Substance Now at the Heart of Tax Planning Debate
These issues were discussed today at a global tax conference for multinational companies, held in Madrid by Taxand, the world's largest independent global organisation of specialist tax advisors to multinational businesses.
The question of beneficial ownership is central to the substance debate with change being effected by the OECD and through local legislation need.
Arguably, Denmark has the most impending case law on the definition of beneficial ownership. A number of changes relate to withholding tax relief requirements which multinationals are finding increasingly more difficult to satisfy. The distribution of dividends is also facing more scrutiny and authorities are looking for clearer reporting from multinationals in this area.
In the Netherlands, the conclusion of numerous tax treaties, with multiple countries across the globe, is proving beneficial in terms of the overall investment climate, though these treaties now include many more tests for substance.
Across the globe, the need to structure intermediaries appropriately is also paramount. The demonstration of income, beyond dividends from the parent company, is particularly important. In Germany, for example, the qualification rules for withholding tax relief stipulate that more than 10% of income must be generated from activities other than the dividend stream. It is crucial that multinationals ensure they have the appropriate systems and control to monitor this and structure their operations appropriately.
The structuring of companies below the parent group is also central to the probe of tax authorities in this area. In Spain this has been strongly extended in the areas of inter-group financing and inter-group acquisitions. The ability of multinationals to demonstrate valid business reasons for structuring is critical.
In Germany, the focus of authorities has been around the shifting of company activities out of the country. The so called 'exit taxation' throws up a number of issues that multinationals should ensure they are up-to-speed on, as the process is based on complex calculations.
More than ever, companies need to be comfortable with the entire structure of their business activities to show sufficient substance at all levels. With decision making processes increasingly under scrutiny, Director liability on the rise, and public opinion influencing corporate reputations, empty structures are no longer a viable option. More than ever tax planning must be an integral part of commercial strategies to ensure business can pass increasingly challenging substance requirements.
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