Cyprus National Report - IFA 2019 London Congress Subject 2: Investment Funds
pwc-international-tax-news-august-2015
1. International
Tax News
Edition 30
August 2015
Welcome
Keeping up with the constant flow of
international tax developments worldwide
can be a real challenge for multinational
companies. International Tax News is a monthly
publication that offers updates and analysis
on developments taking place around the
world, authored by specialists in PwC’s global
international tax network.
We hope that you will find this publication
helpful, and look forward to your comments.
Shi-Chieh ‘Suchi’ Lee
Global Leader International Tax Services Network
T: +1 646 471 5315
E: suchi.lee@us.pwc.com
Tax Legislation Proposed Legislative
Changes
Administration
& Case Law
Treaties Previous issues In this issue
OECD
Model documents for
implementing country-by-
country reporting released
Brazil
Tax authorities release ruling
regarding the deductibility of
royalty payments
Cyprus
Introduction of a notional
interest deduction (NID) on
new corporate equity
China
Multilateral Convention
on Mutual Administrative
Assistance in Tax Matters
approved
2. www.pwc.com/its
In this issue
Administration & case lawTax legislation TreatiesProposed legislative changes
Tax Legislation Proposed Legislative
Changes
Administration
& Case Law
Treaties Previous issues In this issue
Cyprus
Introduction of a notional interest
deduction (NID) on new corporate equity
Brazil
Further changes to the application of PIS/
COFINS on certain financial revenues
Cyprus
Tax neutral treatment of foreign currency
exchange differences (forex) and extension
of the arm’s‑length principle to downwards
adjustments
Brazil
Tax authorities release ruling regarding the
deductibility of royalty payments
Brazil
Tax authorities publish a tax ruling regarding
the imposition of PIS/COFINS on imports for
remittances relating to license agreements
Brazil
Tax authorities publish a ruling regarding
the obligation to register payments in the
SISCOSERV
Brazil
Tax authorities release ruling confirming
that payments to France in consideration
for certain technical services should not be
subject to withholding tax
OECD
Model documents for implementing country-
by-country reporting released
Switzerland
Supreme Court: tax-privileged quasi merger
is only granted if receiving company is
issuing own shares
United Kingdom
Supreme Court judgment: UK resident
member of US LLC - Entitlement to DTR for
US tax
Canada
Convention with New Zealand entered into
force and TIEA with the Cook Islands signed
Hong Kong
Exchange of Notes on the DTT with Japan
entered into force
Italy
DTT with Hong Kong ratifiied
Latvia
Administrative burden on Latvian tax
residents working in EU to ease
United Kingdom
Conservative government’s Summer
Budget
United States
IRS Chief Counsel’s office provides guidance
on economic substance analysis
China
Multilateral Convention on Mutual
Administrative Assistance in Tax
Matters approved
China
DTT with Chile signed
China
New protocol amending the DTT with
Russia signed
3. www.pwc.com/its
Tax Legislation
Tax Legislation
Cyprus
Introduction of a notional interest deduction (NID) on
new corporate equity
New corporate equity injected into a company as of
January 1, 2015 in the form of paid-up share capital or
share premium is eligible for an annual notional interest
deduction (NID).
New equity may be contributed in cash or in assets in kind. In the case
of assets in kind, the amount of new equity may not exceed the market
value of the asset.
In a similar way that an interest expense on debt financing is generally
calculated as an interest rate on loan principal, the annual NID is
calculated as an interest rate on the eligible share capital / share
premium. The NID interest rate is the yield on ten‑year government
bonds (as at December 31 of the prior tax year) of the country where
the funds are employed in the business of the company plus a 3%
premium. This is subject to a minimum amount which is the yield of
the ten-year Cyprus government bond (as at the same date) plus a
3% premium.
The NID is tax deductible in a similar manner as actual interest
expense, i.e. the NID is available for tax purposes when new equity is
utilised to finance most types of business assets, with the proviso that
the NID cannot exceed 80% of the taxable profit (as calculated prior
to the NID).
A taxpayer may annually elect not to claim part or all of the
available NID.
In order to tackle possible abuse of the NID, the law contains a general
anti-avoidance provision for non-commercial transactions as well
as a number of specific anti-avoidance provisions which may restrict
the NID.
The NID applies to Cyprus tax resident companies and to permanent
establishments (PEs) in Cyprus of non-resident companies and is
effective as of January 1, 2015.
PwC observation:
The aim of the amendment is to encourage new equity which in
turn should increase the economic robustness of Cyprus companies
through less reliance on debt financing, whilst keeping their
competitiveness. Corporations should now consider how this
amendment may impact the structure of their financing.
This amendment is part of a package of measures aiming to
enhance the corporate and personal tax competitiveness of Cyprus.
Also included within this package are proposals for a simpler tax
treatment of foreign exchange differences and fairer treatment
of arm’s‑length adjustments (refer to the Proposed Legislative
Changes section) as well as enacted law to exempt certain income
of non-domiciled individuals from tax in Cyprus and proposals
to improve the exemptions available for high-earning expatriates
working in Cyprus.
Marios Andreou Stelios Violaris Joanne Theodorides
Nicosia Nicosia Nicosia
T: +357 22 555 266
E: marios.andreou@cy.pwc.com
T: +357 22 555 300
E: stelios.violaris@cy.pwc.com
T: +357 22 553 694
E: joanne.theodorides@cy.pwc.com
Proposed Legislative
Changes
Administration
& Case Law
Treaties Previous issues In this issue
4. www.pwc.com/its
Proposed Legislative
Changes
Proposed legislative changes
Brazil
Further changes to the application of PIS/COFINS on
certain financial revenues
On May 20, 2015, Decree No. 8,451/2015 was published
amending Decree No. 8,426/2015 (issued at the beginning
of April 2015) in relation to the application of Social
Integration Program (PIS) and the Contribution for Social
Security Financing (COFINS) on financial revenues earned
by companies subject to the non-cumulative system to
calculate PIS/COFINS.
Prior to Decree No. 8,426/2015, the PIS and COFINS rate on financial
revenues was equal to 0%. On April 1, 2015, Decree No. 8,426/2015
reintroduced PIS/COFINS on financial revenue at the rate of 0.65%
and 4% respectively. Decree No. 8,451/2015 provides that the 0%
rate will continue to apply on financial revenues resulting from
foreign exchange inflation adjustments relating to the export of goods
and services to foreign operations. Foreign exchange derived from
contractual obligations including loans and financing are also covered
by the 0% rate.
Decree No. 8,451/2015 also provides that the 0% rate should apply to
financial revenues arising from hedging transactions conducted on
stock exchanges, commodities and futures markets or contracted ‘over-
the-counter’ for the purpose of protecting against risks associated with
fluctuations related to the operating activities of the entity and which
can be allocated to the protection of such rights or obligations.
Decree 8451/2015 will apply from July 1, 2015 (the same date as the
earlier Decree restoring the 4.65% rate will take effect).
PwC observation:
Brazilian taxpayers accruing
financial revenues should
consider the impact of
Decree 8,426/2015 and
8,451/2015 on their particular
circumstances to determine
whether PIS/COFINS will
apply to their transactions
from July 1, 2015.
Durval Portela Alvaro Pereira Mark Conomy
São Paulo Salvador São Paulo
T: +55 11 3674 2522
E: durval.portela@br.pwc.com
T: +55 71 3319 1912
E: alvaro.pereira@br.pwc.com
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
Tax Legislation Administration
& Case Law
Treaties Previous issues In this issue
5. www.pwc.com/its
Proposed Legislative
Changes
Cyprus
Tax neutral treatment of foreign currency exchange
differences (forex) and extension of the arm’s‑length
principle to downwards adjustments
A bill concerning the tax treatment of foreign currency
exchange differences (forex) has been sent to the Cyprus
Parliament for discussion and voting. The bill proposes
for all forex to be tax neutral from a Cyprus income
tax perspective (i.e. gains not taxable / losses not tax
deductible) with the exception of forex arising from trading
in forex, which remains taxable / deductible.
The definition of forex includes gains / losses on foreign currency
rights or derivatives.
Regarding trading in forex, which remains subject to tax, this proposal
introduces an option for taxpayers to make an irrevocable election
whether to be taxed only upon realisation of forex rather than on an
accruals / accounting basis.
Regarding the arm’s‑length adjustments, the income tax law currently
only provides for unilateral upwards adjustments to profits in cases
where taxable profits earned on related party transactions are below
an arm’s length (i.e. market value) amount.
The bill sent to Parliament also contains proposals to introduce the
possibility for a downwards adjustment in cases where expenses /
losses incurred with related parties are not at arm’s length.
Further, in cases where two related Cyprus taxpayers transact and the
Cyprus tax authorities make an upwards arm’s‑length adjustment to
one of the taxpayers, it is proposed that there will be a corresponding
downwards adjustment for the other taxpayer.
It is expected that the Parliament will discuss and vote on these
proposals this coming September following the summer recess with
their expected effective date to be January 1, 2015.
PwC observation:
Businesses with cross-border transactions usually incur forex.
Forex is often difficult to predict, especially in the current global
economic climate. The above proposal aims to simplify the income
tax treatment of forex. Further the above proposals aim to be fairer
to businesses in the tax treatment of their related party dealings.
This amendment is part of a package of measures aiming to
enhance the corporate and personal tax competitiveness of Cyprus.
Also included within this package are amendments which have
already been enacted in relation to the introduction of notional
interest deduction (NID, refer to Tax Legislation section) and
exemption of certain incomes of non-domiciled individuals as well
as proposals to improve the exemptions available for high-earning
expatriates working in Cyprus.
Marios Andreou Stelios Violaris Joanne Theodorides
Nicosia Nicosia Nicosia
T: +357 22 555 266
E: marios.andreou@cy.pwc.com
T: +357 22 555 300
E: stelios.violaris@cy.pwc.com
T: +357 22 553 694
E: joanne.theodorides@cy.pwc.com
Tax Legislation Administration
& Case Law
Treaties Previous issues In this issue
6. www.pwc.com/its
Latvia
Administrative burden on Latvian tax residents
working in EU to ease
Proposals for amending the personal income tax (PIT)
Act that were presented to Parliament on May 27, 2015
providing for exempting Latvian tax residents that have
earned employment income elsewhere in the European
Union (EU) from the obligation to file the annual income
tax return in Latvia.
Under current tax law, Latvian tax residents that have earned
employment income outside Latvia must file the annual income tax
return in Latvia. Based on experience, Latvian residents frequently
seem to have difficulties to obtain written confirmation of the tax paid
from foreign tax authorities because:
• the authorities do not see why such confirmation is necessary,
given the automatic exchange of information (EoI) with the
Latvian tax authorities, and
• different filing deadlines mean this confirmation might be received
up to one year after the due date in Latvia.
In this situation, the Latvian tax authorities recognise the taxpayer’s
income earned abroad but do not recognise the foreign tax paid,
resulting in the taxpayer paying extra tax in Latvia.
Thus, the proposals for amending the Latvian PIT Act provide that in
future the annual income tax return will no longer need to be filed by
Latvian tax residents having earned employment income and paid a
similar income tax elsewhere in the EU.
However, Latvian tax residents having derived any other type of
income, such as deposit interest, dividends or capital gains, will still
have to file the annual income tax return in Latvia.
It is also important to note that the proposals provide for removing
the administrative burden from Latvian tax residents employed only
in the EU, given the automatic EoI among the member states. Latvian
tax residents having earned employment income in a country that
has concluded an effective double tax treaty (DTT) with Latvia (e.g.
Russia, Switzerland, or Norway) will still have to file the annual
income tax return in Latvia and confirmation from the foreign
tax authorities.
The proposals have been presented to the Parliamentary Budget and
Finance (Taxation) Committee and are to be debated by Parliament
in three readings. It is not yet known when the amendments might
be enacted.
Viktorija Kristholde-Luse
Latvia
T: +371 6709 4400
E: viktorija.kristholde-luse@lv.pwc.com
PwC observation:
The proposals would provide a reduction of administrative burden
to Latvian tax residents earning employment income elsewhere in
the EU, as they will no longer be required to file the Latvian annual
tax return.
Proposed Legislative
Changes
Tax Legislation Administration
Case Law
Treaties Previous issues In this issue
7. www.pwc.com/its
United Kingdom
Conservative government’s Summer Budget
The Chancellor of the Exchequer delivered the Summer
Budget on July 8, 2015. This is the first Budget of the new
conservative government following the general election in
May, and the second Budget for calendar year 2015. The
Finance Bill containing draft legislation will be published
on July 15, 2015.
The key Budget measures of relevance to international tax include:
• The main UK corporation tax rate will be reduced from the current
rate of 20% to 19% effective April 1, 2017, and to 18% effective
April 1, 2020.
• The government has committed to publishing a business tax
roadmap by April 2016 setting out its plans for business taxes over
the rest of the Parliament.
• For profits arising on or after July 8, 2015, companies may no
longer offset UK losses and expenses against profits taxable under
the controlled foreign companies (CFC) rules.
• For acquisitions arising on or after July 8, 2015, no corporation tax
relief will be available for the amortisation of purchased goodwill
and certain customer-related intangibles.
• Several changes will be made to the taxation of corporate debt and
derivative contract rules for companies, most of which will take
effect for periods beginning on or after January 1, 2016.
• The link company requirements for consortium relief claims will
be simplified with retrospective effect from December 10, 2014.
PwC observation:
The surprise announcement of a cut in corporation tax rates signals
that Britain is keen to remain competitive internationally and is
‘open for business’.
There was a strong focus on tackling tax avoidance and aggressive
tax planning. An array of piecemeal changes and new initiatives is
intended to raise approximately 7 billion pounds (GBP) of revenue
but with no big headline grabbers.
The announcement that requires immediate attention is the
restriction on the offset of losses against a CFC charge. Affected
groups (i.e. loss-making groups with CFCs that are currently subject
to a CFC charge) will need to analyse the impact of these changes.
There were no changes to those areas currently under review
as part of the Organisation for Economic Co-operation and
Development’s (OECD’s) work plan. It appears therefore that the
UK government will wait for the final base erosion and profit
shifting (BEPS) recommendations before proposing any changes in
this area.
Proposed Legislative
Changes
Stella C Amiss Jonathan Hare
London, Embankment Place London, Embankment Place
T: +44 20 7212 3005
E: stella.c.amiss@uk.pwc.com
T: +44 20 7804 6772
E: jonathan.hare@uk.pwc.com
Tax Legislation Administration
Case Law
Treaties Previous issues In this issue
8. www.pwc.com/its
Administration and case law
Brazil
Tax authorities release ruling regarding the
deductibility of royalty payments
On June 8, 2015, the Brazilian Federal Revenue Authorities
(RFB) issued Tax Ruling No. 146/2015 providing that
expenses relating to royalties and technical, scientific,
administrative assistance should be deductible following
registration and approval with the National Institute of
Intellectual Property (INPI) back to the date of the request.
In addition to the general deductibility requirements, deductibility
of royalty payments relating to the use / exploitation of patents,
trademarks and technical, scientific, administrative assistance is
limited to a percentage varying from 1% to 5% of income or profits
(less certain specific operational expenses). Further, the deductibility
of royalties paid to a foreign beneficiary is conditioned to the
registration of the relevant agreement with the Brazilian Central Bank
(BACEN) and approval by the INPI.
According to Tax Ruling No. 146/2015, the RFB considers that a
deduction for such royalty payments should be available retroactively
to the date the request of registration is filed with the INPI.
On June 2, 2015, the Minister of National Revenue signed the
international Multilateral Competent Authority Agreement (MCAA),
an important step towards implementing the CRS.
PwC observation:
Brazilian taxpayers making
royalty payments abroad
should consider the impact of
Tax Ruling No. 146/2015 on
their particular circumstances
to ensure that they are
obtaining an appropriate
deduction.
Brazil
Tax authorities publish a tax ruling regarding the
imposition of PIS/COFINS on imports for remittances
relating to license agreements
On March 10, 2015, the Brazilian Federal Revenue
Authorities (RFB) released Tax Ruling No. 71/2015
providing that the Social Integration Program (PIS) and
the Contribution for Social Security Financing (COFINS)
on imports should not be imposed on remittances limited to
the license to use patents and trademarks.
Under Brazilian law, PIS/COFINS on imports are social contributions
applicable to the importation of certain goods and services. Following
the introduction of Complementary Law no 116/2003 regulating
Service Tax (ISS), which included the license to use trademarks and
software in the list of activities considered to be triggering events for
ISS purposes, there was some debate regarding whether PIS/COFINS
should apply on such remittances.
The ruling provides that in agreements which include services related
to the license to use patents and trademarks, the respective amounts
should be segregated. Otherwise the total amount should be deemed a
service fee and taxed accordingly (service fees are typically subject to
higher taxation in Brazil).
PwC observation:
Taxpayers making such remittances should review their current
treatment of such payments to determine whether they may be able
to benefit from the prescribed treatment set out in the ruling. It may
represent a reduction of 9.25% on the amount of the importation.
Durval Portela Alvaro Pereira Mark Conomy
São Paulo Salvador São Paulo
T: +55 11 3674 2522
E: durval.portela@br.pwc.com
T: +55 71 3319 1912
E: alvaro.pereira@br.pwc.com
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
Durval Portela Alvaro Pereira Mark Conomy
São Paulo Salvador São Paulo
T: +55 11 3674 2522
E: durval.portela@br.pwc.com
T: +55 71 3319 1912
E: alvaro.pereira@br.pwc.com
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
Tax Legislation Proposed Legislative
Changes
Treaties Previous issues In this issueAdministration
Case Law
9. www.pwc.com/its
Brazil
Tax authorities publish a ruling regarding the
obligation to register payments in the SISCOSERV
On April 22, 2015, the Brazilian Federal Revenue
Authorities (RFB) released Tax Ruling No. 105 providing
that the subscriptions of shares using intangible assets
should be registered in the Integrated System of Foreign
Service Trade (SISCOSERV).
By way of background, since August 2012, Brazilian individuals,
legal entities and other entities are required to provide information
to the Ministry for Development, Industry, and International Trade
in relation to transactions carried out with non-residents involving
services, intangibles, and other operations that produce changes to the
Brazilian entity’s net worth.
Broadly, for the purposes of registration in the SISCOSERV, services
should be understood as an activity that requires the service provider
to perform something in benefit of the party contracting the service.
Intangibles should be interpreted as a transferable and immaterial
asset from which future economic benefits are expected. Finally, other
operations that produce changes to the Brazilian entity’s net worth
are those operations that do not fall within the definition of service or
intangible, but are included in the Nomenclature of Services (NBS)
which sets out a list of codes in order to classify the activities for
SISCOSERV purposes.
In the present case, the RFB concluded that the subscription and
the payment of subscribed shares in cash should not fall within the
definition of services, intangibles nor in the NBS, and on this basis
should not be registered with SISCOSERV. However, where the
subscription of shares is made by a related party located abroad in
consideration for intangible assets, the relevant information should be
registered in the SISCOSERV.
Durval Portela Alvaro Pereira Mark Conomy
São Paulo Salvador São Paulo
T: +55 11 3674 2522
E: durval.portela@br.pwc.com
T: +55 71 3319 1912
E: alvaro.pereira@br.pwc.com
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
PwC observation:
Foreign investors intending to subscribe for shares in Brazilian
companies using intangible assets should consider their current
registration and disclosure practices with respect to SISCOSERV in
order to determine whether they may be impacted by Tax Ruling
No. 105.
Tax Legislation Proposed Legislative
Changes
Treaties Previous issues In this issueAdministration
Case Law
10. www.pwc.com/its
Brazil
Tax authorities release ruling confirming that
payments to France in consideration for certain
technical services should not be subject to
withholding tax
On June 17, 2015, the Brazilian Federal Revenue
Authorities (RFB) released Tax Ruling No. 153/2015
providing that amounts paid or credited to individuals or
entities domiciled in France in consideration for certain
technical services / assistance should not be subject to
withholding tax (WHT).
By way of background, in June 2014, Interpretative Declaratory Act
(ADI) 5/2014 was released detailing the tax treatment applicable to
payments made by Brazilian entities in relation to technical assistance
and services (with or without transfer of technology) to a company
located in a country with which Brazil has signed a double tax treaty
(DTT). Broadly speaking, ADI 5/2014 provided that where the relevant
DTT or protocol treats technical services and / or assistance as
royalties or the service relates to the technical qualification of a person
or a group of persons, payments should be governed by the article
dealing with royalties or independent personal services (generally
Article 12 or 14 respectively). In these cases, the Brazilian DTTs
generally grant taxing rights to Brazil. In other situations, payments
should be governed by the article dealing with business profits
(generally Article 7), in which case Brazil is prevented from taxing
the profits of the foreign entity unless the entity carries on business in
Brazil through a permanent establishment (PE).
In the case of Tax Ruling No. 153/2015 being considered, the DTT
signed between Brazil and France does not treat technical services
and / or assistance as royalties and the particular services provided
were not considered to fall within the definition of independent
personal services. On this basis, the RFB considered that the
remittances in relation to the services provided should not be subject
to WHT. The ruling confirmed that the payments should still remain
subject to Contribuição de Intervenção de Domínio Econômico (CIDE) at
the rate of 10%.
PwC observation:
Multinational groups should examine whether they may be able
to potentially lower or eliminate Brazilian WHT on payments to
certain treaty countries in relation to technical assistance and
service agreements.
Durval Portela Alvaro Pereira Mark Conomy
São Paulo Salvador São Paulo
T: +55 11 3674 2522
E: durval.portela@br.pwc.com
T: +55 71 3319 1912
E: alvaro.pereira@br.pwc.com
T: +55 11 3674 2519
E: conomy.mark@br.pwc.com
Tax Legislation Proposed Legislative
Changes
Treaties Previous issues In this issueAdministration
Case Law
11. www.pwc.com/its
Isabel Verlinden Adam Katz Richard Stuart Collier
Brussels New York London
T: +32 2 710 4422
E: isabel.verlinden@be.pwc.com
T: +1 646 471 3215
E: adam.katz@us.pwc.com
T: +44 20 7212 3395
E: richard.collier@uk.pwc.com
OECD
Model documents for implementing country-by-
country reporting released
On June 8, 2015, the Organisation for Economic
Co‑operation and Development (OECD) released a
‘Country‑by‑Country Reporting Implementation Package’.
The package includes model legislation the OECD
suggests could be used by countries to mandate filing
of country‑by‑country reports (CbCRs).
The model legislation does not attempt to address the filing of the
so-called master file or local file reports. The implementation package
also includes three model competent authority agreements that could
be used by each country, depending on whether it intends to affect
exchange of CbCRs through the ‘Multilateral Convention on Mutual
Administrative Assistance in Tax Matters’, the exchange of information
(EoI) article of a bilateral tax convention, or a bilateral tax information
exchange agreement (TIEA).
Neither the model legislation nor any of the model competent authority
agreements contains additional guidance regarding the particular data
that multinational enterprises need to provide in the CbCRs. Rather,
the model legislation merely sets forth a general description of that
data and provides that it should be provided in a form identical to, and
applying the definitions and instructions contained in, the ‘standard
template’ set out either in the OECD Transfer Pricing Guidelines, the
final report on Base Erosion and Profit Shifting (BEPS) Action 13, or an
appendix to the legislation, once adopted. Presumably, the ‘standard
template’ referred to can be expected to look like the CbCR template set
forth in the OECD’s first report on Action 13 released on September 16,
2014. In this regard, however, the introduction to the implementation
package indicates that, as a next step, an ‘XML Schema’ and ‘related
User Guide’ will be developed with a view to accommodating the
electronic exchange of the CbCRs. Additional guidance on the CbCR
data requirements may emerge once this schema and user guide are
issued.
Helpfully, the model legislation and model competent authority
agreements also reveal the OECD members’ current thinking on,
among other things, (i) how a MNE group is to be comprised for
purposes of the filing requirements, (ii) which small MNE groups
would be excluded from the requirements, (iii) which entity in the
MNE group would be expected to file the CbCR, and (iv) the intended
government use and confidentiality of the CbCR information.
PwC observation:
Key takeaways are that the country-by-country (CbC) reporting
obligation will fall on the ultimate parent entity. If, however, the
ultimate parent is not obligated to file, or the jurisdiction of the
ultimate parent does not have an EoI agreement in place, or there
has been a systematic failure under that agreement, then the MNE
group may appoint a Surrogate Parent Entity to do the filing in its
country of tax residence. Furthermore, if in the above scenarios the
MNE group does not appoint a surrogate, then each Constituent
Entity will have to file the CbCR locally.
The implementation package contains measures meant to address
concerns of MNE groups regarding the lack of rigorous safeguards
for the commercially sensitive information to be shared among
tax authorities under the proposed CbC reporting requirements.
Specifically, a Country Tax Administration shall preserve the
confidentiality of the information contained in the CbCR report at
least to the same extent that would apply if such information were
provided to it under the provisions of the Multilateral Convention
on Mutual Administrative Assistance in Tax Matters. Whether
and how countries can actually implement and police these use
and confidentiality restrictions, of course, necessarily remains to
be seen.
As the OECD has now finalised implementation through the model
legislation and the next step is now at the local country level, MNEs
should evaluate, if they have not done so already, whether they can
timely comply with the CbC reporting proposal. Issues to consider
include: (i) determining whether MNEs can gather the data (noting
that the data points required require significant modification from
ledger entries), (ii) performing various analytics on the CbC data
to assess risks, and (iii) evaluating what, if any, issues must be
addressed (including quality of data concerns and process and
control issues).
Tax Legislation Proposed Legislative
Changes
Treaties Previous issues In this issueAdministration
Case Law
12. www.pwc.com/its
Switzerland
Supreme Court: tax-privileged quasi merger is only
granted if receiving company is issuing own shares
Swiss Supreme Court denies qualification of a specific
transaction as a so-called quasi-merger and hence as a
Swiss tax-neutral restructuring
In Switzerland, the quasi-merger is not stipulated under formal Swiss
merger law. Yet, in the Swiss tax practice, quasi-mergers typically
qualify as tax neutral restructurings (so-called ‘tax privileged’
restructurings), if certain criteria are met.
According to Circular Letter No. 5 ‘Reorganisations’ of the Swiss
Tax Administration, a Swiss tax-privileged quasi-merger usually
requires that the receiving company takes over at least 50% of the
target’s voting power. In addition, the target’s shareholders may, at a
maximum, receive a fraction of 50% of the total consideration for their
previously held shares in the target in cash and consequently at least a
fraction of 50% of the total consideration must be paid in new shares
(of the receiving company). Typically, the receiving company procures
the shares for the share-exchange by way of a capital increase.
In the case at hand, the individual A held 100% of the shares of
X-AG and 50% of the shares in Y-AG in his private wealth. In 2007,
A transferred his interest of 50% in Y-AG at book values to X-AG.
Subsequently, A held his interest of 50% in Y-AG indirectly via X-AG.
In its decision of June 10, 2015 (2C_976/2014), the Swiss Supreme
Court confirmed Circular Letter No. 5 and ruled that in lack of a capital
increase at the level of X-AG, the transfer of the Y-AG-shares does
not qualify as quasi-merger for Swiss tax purposes. As a result, the
difference between the market value and the book value of the 50%
interest in the Y-AG-shares was subject to Swiss stamp duty on the
issuance of capital.
United Kingdom
Supreme Court judgment: UK resident member of US
LLC - Entitlement to DTR for US tax
The Supreme Court delivered its unanimous judgment in
the case of Anson v HM Revenue Customs (HMRC) on
July 1, 2015.
It held that the taxpayer, Mr. Anson, is allowed double taxation
relief (DTR) in the UK for US tax paid on profits of the Delaware
limited liability company (LLC) in which he is a member. Based on
the First-tier Tax Tribunal’s earlier finding of fact that the members
of a LLC have an interest in the profits of the LLC as they arise, the
Supreme Court held that the taxpayer’s liability to UK tax is computed
by reference to the same income as was taxed in the US, and he is
therefore entitled to DTR under the UK double tax treaty (DTT) with
US. This overturns the Court of Appeal’s decision that the LLC should
not be regarded as transparent for UK tax purposes, and that DTR for
US tax should therefore be denied on the basis that the UK taxed a
different source of income to the US.
PwC observation:
Companies and individuals
engaging in ‘quasi-mergers’
must therefore carefully
structure the respective
transactions in order to ensure
qualification as a tax neutral
reorganisation.
PwC observation:
Although the case concerns
the UK income tax treatment
of a UK resident individual
member of a Delaware
LLC, from a corporate tax
perspective it has led HMRC
to consider whether their
existing understanding of the
nature of a LLC needs to be
revised. Historically, HMRC
have generally considered
LLCs to be ‘opaque’ entities
akin to companies and in
the vast majority of cases, to
have issued ordinary share
capital. For UK corporate
groups this is an important
consideration when looking at
such matters as grouping and
the substantial shareholdings
exemption.
HMRC are aware of the
uncertainty created by this
judgment and we expect them
to communicate their view
in a public statement in due
course.
Stefan Schmid Sarah Dahinden
Zurich Zurich
T: +41 58 792 4482
E: stefan.schmid@ch.pwc.com
T: +41 58 792 44 25
E: sarah.dahinden@ch.pwc.com
Stella C Amiss Jonathan Hare
London, Embankment Place London, Embankment Place
T: +44 20 7212 3005
E: stella.c.amiss@uk.pwc.com
T: +44 20 7804 6772
E: jonathan.hare@uk.pwc.com
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United States
IRS Chief Counsel’s office provides guidance on
economic substance analysis
The internal revenue service (IRS) released Chief Counsel
Advice 201515020 (the CCA) on April 10, 2015, addressing
the application of the common-law economic substance
doctrine to the taxpayers’ participation in a transaction
with an offsetting loan and contractual rights.
The CCA analysis applies common law because the transaction in
question predated the enactment of Section 7701(o) of the internal
revenue code (IRC), which codified the economic substance doctrine.
The CCA concludes that the IRS could disregard the transaction as
lacking economic substance under both the objective and subjective
prongs of the analysis. In reaching its conclusion, Chief Counsel’s office
considered case law and the case law-derived criteria enumerated in
Directive LBI-4-0711-015 (issued July 15, 2011).
It should be noted that CCA 201515020 is characterised as a
supplemental CCA addressing an issue not previously dealt with in
CCA 201501012, released January 2, 2015, regarding a ‘leveraged
forward contract’.
PwC observation:
CCA 201515020 confirms that the IRS continues to analyse
transactions’ economic substance using common-law factors derived
from case law when the transactions predate Section 7701(o). It also
shows that the IRS is likely to measure a transaction’s profit potential
against its potential tax benefits, rather than respecting the existence
of any profit potential as creating a valid business purpose.
Chip Harter Tim Anson David H Shapiro
Washington D.C. Washington D.C. Washington D.C.
T: +1 202 414 1308
E: chip.harter@us.pwc.com
T: +1 202 414 1664
E: tim.anson@us.pwc.com
T: +1 202 414 1636
E: david.h.shapiro@us.pwc.com
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Treaties
Canada
Convention with New Zealand entered into force and
TIEA with the Cook Islands signed
The new Convention between Canada and New Zealand
for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income, and related
protocols, entered into force on June 26, 2015.
The new Convention with the First Protocol was signed on May 3,
2012, and the Second Protocol was signed on September 12, 2014.
The new Convention limits the rate of withholding tax (WHT) to 5%
for dividends paid where the beneficial owner is a company that holds
directly at least 10% of the voting power in the payor company, to 15%
for dividends paid in all other cases, to 5% for copyright royalties or
other like payments and royalties for the use or right to use computer
software or any patent or for information concerning industrial,
commercial or scientific experience, and to 10% for payments of
interest and all other royalties. The distributive articles of the new
Convention specify that no relief shall be available where the main
purpose or one of the main purposes of any person in undertaking
certain actions is to take advantage of such articles. The new
Convention further permits the taxation of income or gains realised on
the disposition of shares or interests that derive, directly or indirectly,
more than 50% of their value from immovable property situated in the
jurisdiction seeking to tax the income or gains. Provisions reflecting
the Organisation for Economic Co-operation and Development (OECD)
standard for the exchange of tax information are also included.
Furthermore, Canada signed a tax information exchange agreement
(TIEA) with the Cook Islands on June 15, 2015. This TIEA will enter
into force at a later date.
PwC observation:
The new Convention with
New Zealand replaces the
tax convention signed on
May 13, 1980. The new
Convention and related
protocols generally have
effect in Canada in respect
of tax withheld at the source
on amounts paid or credited
to non-residents on or after
August 1, 2015, and in respect
of other Canadian tax for
taxation years beginning on or
after January 1, 2016.
Once the TIEA with the Cook
Islands enters into force,
Canada’s exemption system
can apply to the net earnings
from an active business
carried on in the Cook Islands
by a controlled foreign
corporation (CFC) resident in
the jurisdiction.
China
Multilateral Convention on Mutual Administrative
Assistance in Tax Matters approved
In August 2013, China signed the Multilateral Convention
on Mutual Administrative Assistance in Tax Matters
(the Convention) to join the network of international
cooperation on tax administration.
On July 1, 2015, the Standing Committee of the National People’s
Congress of China approved the signed Convention and clarified the
application of relevant administrative provisions. The Convention shall
apply to the tax jurisdiction of mainland China but not to Hong Kong
and Macao Special Administration Regions.
The Convention provides for all possible forms of administrative
cooperation among the signed states, which include the exchange
of information (EoI), assistance in recovery, service of documents,
etc. – in the assessment and collection of all categories of taxes,
e.g. corporate income tax, individual income tax, value-added tax,
consumption tax.
Meanwhile, the Convention also provides flexibility for reservations
regarding the taxes covered and the type of assistance to be provided.
So far, China has made reservations in terms of tax recovery and
document services.
PwC observation:
The approval of the
Convention is a milestone
in China’s efforts to deepen
and broaden the cooperation
with the international
tax community. It is also
expected to have a significant
impact on China’s domestic
administrative environment
for international taxation.
Now that China has one more
channel under the Convention
to improve tax transparency
and counter tax avoidance
and evasion, multinational
companies operating in China
need to be aware of this new
development and review their
strategy in terms of disclosure
and tax transparency where
necessary.
Kara Ann Selby Maria Lopes
Toronto Toronto
T: +1 416 869 2372
E: kara.ann.selby@ca.pwc.com
T: +1 416 365 2793
E: maria.lopes@ca.pwc.com
Matthew Mui
China
T: +86 10 6533 3028
E: matthew.mui@cn.pwc.com
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China
DTT with Chile signed
On 25 May 2015, China and Chile signed a double tax
treaty (DTT) and an accompanying protocol. If proper
diplomatic procedures are to be completed within 2015,
the DTT would apply to income derived on or after
January 1, 2016.
The DTT between China and Chile includes the following key features:
Permanent establishment (PE)
• The time threshold for constituting a Construction PE should be
six months.
• The time threshold for constituting a Service PE should be 183 days
within any 12-month period.
Shipping and Air transport
It is clarified that the profits arising from the operation of ships or
aircraft in international traffic should include profits from bare boat
charter and container leasing if they are part of the international
shipping or air transportation operations.
Withholding tax (WHT) and Capital gains
• The restricted WHT rate on dividends paid to a beneficial owner
(BO) meeting the prescribed requirements should be 10%.
• The restricted WHT rates on interests paid to a BO meeting the
prescribed requirement should be 4% for interests received by
banks or financial institutions and 10% for other situations.
• The restricted WHT rates on royalties paid to a BO for the use of
industrial, commercial or scientific facilities should be 2% and 10%
for other situations.
• Capital gains arising from the alienation of shares deriving, at
anytime during the 36 months preceding to the alienation, more
than 50% of their value directly or indirectly from immovable
properties should be taxed in the source state.
Other important features
• The article of ‘Exchange of Information’ follows the 2010
Organisation for Economic Co-operation and Development (OECD)
Model Tax Convention.
• A new article of ‘Entitlement to Benefits’ is provided to allow
‘qualified persons’ only to claim the treaty benefit. A ‘Principal
Purposes Test’ provision to attack treaty shopping is also included.
PwC observation:
Generally, the DTT between China and Chile follows the trend of
other tax treaties concluded or re-negotiated by China in recent
years. It also takes some recommendations reflected in the Base
Erosion and Profit Shifting (BEPS) Project into consideration, such
as adding the article of ‘Entitlement to Benefits’ to combat the treaty
shopping. The DTT will definitely provide a lot of treaty benefits
to China / Chile businesses. Relevant investors are recommended
to assess and adjust their current structures/arrangements in
advance in order to fully take the advantage of this new DTT once
it is enacted.
China
New protocol amending the DTT with Russia signed
On October 13, 2014, China and Russia signed a new
double taxation treaty (DTT) and an accompanying
protocol.
On May 8, 2015, another protocol was concluded in order to amend
the interest article in this DTT. In particular, the protocol gives the
exclusive taxation right on interest to the resident country. The
protocol will enter into force on the 30th day upon receipt of the
notification for completing the respective internal legal procedures.
PwC observation:
The China-Russia DTT generally tends to allocate more tax to the
resident country. The new Protocol on the revised interest article
also reflects this general principle. It is a sign that the two countries
are encouraging business from each other. So far, the China-Russia
DTT has not entered into force. Relevant taxpayers are suggested
to take this revision into consideration in advance when assessing
their eligibility for treaty benefits.
Matthew Mui
China
T: +86 10 6533 3028
E: matthew.mui@cn.pwc.com
Matthew Mui
China
T: +86 10 6533 3028
E: matthew.mui@cn.pwc.com
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Hong Kong
Exchange of Notes on the DTT with Japan entered
into force
The Exchange of Notes (the Notes) regarding the Exchange
of Information (EoI) article in the Hong Kong - Japan
double tax treaty (DTT) entered into force on July 6, 2015.
The Notes expand the tax types in Japan that are covered under the EoI
article of the HK-Japan DTT. The EoI article will now cover tax types
other than Japanese income tax (i.e. the inheritance tax, the gift tax,
and the consumption tax). The Notes will take effect in Hong Kong
from April 1, 2016.
PwC observation:
By expanding the tax types in Japan that are covered under the
EoI article of the HK-Japan DTT, Hong Kong shows its commitment
to international tax cooperation and increased tax transparency.
Other than the HK-Japan DTT, similar change has recently been
made to the EoI article of the HK-China DTT by the signing of the
Fourth Protocol, which expands the scope of information exchange
under the HK-China DTT to cover certain non-income taxes
in China.
Italy
DTT with Hong Kong ratifiied
The double tax treaty (DTT) between Italy and Hong Kong,
signed on January 2013, has been ratified by the Italian
parliament with Law n. 96/2015, published in the Italian
Official Gazette n. 155 on July 7, 2015.
Article 25 of the DTT provides for the exchange of information (EoI)
on transactions performed between taxpayer residents in the two
countries, according to Organisation for Economic Co-operation and
Development (OECD) standards, triggering some relevant impacts in
the Italian tax law framework.
The ratification of the DTT would in principle have a significant impact
for multinational enterprises (MNEs) operating in Italy, considering
that:
• The withholding tax (WHT) rates on incomes realised in the other
state are significantly reduced (e.g. dividends 10%, interest 12.5%,
royalties 15%).
• Capital gains would be taxable only in the State where the seller is
a resident (except for capital gains on real estate or a shareholding
in which the value is mainly derived from real estate).
• Hong Kong should be no longer included in the Italian ‘black lists’
identifying the ‘tax haven’ countries relevant for the application of
the controlled foreign company (CFC) regime and the corporate
income tax (CIT) restrictive costs’ deduction regime.
• Hong Kong should be included in the ‘white list’ relevant for the
application of the notional interest deduction (NID) on capital
contributions to Italian subsidiaries.
PwC observation:
Provided that the ratification process would be finalised in 2015,
the DTT could produce its effects starting from January 1, 2016. In
this regard, further legislative actions are expected to be executed
to fully enact the DTT under the Italian tax law framework.
Fergus WT Wong
Hong Kong
T: +852 2289 5818
E: fergus.wt.wong@hk.pwc.com
Franco Boga
Milan
T: +39 02 9160 5400
E: franco.boga@it.pwc.com
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