishment. The term “exploitation” means targeted activities intended to achieve an economic benefit from the licensed rights. No limited tax liability will arise for example where the licence of the software functions is the prime purpose of the contract. 

Withholding tax will only be withheld under Section 50a (1) No. 3 ITA where the non-resident provider of the cross-border software license is a limited taxpayer. A licensing of patented software is generally to be viewed as a temporary license of rights, as a full transfer of patented rights is not permissible.

ECJ: German Anti-Treaty-Shopping Rule infringes EU law.

On 20 December 2017 the European Court of Justice (ECJ) issued its decision on two cases referred to it by the Cologne Tax Court on the compatibility of the anti-abuse rule in Section 50d Income Tax Act (ITA) with EU law. According to Section 50d (3) ITA certain intermediary foreign companies are not entitled to a (full or partial) refund of German withholding tax; without a preceding oral hearing the ECJ took the view that the section was incompatible with both the Parent-Subsidiary Directive and the freedom of establishment

The ECJ considered the German provision to be too one sided and restrictive. The aim of the PSD is to eliminate any (tax) disadvantages arising from the distribution of profits between companies of different Member States and to facilitate the grouping together of companies at EU level. The judges pointed out that whilst the PSD did provide the Member States with the right to introduce rules to prevent abuse, the measures must be appropriate for attaining that objective and must not go beyond what is necessary to attain it. The German provision does not meet this criteria.

The ECJ took the view that Section 50d (3) ITA leads to a difference in treatment, likely to dissuade a non-resident parent company from carrying on an economic activity in Germany through a German subsidiary and therefore constitutes an impediment to the freedom of establishment. The Court was unable to establish any justification for this restriction. This could be the case where situations are not objectively comparable or where it can be justified by overriding reasons in the public interest recognised by EU law. Such justifications could not be demonstrated here.

German Constitutional Court rulings on property valuations for real estate tax and on trade tax 

On 10 April 2018, the German Constitutional Court issued two separate decisions. In the one decision it pronounced as unconstitutional the provisions on the valuation of property for the purposes of real estate tax and demanded new regulations. In the second decision, it concluded that the complaint that the trade tax treatment of profits from the disposal of partnership interests was unconstitutional because it contravened the principle of equality was not justified.

 

Luxembourg

Circular L.G.-A. n°61 of 8 December 2017: New rules regarding the issuance of certificates of residence for Undertakings for Collective Investment

With this new Circular, the Luxembourg Tax Authority updated the rules provided in 2015 regarding the issuance of certificates of residence for Luxembourg Undertakings for Collective Investment (UCIs). The new Circular updates the list of tax treaties applicable to UCIs (including Andorra, Brunei, Croatia, Estonia, Serbia and Uruguay) and how the Funds can obtain a certificate of residence, including Reserved Alternative Investment Funds (RAIFs). 

Provided that certain conditions are met, RAIFs with corporate form can obtain tax residence certificates for the purposes of a number of tax treaties.

If a double tax treaty is applicable, as defined in the updated list of the new Circular (http://www.impotsdirects.public.lu/content/dam/acd/fr/legislation/circulaires/lga-61- 08122017.pdf), then a Luxembourg certificate of residence can be issued based on the relevant double tax treaty. 

If treaty benefits are not granted, or when treaty application is uncertain, then the Luxembourg tax authority will not issue certificates based on double tax treaty provisions but based on the provisions of domestic Luxembourg law. 

RAIFs with contractual form (FCPs) and RAIFs organised as partnerships are transparent from a Luxembourg tax perspective and generally do not have access to treaty benefits. Exceptionally, RAIFs with transparent form can have access to a limited number of treaties listed in the new Circular. In that case, transparent RAIFs are seen as tax residents according to those double tax treaties and Luxembourg tax residence certificates can be issued for such purpose.

Tax changes for 2018

On 14 December 2017, the Luxembourg Parliament approved Bill No. 7200. The main tax changes concern: 

  1. Widening the investment tax credit regime to include purchased software, and certain “sustainable mobility” assets.
  2. Confirming the tax-deductibility of business start-up, and R&D, costs. 
  3. Adding more flexibility to the tax regime coming into effect for 2018 for non-resident individual taxpayers. 
  4. Offering a EUR 2,500 tax rebate to individuals buying hybrid electric cars.

Change in VAT was also made. The fund management exemption is extended to the service of management of collective internal funds of life insurance companies. These funds are deemed to be equivalent to other types of collective investments, mainly UCITS, and should therefore benefit from the same exemption with regard to qualifying management services.

 


Other countries

USA

US tax reform legislation signed by President Trump 

Congress on December 20, 2017 gave final approval to the House and Senate conference committee agreement on tax reform legislation that lowers business and individual tax rates, modernize US international tax rules, and provide the most significant overhaul of the US tax code in more than 30 years. President Trump signed the tax bill on 22 December 2017. 

The US federal corporate income tax rate will be reduced from 35 percent to 21 percent. Also, the current 39.6-percent top individual income tax rate will be reduced to 37 percent and other individual income tax rates and brackets be revised. Both the new corporate tax rate and revised individual tax rates will be effective for tax years beginning after December 31, 2017. 

The US tax reform provides the most significant overhaul of US international tax rules in more than 50 years by moving the United States from a ‘worldwide’ system to a 100-percent dividend exemption ‘territorial’ system. As part of this change, two minimum taxes are included aimed at safeguarding the US tax base from erosion, along with other international tax provisions.

Collecting and reporting US and foreign TINs – IRS issues additional guidance

The Internal Revenue Service (IRS) recently issued Notice 2017-46 (Notice), which provides guidance to Model 1 financial institutions (FIs) required to obtain and report US taxpayer identification numbers (TINs) related to US reportable accounts, and to FIs required to collect foreign TINs from non-US account holders for accounts maintained at a US office or branch.  

The Notice modifies the implementation timeline for collecting and reporting TINs and provides some exceptions from the requirements for collecting foreign TINs. Regarding the collection of US TINs by Model 1 FIs, the Notice also prescribes a set of “reasonable effort” requirements for FIs still working to obtain US TINs for pre-existing US reportable accounts.

Base erosion and anti-abuse tax 

The 2017 tax reform reconciliation act (the Act) — targets US tax-base erosion by imposing an additional tax liability on certain corporations that make ‘base-erosion payments’ to related foreign persons. Non-US headquartered service companies operating in the United States (US inbound service companies) could find their business operations negatively affected by the BEAT because deductible payments they make to non-US related parties, such as interest, royalties, or service payments, may be subject to the tax. Even though the Act reduces the corporate income tax rate to 21 percent, the BEAT nonetheless may increase the cost of doing business in the United States for these companies.

The new base erosion and anti-abuse tax (BEAT) essentially is a minimum tax calculated on a base equal to the taxpayer’s taxable income determined without regard to:

1. the tax benefits arising from base erosion payments and 

2. the base erosion percentage of any net operating loss (NOL) allowed for the tax year. 

The BEAT rate is:

  • 5% for tax years beginning in calendar year 2018,
  • 10 % for tax years beginning in 2019 through 2025, and 
  • 12.5 %t for tax years beginning after December 31, 2025. 

Those BEAT rates increase by one percent for certain banks and securities dealers. 

The service cost method (SCM) exception

Many US inbound service companies – for example, a consulting or engineering company – will execute a contract with a US customer to provide a variety of services, some of which may not be performed by the US inbound service company. Instead, the US inbound service company may subcontract the services to be performed by non-US based affiliates for completion, usually at cost plus an additional amount known as a markup. 

These payments likely will be subject to the BEAT unless the SCM exception applies and there is no ‘markup component.’ The SCM generally provides that deductions for services made to foreign related parties generally would not be added back in computing modified taxable income if adequate books and records are maintained and the service:

1. Is either 

  • a ‘covered service’ as defined in a list of over 100 services or
  • is a ‘low margin covered service,’ i.e., a controlled services transaction that has a median comparable markup on total services of no more than seven percent; 

2. Is not an ‘excluded activity,’ i.e., 

  • manufacturing, 
  • production, 
  • extraction, exploration, or processing of natural resources, 
  • construction, 
  • reselling, distribution, acting as a sales or purchasing agent, or acting under a commission or other similar arrangement, 
  • research, development, or experimentation, 
  • engineering or scientific, 
  • financial transactions, including guarantees, and
  • insurance or reinsurance.

 

China

China unveils withholding tax deferral treatment for foreign direct re-investment

In August 2017, the State Council released Notice Regarding Measures on Promoting the Growth of Foreign Capital in China (Guofa [2017] No.39) , which sets forth 22 measures to further improve the business environment for foreign investors in China. One of the prominent supporting tax measures is to allow foreign investors to enjoy a withholding tax (WHT) deferral treatment (hereinafter refer to as the “tax deferral treatment” or the “treatment”) on the direct re-investment of profits distributed from Chinese tax resident enterprises (TREs) into China’s “encouraged projects”.

On 21 December 2017, the authorities unveiled this long-awaited year-end gift, i.e. the Notice Regarding the Provisional Deferral Treatment for WHT on Direct Re-investment by Foreign Investors Using Profits Distributed from TREs in China (Caishui [2017] No.88, or the Notice), which clarifies the criteria to enjoy tax deferral treatment, application procedures and responsibilities, and post-administration by the tax authorities. According to the Notice, such treatment would be effective retrospectively from 1 January 2017, and tax payments already settled on eligible re-investment can be refunded. Subsequently, the above four ministries jointly released a list of Q&As through the MOF’s official website on 28 December 2017 (the Q&As), providing their interpretations on the background of certain provisions in the Notice and relevant implementation requirements.

The tax deferral treatment is a very favorable policy to attract foreign capital flow into China. Foreign investors that have generated profits from their investment activities in China are suggested to proactively assess their existing group investment strategy and adjust accordingly in order to fully leverage on such treatment. Meanwhile, they should also pay close attention to the local-level implementation of this tax deferral treatment and make early preparation.

China had significantly sped up the closing of Mutual Agreement Procedures cases according to the 2016 Mutual Agreement Procedure Statistics released by the OECD

The Organization for Economic Co-operation and Development (OECD) released the 2016 mutual agreement procedure (MAP) statistics in November 2017. This is the first time, under the Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the OECD reported the MAP statistics based on the agreed reporting framework proposed in BEPS Action 14. The 2016 MAP statistics cover the relevant figures for all members that joined the Inclusive Framework prior t0 2017, including China. The statistics provide information on the opening and closing inventory, cases started and closed during 2016, and average time taken to close MAP cases by each of the countries.

According to the statistics, the opening inventory of MAP cases in 2016 is significantly higher than the previous years, while the number of cases closed during the year increased and the average time taken to close the cases shortened. Meanwhile, the China related statistics show that China has sped up her closing of MAP cases. The inventory level has been significantly reduced with a high success rate of 91%. 

China issued new rules on Corporate Income Tax withholding for Non-Tax Resident Enterprises

In October 2017, China’s State Administration of Taxation (“SAT”) released Public Notice 37 which contains a lot of changes.

Notice 37 abolishes some of the WHT document registration requirements and clarifies WHT calculations for disposal gains. It also introduces new timeframes for WHT payment.  The document also contains clarification of the respective obligations of WHT agents, as well as overseas payment recipients.

 

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