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Taxand's Take - Your regular update on the latest issues affecting multinationals
Welcome to the latest edition of Taxand's Take - your regular update on the topical tax issues affecting multinationals. Accessible online this newsletter is sent to you every two months. And Taxand's Take will give you just that - informed opinion on the latest tax changes and how they affect you.
Cyprus / Germany - New Double Taxation Agreement on Income and Capital Signed
On 18 February 2011, a New Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion on Income and Capital was signed between Germany and Cyprus. The New Agreement is based on the 2003 OECD Model. The 2011 Agreement will eventually replace the existing Agreement (DTT) in force between the two Contracting States since 1977. In a nutshell, it aims to have a more beneficial effect on the tax treatment of dividends; it incorporates rules on the exchange of information and introduces a clearer status on shipping activities as well as introducing new terms, such as beneficial ownership. A follow up Protocol has also been introduced to be integral part of the Agreement making extensive reference to the principle of the exchange of information. Taxand Cyprus and Taxand Germany discuss the new agreement and the likely impacts on multinationals with business activities in these two countries.
Transfer Pricing - New TP Documentation Obligation Impacts MNCs Doing Business in France
The Corrected French Finance Bill (dated 30 December 2009) introduced a new obligation for large companies to document their transfer pricing policy starting January 2010. French companies with a turnover or gross assets exceeding 400 MEUR (or whose direct or indirect ascendants or descendants' turnover or gross assets exceed such threshold) must keep at the tax authorities' disposal documentation supporting their related parties' transactions. Even if the law introducing the new regulation specifies the general outline of the obligation, it quickly raised several issues such as the extent to which the new regulation would apply to permanent establishments of foreign companies or the conditions of application of the penalty for lack of documentation. Taxand's Global Transfer Pricing Service Line Leader assesses the French Tax Authorities' Instruction 4 A-10-10 commenting on the new documentation obligation signed in December 2010 that provides clarifications on these issues.
Denmark / Netherlands - Danish Tax Authorities Prevail in New Remarkable Beneficial Ownership Ruling
On 27 January 2011 a ruling from the Danish Tax Tribunal considering the concept of beneficial ownership was published. The ruling is the third ruling from the Tax Tribunal regarding beneficial ownership, all of which were issued in 2010. While the facts of the case suggest that the financing structure was suitable to allow interest payments to be up streamed to an ultimate owner resident in a deemed tax haven jurisdiction, the ruling appears to have little regard to the subtleties inherent in the beneficial ownership requirement under the Nordic Tax Treaty and the EU Interest and Royalty Directive. Accordingly, there is reason to believe that the ruling will be brought before the Danish Courts. Ultimately, the concept of beneficial ownership as applied in Denmark must be addressed by the Danish Supreme Court in order to - hopefully - establish the legal guidelines currently lacking. Taxand Denmark and Taxand Netherlands discuss this remarkable beneficial ownership ruling.
India - New Tax Proposals in India Budget 2011
The backdrop leading up to the presentation of the annual Budget of the Government of India for fiscal year 2011-12 was punctuated by robust growth, high inflation and the issue of unaccounted money in tax havens and low tax jurisdictions. On the fiscal legislation front, the ground was being set for two key new enactments - the Direct Taxes Code ("DTC") and the Goods and Services Tax Act ("GST"). On the policy side, the standout proposal of the Government was to provide stimulus to investments in infrastructure with an outlay higher by 23 percent compared to last year. Foreign Institutional Investors ("FII") investment limits in infrastructure bonds will be permitted to raise foreign capital with interest payouts being subject to tax withholding only at 5 percent, down from the normal level of 20 percent. The Government is also set to announce a manufacturing policy, which is expected to provide further impetus to the economy. While reiterating the Government's intention to introduce the DTC effective 1 April 2012, the Government was more circumspect with regard to the implementation timelines for the GST. As a first step paving the way for GST, a Bill to amend the Constitution is proposed to be placed before Parliament in the current session. Taxand India examines certain key tax proposals in the Finance Bill, 2011 ("the Bill") presented by the Indian Finance Minister on 28 February 2011, and discusses why taxpayers should revisit their existing business structures and models ahead of time in preparation for the DTC.
Global - The Importance of Substance in International Tax Planning
In the current environment multinational companies try to generate an optimal return for their shareholders, partly by reducing their tax charge. They operate in a global environment where tax systems differ widely from country to country. Frequently the tax authorities intentionally create differences between tax systems in order to attract (foreign) investors. Multinationals use these differences to their advantage in an effort to achieve a low effective tax rate and increase shareholder value. Much tax planning is however done as legal or financial (re)structuring without changing the operational structure of the company. These structures therefore often lack economic substance. Taxand discusses the importance of substance in international tax planning and why structures which are considered to be artificial are under ever increasing scrutiny by tax authorities and now also the press.
ECJ: Tax-Neutral Exchange of Shares Case Impacts Cross-Border Transactions
The Finnish Supreme Administrative Court (SAC) decided on 31 January 2011 to ask for a preliminary ruling from the Court of Justice of the European Union (ECJ) concerning the question whether a tax-neutral share exchange can be completed between a company residing in an EU country and a company residing in an EEA country (such as Norway, Iceland and Liechtenstein). Despite a previous positive ruling by the Finnish Central Tax Board, it is currently unclear whether acquisitions can be made or whether group structures may be reorganised through tax-neutral exchanges of shares, when either the target or the acquiring company is located in Norway, Iceland or Liechtenstein but the other one is in EU. Taxand Finland and Taxand Norway examine the impacts this ruling could have on cross-border transactions involving parties from the EU and countries like Norway, Iceland and possibly Liechtenstien.
Canada - Amend Regulation 105 Imposing WHT on Non-Residents for Services Rendered in Canada
A Canadian income tax provision is hampering Canadian businesses and prompting US companies to reconsider business opportunities in Canada. One year ago, this statement referred to Section 116 of the Income Tax Act ("ITA") which, for years, was a major deterrent to US private equity and venture capital investors looking to acquire Canadian targets. In the March 2010 budget, following calls for reform, the Canadian federal government proposed legislative amendments which provided relief for Canadian and foreign companies alike. Following these amendments, subsection 105 of the Income Tax Regulations ("Regulation 105") finds itself at the forefront of income tax provisions in need of amendment. In short, Regulation 105 imposes a withholding tax on non-residents for services rendered in Canada. Taxand Canada examines the scope of Regulation 105, its onerous characteristics, and an alternative approach to the current system it imposes.
The information contained in this document is intended only to be a guide. It must not be relied on in, or applied to, specific situations without previously seeking proper professional advice. Even though all reasonable care has been taken in its preparation, Taxand and all of its firms do not accept any liability for any errors that it may contain or lack of update before going to press, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person. Descriptions of, or references or access to, other publications within this publication do not imply endorsement of them. As provided in the US Treasury Department Circular 230, this tax newsletter is not intended, or written by any Taxand firm, to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
Taxand firms have produced this tax newsletter in connection with the marketing of our tax services relating to matters discussed therein. Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Taxand is a global organisation of tax advisory firms. Each firm in each country is a separate and independent legal entity responsible for delivering client services.
(C) Taxand Economic Interest Grouping 2011