International Update

Joan O'Connor Partner, Taxation, Deloitte Estonian Proposals

Estonia's Ministry of Finance has announced its proposal to introduce an annual 10% tax on corporate profits commencing in 2009. The current regime, where income tax is levied on only corporate income distributed to shareholders (along with non-business expenses, donations etc.) was held to be contrary to EU law. Dividends paid to parent corporations will be exempted from income tax.

Austrian Capital Duty

The Austrian Ministry of Finance has announced that contributions from grandparent companies will remain free from capital duty, despite a recent ECJ judgment that such contributions may be subject to capital duty.

Dutch Tax Reform

The Dutch Government has submitted to the parliament a package of tax measures designed to strengthen the Dutch business and investment climate. The most significant measures include the following:

  • A reduction in the corporate tax rate from 29.6% to 25.5% with effect from 1 January 2007.
  • The introduction of a special regime for net interest received within a group. Upon election, such interest would be subject to a 5% tax rate. This measure is intended to keep capital in the Netherlands and attract capital from abroad.
  • A relaxation of the "subject to tax" and "non-portfolio" requirements in order to qualify for the participation exemption. Under the new proposals, any shareholding of 5% or more will qualify as a qualifying participation regardless of whether the entity is subject to tax.
  • A decrease in the rate of dividend withholding tax from 25% to 15%.
  • The introduction of a special regime for royalties, with qualifying activities (generally, innovative activities would be taxed at a reduced rate of 10% (following election)). Profits realised on intellectual property developed by the company will be taxed at this rate if a patent has been granted.
  • The introduction of a restriction on use of losses (currently, losses may be carried back three years and carried forward indefinitely). Carry-backs will be limited to one year and carry-forwards to nine years.

Malta to Phase Out Preferential Tax Regime

The European Commission has welcomed the announcement by the Maltese Government that it will gradually abolish the existing aid schemes providing tax advantages for offshore trading companies in Malta. The Commission had issued a recommendation earlier in the year that the schemes violated the EC Treaty's ban on state aid liable to distort competition.

Spanish Anti-Avoidance Bill

A Bill relating to anti-avoidance tax measures has been submitted to the Spanish parliament for discussion. It is expected to enter into force with effect from 1 January 2007. The key proposals are as follows:

  • Corporate taxpayers would be required to value their transactions at arm's-length prices, and would need to prepare and maintain specific transfer-pricing documentation relating to the valuation method used for both domestic and cross-border transactions with related parties. Penalties for non-compliance would be introduced.
  • Capital gains arising from the transfer of shares in entities, which are resident in countries or territories where there is no effective exchange of information with the Spanish tax authorities, and such entities derive the majority of their value (directly or indirectly) from Spanish real estate, would be subject to Spanish tax based on the fair market value of such real estate.
  • Transfer tax in respect of the transfer of shares in real-estate companies would be extended to the transfer of shares in a company, which in turn controls another real-estate company.

Spain Accelerates Tax Cut

Earlier in the year, Spain announced that it would gradually reduce its corporate tax rate for large companies from 35% to 30% over a five-year period. However, it recently announced that the 5% reduction will now take place over a two-year period beginning in 2007.

AG Opinion in Cadbury Schweppes Case

The Advocate-General has provided his opinion in respect of the Cadbury Schweppes case, a case dealing with the UK's controlled foreign company ("CFC") rules. The AG recommended that the ECJ rule that the UK CFC legislation should be able to be applied in accordance with the EC law only where the foreign company had entered into wholly artificial arrangements designed to circumvent national tax laws. The AG indicated that Cadbury's decision to establish subsidiaries in Ireland solely to enjoy a very favorable tax rate did not itself constitute an abuse of the right of establishment. The AG noted that, if the subsidiary provides genuine and actual services to the parent company. this could not be regarded as tax evasion or avoidance. In determining whether an arrangement is wholly artificial, the AG said that the three tests outlined below may be relevant. These tests are quite similar to the guidance used by Irish Revenue in determining whether a company is carrying on a trade in Ireland:

  • Whether the CFC had premises, staff and equipment to carry out the services;
  • Whether the subsidiary's staff had the necessary competence respecting of the services provided and whether they actually took the relevant decisions; and
  • Whether the subsidiary's activities had economic substance.

The AG indicated that it was for the UK courts to determine whether the UK CFC legislation applied to only wholly artificial arrangements designed to circumvent national tax laws.

If the Ed's decision in the case were the follow the AG's opinion, it is likely that the circumstances where the UK CFC provisions could be applied would be greatly restricted. However, responsibility would still rest with the UK courts to opine on whether a particular arrangement is wholly artificial.

There are also other pending ECI cases concerning the UK CFC legislation. The EC) decision in the Cadbury Schweppes case, along with the other pending cases, may also affect CFC rules in other Member States.

Impact of Indofood Cas

The UK Court of Appeal decision in the Indofood case has attracted the attention of some tax authorities around the world and raised concern among the investment community about the wider implications for structured finance transactions. However, a more detailed analysis of the facts suggests that, in many of these cases, these concerns may be unfounded.

HMRC is understood to view the case as a very significant development, which will assist them in attacking many financing structures. However, Indofood had a very specific and unusual fact pattern, with the implication that no spread was proposed in the Dutch newco and that the interest received by Indofood was mandated by the trustees. Such back-to-back structures have typically been, and continue to be, more susceptible to tax authority attack.

In the UK, the likelihood is that traditional Irish, Luxembourg and Dutch SPVs will be subject to additional scrutiny from the tax authorities. In the majority of cases, the fact pattern would be expected to be sufficiently different from Indofood to successfully differentiate them from that judgment. Companies seeking to raise finance can expect potential lenders and ratings agencies to be aware of the issues involved and seek tax opinions where necessary.

In most other countries, the expectation is that the decision in Indofood merely reinforces the need to ensure that SPVs and other conduits/intermediaries have adequate substance in accordance with the legislation of the relevant jurisdiction.

The Treasury & Resources Department in Jersey has issued a consultation paper relating to a new corporate tax regime, which is intended to be introduced with effect from 2009. The main proposals are as follows:

  • The standard rate of corporate tax will be zero.
  • A special 10% rate of corporate tax will apply to specified financial services companies.
  • Jersey permanent establishments of non-resident companies will be taxed at the 0% or 10% rate, as appropriate.
  • The test for determining corporate residence will continue to be based on incorporation or management and control in Jersey.
  • Corporate and individual taxpayers with income from Jersey real estate will be taxed at a rate of 20%.
  • A new tax-transparent limited-liability vehicle, the limited trading partnership, will be introduced.
  • A deemed distribution charge will be introduced where trading profits have not been distributed within three years,
  • Withholding tax on dividends, interest and annuities paid by companies (other than insurance or superannuation companies) will be repealed.
  • Non-residents will be eligible for exemption in respect of Jersey-source dividends, interest, annuities and management fees.

It is expected that the proposals will be presented to the parliament in August 2006 and legislation passed later this year.

Guernsey has also presented a package that would set the corporate tax rate to 0% and 10% (for some financial services companies) beginning 1 January 2008.

EU- Switzerland Savings Tax Agreement

Switzerland's Federal Department of Finance has announced that it collected approximately CHF138 million (€89 million) in withholding tax on Swiss interest paid to residents of EU Member States in the first six months that the EU - Switzerland Savings Tax Agreement was in force (i.e., the period to 31 December 2005). Under the agreement, Switzerland is entitled to retain a quarter of the amount collected. The rate of withholding taxis currently 15% but will gradually increase to 35% by 2011-

Us Repeals Tax Breaks to US Exporters

As part of the package mentioned above, the grandfathering provisions relating to the tax breaks for US exporters ("ETI regime"), which were contained in the American Jobs Creation Act, have been repealed. As a result, the EU has permanently lifted the WTO-authorised sanctions against US goods.

US Tax Cut Package

A new package of US tax-cut extensions has been signed into law. The new Act will extend the Sub-part F exemption for active financing income for two years and will modify the look-through treatment of payments between related controlled foreign corporations under the foreign personal holding company income rules. The legislation also changes the rules relating to the exclusion for foreign earned income.

On the domestic front, the Act provides for a two-year extension of the reduced tax rates on capital gains and dividends, and a one-year extension to the alternative minimum tax relief.

Canadian Budget 2006

The Canadian Minister for Finance has presented Canada's 2006 Budget, The key measures contained in the Budget are as follows:

  • The general corporate tax rate will be reduced from 21% to 19% by 2010. The reduction will occur in a number of steps, beginning with a decrease of 0.5% in 2008,
  • The corporate surtax, which is 4% of federal corporate income tax payable, will be eliminated for all corporations effective 1 January 2008. Legislation was already in place to eliminate the surtax for small and medium-sized corporations in 2008.
  • The period during which a non-capital loss may be carried forward has been extended from 10 to 20 years.
  • The federal capital tax (currently levied at a rate of 0.125% on taxable capital in excess of CAD50 million) will be eliminated with effect from 1 January 2006 (two years earlier than scheduled),
  • The Canadian Department of Finance will explore the possibility of allowing companies, which are required for financial-reporting purposes to report in a functional currency other than the Canadian dollar, to determine their income for Canadian tax purposes in that functional currency.

US and Denmark

The US and Denmark signed a Protocol amending their existing double tax treaty. The Protocol reduces the withholding tax rate to zero for dividends received by certain controlling corporate shareholders (beneficially owning directly or indirectly shares representing at least 80% of the voting power for at least 12 months), qualified government entities and pension funds. It also contains an updated limitation on benefits ("LOB") article, including publicly traded, based erosion, derivative benefits, and active business tests, as well as a competent authority determination provision.

US and Germany

The US and Germany have also signed a Protocol amending the existing double tax treaty in place between the countries. The Protocol provides for a 0% withholding tax for dividends paid to a company that owns directly at least 80% of the voting power of the payer for a 12-month period. The controlling corporate shareholder must also satisfy one of the three LOB tests or receive a competent authority determination. Separate rules apply for a US Regulated Investment Company (RIC) and a REIT, as well as for a German Investmentvermogen. The Protocol also contains a new LOB article,

Source: Irish Tax Review. Volume 19 Number 4 July 2006