International Tax Newsletter
Cyprus economic news
New significant gas find in Cyprus’ territorial waters
Oil giants ENI and Total have made a large gas discovery at their Calypso prospect in Block 6, forming part of Cyprus’ territorial waters. The natural gas field is believed to hold between 6 and 8 trillion cubic feet, Italian energy firm ENI has recently confirmed.
ENI representatives said an appraisal well would have to be drilled to understand the real volumes of the discovery. But asked whether it is believed to hold around 6 to 8 trillion cubic feet, ENI said that it could be more or in that range, but for sure it cannot be less.
An analysis of data following a collection of fluids and rock samples revealed that Calypso is a promising gas discovery and confirms the extension of the ‘Zohr-like’ play” into Cyprus’ waters. Zohr is a supergiant gas field discovered by ENI in 2015 in adjacent Egyptian waters and holds an estimated 30 trillion cubic feet of resources in place.
Cyprus tax news
Circular issued about the VAT treatment of Cypriot holding companies
On 9 January 2018, the Cyprus Tax Department issued an Interpretative Circular in relation to the treatment of input VAT for holding companies based in Cyprus, in particular the right to deduct management expenses pertaining to subsidiaries.
The Circular is based on recent case law of the European Court of Justice and it distinguishes between situations of simple holding of shares and cases where there is management or administration of subsidiaries.
In the first case, the Circular reiterates long standing jurisprudence that the mere holding of shares is not an economic activity for VAT purposes. As a result. a mere holding company is not allowed to register for VAT and reclaim input VAT.
However, a holding company is considered to engage in economic activities and as such allowed to register for VAT in case it is involved in the active management of its subsidiaries, directly or indirectly, by administrating, coordinating, organizing, deciding or overseeing the operations of the subsidiaries. The dividend income received by the holding company may in this case be regarded as consideration for the management of the subsidiary.
The holding company may purchase services from third parties in relation to the management of its subsidiaries . In this case, the company may reclaim the related input VAT if the purchased services are used for the provision of taxable supplies, which is the case if the holding company recharges such services to its subsidiaries. In case a holding company conducts both economic and non-economic activities, input VAT must be apportioned and reclaimed on a pro rata basis.
The Circular also states that each case must be examined based on its particular circumstances. Indicators such as the existence of common directors of the holding company and its subsidiaries, or board minutes explaining the decision-making process, may be used in the analysis.
Treaty between Cyprus and Ethiopia enters into force
On 19 October 2017, the Cyprus - Ethiopia Income Tax Treaty (2015; the Treaty) entered into force. The Treaty generally applies from 1 January 2018 in Cyprus and from 8 July 2018 in Ethiopia.
The maximum rates of withholding tax in the Treaty will be as follows:
- 5% on royalties;
- 5% on interest, and;
- 5% on dividends.
Double Tax Treaty between Cyprus and Saudi Arabia signed
On 3 January 2018, Cyprus and Saudi Arabia signed an income tax treaty in Riyadh (the Treaty).
The maximum rates of withholding tax in the Treaty will be as follows:
- royalties; 5% in cases where the royalties are paid for the use of, or the right to use, industrial, commercial or scientific equipment. In all other cases the withholding tax is 8%.
- 0% on interest, and;
- there is no withholding tax on dividends in cases where there is at least a 25% participation by a company that is tax resident in the receiving jurisdiction. In all other cases the dividend withholding tax is 5%.
The Treaty provides that gains arising from the disposal of shares of a substantial participation in the capital of a company which is resident of a Contracting State may be taxed in the latter State. A person is considered to have a substantial participation when this participation is at least 25% of the capital of that company, at any time within 12 months prior to disposal.
International tax news
Changes to Dutch dividend withholding tax as of 1 January 2018
According to changes in Dutch tax legislation, as per 1 January 2018 profit distributions by holding cooperatives ‘(co-ops’) are subject to Dutch dividend withholding tax (DDWT).
However, under the same rules, distributions by companies and co-ops resident in the Netherlands are exempt from DDWT in case the direct shareholder/member is;
- a legal entity,
- with tax residency in a tax treaty jurisdiction (the applicable treaty must have a dividend article) or in a EU/EAA country,
- holding an interest of at least 5% in the distributing entity,
- in a non-abusive situation.
The latter condition coincides with amendment of an existing anti-abuse rule. This rule will be brought in line with both the General Anti-Avoidance Rule (GAAR) in the EU Parent/Subsidiary Directive and the Principle Purpose Test included in the so-called ‘BEPS Action 6 Report’. BEPS Action 6 is one of 15 actions to address Base Erosion and Profit Shifting in a comprehensive manner, introduced by the OECD.
Point 4) represents a cumulative, two-fold test where the first question is whether a corporate structure was set up to avoid DDWT (the subjective test) and the second question is whether such structure is deemed part of an artificial arrangement or transaction (the objective test).
The subjective test can be considered to be met if somewhere in the corporate structure above the Dutch company/co-op, there is a company conducting an active business or trade (hereafter ABC -‘active business company’-).The structure is not deemed abusive according to this test if a DDWT exemption would also have applied to a distribution made directly to ABC.
The objective test is met if it can be demonstrated that there are valid business reasons for the relevant corporate structure that reflect economic reality.
If the direct shareholder of the distributing Dutch company/co-op conducts an active trade or business to which the interest can be attributed, this would in general be the case.
If the direct shareholder of the distributing Dutch company/co-op is a top tier holding company that carries out certain activities for the whole group, this may also be the case.
If the Dutch company/co-op is held by a foreign holding company (FHC), which does not conduct an active trade or business, but which is itself held by an ABC, FHC must have sufficient substance. More specifically, FHC has to meet substance requirements that already apply to Netherlands resident companies/co-ops, together with additional requirements in the area of payroll costs and office space.
The payroll cost requirement means that FHC should have at least the equivalent of €100,000 of labour costs related to the holding operations. The office space requirement means FHC should own or rent office space used for the conduct of its activities for at least 24 months.
In case of existing structures, the payroll cost and office space conditions should both ultimately be met on 1 April 2018.
The new rules apply to all distributions made as from 1 January 2018.
Treaty between Belgium and Luxembourg; Brussels Court of Appeal rules on place of effective management of a Luxembourg company
The Brussels Court of Appeal (hereafter the Court) recently gave its decision in the Belgacom Invest case (case no. 2014/AF/271). In dispute was the place of residence of a Luxembourg intermediate holding company under Belgian law and under article 4 of the Belgium - Luxembourg Income and Capital Tax Treaty (1970).
In 2003 Belgacom incorporated a Luxembourg intermediate holding company (LHC). LHC became the owner of the shares in Belgium based company Belgacom Mobile (BM) and of part of the shares in the Belgian coordination centre of the group.
Through the use of LHC, Belgacom avoided additional tax costs for its shareholders, which would have resulted from a second levy of corporate income tax on dividends paid by BM to Belgacom.
Following an audit, the Belgian tax administration took the position that LHC was a company without actual decision-making power, managed in Belgium by its parent company and the Belgian coordination centre of the group. LHC had no personnel or offices. LHC’s day-to-day management was carried out by a lawyer and a Luxembourg based corporate service provider. LHC had three directors: the afore-mentioned lawyer, responsible for daily management, and two Belgian residents, employees of the Belgian parent company and the Belgian coordination centre of the group.
Even though (most of) the general meetings and board of directors meetings took place in Luxembourg, the Belgian tax administration took the position that the directors were merely rubber stamping the decisions of the parent company taken on Belgian territory.
The Court, however, ruled in favour of the taxpayer. The statement that LHC was a Belgium based company was speculative, based on assumptions and not on facts. The Luxembourg seat of management was not a sham, also proven by a certificate of residence issued by the Luxembourg tax authorities. The latter demonstrated that LHC’s place of principal establishment was in Luxembourg and that it was a Luxembourg company governed by the laws of Luxembourg.
LHC could not be regarded as mere ‘letterbox company’. Its day-to-day management took place in Luxembourg. No law requires a company to hire personnel and/or rent an office. The Court also observed that it is not uncommon to outsource secretarial, administrative and other functions to third parties. All facts of the case demonstrated that LHC had sufficient substance to conduct its intermediate holding activities, notwithstanding the fact that the minutes of the board of directors' and general shareholders' meetings were prepared in Belgium at the head office of the parent company and that some meetings took place by phone (for efficiency reasons).
The Court also ruled that the argument that the Belgian directors are mere employees of the group and thus not capable of taking independent decisions neglects the corporate rules applying to a holding company such as LHC. The facts provided all required evidence that decisions have been taken by LHC, a Luxembourg company, through its competent bodies in Luxembourg, where it has sufficient substance for the conduct of its activities.
No facts were submitted by the Belgian tax administration which could lead to the conclusion that LHC had a place of management in Belgium or that the place of management in Luxembourg was a sham.
The Council of the European Union amends its list of non-cooperative jurisdictions
On 23 January 2018, the Council of the European Union (the Council) decided to remove 8 countries from the list of non-cooperative jurisdictions for tax purposes, following the commitments made by these jurisdictions to address deficiencies identified by the Council.
These countries are the following:
– Republic of Korea;
– Macao SAR;
– Tunisia; and
– United Arab Emirates.
Although the list is revised at least once a year, the Code of Conduct Group can recommend updates at any time.
Sweden proposes tax of unrealized gains for individual taxpayers moving abroad
The Swedish tax administration has submitted a proposal (hereafter the Proposal) to Sweden’s Ministry of Finance to prevent tax evasion of individual taxpayers relocating out of Sweden.
According to the Proposal, unrealized capital gains over SEK 100,000 would be subject to taxation if a taxpayer: (i) leaves the country after having been a tax resident of Sweden for 5 of the last 10 years; or (ii) receives assets as a gift from another taxpayer which fulfils the aforementioned residency requirement.
If approved, the Proposal will enter into force on 1 January 2020.
European Commission: Luxembourg provided illegal State aid to Amazon
The European Commission (EC) has concluded that Luxembourg had granted illegal tax benefits of up to EUR 250 million to Amazon.
The EC based its conclusions on analysis of a tax ruling, which was issued by Luxembourg in 2003 and extended in 2011. Based on the tax ruling, Amazon was allowed to shift the vast majority of its profits from an Amazon group company subject to tax in Luxembourg (Amazon EU, hereafter AEU) to a company that was exempt from taxation over its profits (Amazon Europe Holding Technologies, hereafter AEHT). In particular, the tax ruling endorsed payment of a royalty from AEU to AEHT, leading to significant reduction of AEU's Luxembourgish taxable profits.
The EC concluded that the ruling reduced the corporate income tax payable by Amazon in Luxembourg without any valid justification. As a result of this decision, an amount of EUR 250 million (plus interest) must be paid by Amazon to Luxembourg.
Luxembourg's Ministry of Finance has made public that the country disagrees with the EC’s conclusions in this case.
Luxembourg considers that it did not provide the company with State aid which is incompatible with the internal market within the meaning of Article 107 (1) of Treaty on the Functioning of the EU (TFEU).
The European Commission refers Ireland to the European Court of Justice for not recovering Apple State aid
The EC has decided to refer Ireland to the European Court of Justice (ECJ) for failing to recover the State aid granted by Ireland to Apple.
In the EC’s view Apple continues to benefit from an illegal advantage until the granted State aid is recovered. The deadline for implementing the EC Apple State aid decision was 3 January 2017, but it is Ireland’s intention to conclude its work by March this year at the earliest.
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