comparative corporate income taxes in europe prof. dr. geerten m.m. michielse technical assistance...

Comparative Corporate Income Comparative Corporate Income TaxesTaxesin Europein Europe

Prof. Dr. Geerten M.M. MichielseProf. Dr. Geerten M.M. Michielse

Technical Assistance Advisor IMF, WashingtonTechnical Assistance Advisor IMF, Washington

Georgetown University Law CenterGeorgetown University Law Center

May 2003May 2003

What will be discussed?What will be discussed?

Corporate Income Tax SystemsCorporate Income Tax Systems

Measurement of Business IncomeMeasurement of Business Income

Thin CapitalizationThin Capitalization

Inter-company Dividends (EU Parent-Subsidiary)Inter-company Dividends (EU Parent-Subsidiary)

Corporate Reorganizations (EU Merger)Corporate Reorganizations (EU Merger)

LiquidationsLiquidations

May 2003May 2003

Corporate Income Tax Corporate Income Tax SystemsSystems

No integrationClassical System

DividendDeduction

System

Split RateSystem

AdvancedProfit T ax

System

Corporate Level

DividendExem ption

System

FinalW ithholding

System

Im putationSystem

Shareholder Level

Integration ofDistributed Profits

FullIntegration

CorporateIncom e

T axSystem s

Current EU SystemsCurrent EU Systems

Country:Country: System:System: Rate (%):Rate (%):

AUTAUT Final WithholdingFinal Withholding 3434

BELBEL Final WithholdingFinal Withholding 33.9933.99

DEUDEU Dividend ExemptionDividend Exemption 39.5839.58

DNKDNK ClassicalClassical 3030

ESPESP ImputationImputation 3535

FINFIN ImputationImputation 2929

FRAFRA ImputationImputation 34.3334.33

GBRGBR ImputationImputation 3030

GRCGRC Dividend ExemptionDividend Exemption 3535

IRLIRL ClassicalClassical 12.512.5

ITAITA ImputationImputation 38.2538.25

LUXLUX Dividend ExemptionDividend Exemption 30.3830.38

NLDNLD ClassicalClassical 34.534.5

PRTPRT ImputationImputation 3333

SWESWE ClassicalClassical 2828

May 2003May 2003

Central & East European Central & East European SystemsSystems

Country:Country: System:System: Rate (%):Rate (%):

BGRBGR Final WithholdingFinal Withholding 23.523.5

CZECZE Advanced Profit TaxAdvanced Profit Tax 3131

ESTEST ))11

HUNHUN Final WithholdingFinal Withholding 1818

LTULTU Advanced Profit TaxAdvanced Profit Tax 2424

LVALVA Dividend ExemptionDividend Exemption 2525

POLPOL Final WithholdingFinal Withholding 2727

ROMROM Final WithholdingFinal Withholding 2525

SVKSVK Final WithholdingFinal Withholding 2525

SVNSVN Dividend ExemptionDividend Exemption 2525

May 2003May 2003

Preliminary ConclusionsPreliminary Conclusions

Only CZE has integration on corporate level Only CZE has integration on corporate level (APTS);(APTS);

GRC has moved from corporate level (DDS) to GRC has moved from corporate level (DDS) to shareholder’s level (DES);shareholder’s level (DES);

DEU, IRL and LTU have moved away from DEU, IRL and LTU have moved away from integration of tax liability (APTS/IMPS);integration of tax liability (APTS/IMPS);

FRA is gradually moving out of IMPS (by FRA is gradually moving out of IMPS (by reducing imputation-%);reducing imputation-%);

Most countries favor FWHT.Most countries favor FWHT.

May 2003May 2003

Dividend Deduction andDividend Deduction andSplit Rate SystemsSplit Rate Systems(international aspects)(international aspects)

Non-Resident ShareholdersNon-Resident Shareholders– exclusion from DDS/SRS exclusion from DDS/SRS

discrimination?discrimination?– high withholding taxhigh withholding tax

distribution quotadistribution quota tax treaty protectiontax treaty protection

Permanent EstablishmentPermanent Establishment– moment of distribution parent companymoment of distribution parent company– allocation issuesallocation issues

May 2003May 2003

Lithuanian Profit TaxLithuanian Profit Tax(before 2003)(before 2003)

Pre-tax profits 1,000Profit tax (24%) 240Dividend distribution 760Withholding tax (29% of 760) 220

Profit tax 240Less: WHT credit 220MPT 20

At shareholder’s level: dividends taxable in full

May 2003May 2003

Czech Corporate Income TaxCzech Corporate Income Tax

Pre-tax profits 1,000Income tax (31%) 310Dividend distribution 690Withholding tax (15% of 690) 104

Income tax 310Less: 50% WHT credit 52MCIT 258

At shareholder’s level: final withholding

May 2003May 2003

Advanced Profit Tax SystemsAdvanced Profit Tax Systems(European aspects)(European aspects)

No No withholding taxwithholding tax on dividends paid on dividends paid to qualifying EU parent company;to qualifying EU parent company;

No credit for withholding tax available;No credit for withholding tax available; Higher tax rate on companies owned by Higher tax rate on companies owned by

qualifying EU parent companies;qualifying EU parent companies; Non-discrimination issue.Non-discrimination issue.

May 2003May 2003

SolutionSolution: Advanced Profit Tax: Advanced Profit Tax

Pre-tax profits 1,000Profit tax (20%) 200Dividend distribution 800Advanced profit tax (25% of 800) 200

Profit tax 200Less: Advanced profit tax 200Main profit tax 0

At shareholder’s level: dividends taxable in full

May 2003May 2003

Finnish Imputation SystemFinnish Imputation System

Pre-tax profits 1,000Corporate income tax (29%) 290Available for distribution 710Imputation credit (CIT) 290Grossed-up dividends 1,000

Personal income tax (38%) 380Imputation credit 290Net tax due 90

May 2003May 2003

French Imputation SystemFrench Imputation System

Pre-tax profits 1,000Corporate income tax (34.33%) 343Available for distribution 657Imputation credit (10% of 657) 66Grossed-up dividends 723

Personal income tax (49.58%) 358

Imputation credit 66Net tax due 292

May 2003May 2003

Imputation SystemsImputation Systems(international aspects)(international aspects)

Distribution of Distribution of foreign source profitforeign source profit to to domestic shareholdersdomestic shareholders

Equalization tax?Equalization tax?

Distribution of domestic source profit Distribution of domestic source profit to to foreign shareholdersforeign shareholders

Tax credit?Tax credit?

Distribution of Distribution of foreign source profitforeign source profit to to foreign shareholdersforeign shareholders

Equalization tax exemption? Equalization tax exemption?

May 2003May 2003

Cash Flow Tax SystemsCash Flow Tax Systems

Croatia (1994-2000):Croatia (1994-2000):– Investment income is tax exempt;Investment income is tax exempt;– ‘‘Protective Interest’ deduction (normal Protective Interest’ deduction (normal

rate of return on equity);rate of return on equity);– Economic rent taxable (35%).Economic rent taxable (35%).

Estonia (2000-…?):Estonia (2000-…?):– Retained earnings are tax exempt;Retained earnings are tax exempt;– Distribution of profit establishes profit tax Distribution of profit establishes profit tax

(26/74(26/74thth););– Final withholding tax (26%).Final withholding tax (26%).

May 2003May 2003

Croatian Corporate Tax Croatian Corporate Tax SystemSystem

Commercial profitCommercial profit 1,0001,000

PI deduction (5% of equity)PI deduction (5% of equity) 500 500

Taxable profitTaxable profit 500 500

Corporate income tax (35%)Corporate income tax (35%) 175175

Available for distributionAvailable for distribution 825 825

At shareholder’s levelAt shareholder’s level: dividends exempt: dividends exempt

May 2003May 2003

Estonian Corporate Tax Estonian Corporate Tax SystemSystem

Commercial profitCommercial profit 1,000 1,000

Dividend distributionDividend distribution 1,0001,000

Corporate income tax (26/74Corporate income tax (26/74thth)) 351 351

Available for distributionAvailable for distribution 649 649

Withholding tax (26%)Withholding tax (26%) 169 169

Net dividend receivedNet dividend received 480 480

At shareholder’s levelAt shareholder’s level: final withholding: final withholding

May 2003May 2003

Cash Flow Tax SystemsCash Flow Tax Systems(international/european issues)(international/european issues)

Croatian variantCroatian variant::– Characterization as income tax?Characterization as income tax?– FTC countries wipe out PI deductionFTC countries wipe out PI deduction– Harmful tax competition?Harmful tax competition?

Estonian variantEstonian variant::– Characterization as withholding tax?Characterization as withholding tax?– Harmful tax competition?Harmful tax competition?

May 2003May 2003

Harmful Tax CompetitionHarmful Tax Competition

Open only to non-residents or to transactions to Open only to non-residents or to transactions to non-residents;non-residents;

Ring-fenced from the domestic market;Ring-fenced from the domestic market;(i.e. they do not have an impact on the national tax base)(i.e. they do not have an impact on the national tax base)

Granted without any real economic activity and Granted without any real economic activity and substantial economic presence;substantial economic presence;

Profit determination departs from internationally Profit determination departs from internationally accepted (OECD) standards (??);accepted (OECD) standards (??);

Lack of transparency.Lack of transparency.

May 2003May 2003

Epson case (C-375/98)Epson case (C-375/98)

Portuguese Inheritance and Gift TaxPortuguese Inheritance and Gift Tax

ArgumentsArguments by ECJ: by ECJ:– Chargeable event = payment of dividendsChargeable event = payment of dividends– Taxable amount = income from the sharesTaxable amount = income from the shares– Taxable person = holder of the sharesTaxable person = holder of the shares

DecisionDecision by ECJ: by ECJ:– WHT: any tax of whatever nature or however WHT: any tax of whatever nature or however

described, which takes the form of WHT on described, which takes the form of WHT on dividends.dividends.

May 2003May 2003

Athinaika Case (C-294/99)Athinaika Case (C-294/99)

Greek dividend withholding tax under DDSGreek dividend withholding tax under DDS

ArgumentsArguments by ECJ: by ECJ:– Chargeable event = distribution of profitChargeable event = distribution of profit– Tax directly related to size of distributionTax directly related to size of distribution– No absorption of loss carry forwardNo absorption of loss carry forward– DTA provision indicates withholding taxDTA provision indicates withholding tax

DecisionDecision by ECJ: by ECJ:– WHT if tax-exempt income re-incorporated in tax WHT if tax-exempt income re-incorporated in tax

basis upon distribution, whereas otherwise exempt.basis upon distribution, whereas otherwise exempt.

May 2003May 2003

Profit / Corporation TaxProfit / Corporation Tax

Profit TaxProfit Tax

– Distinction between Distinction between Business IncomeBusiness Income and and Other IncomeOther Income

– Profit vs. Income TaxProfit vs. Income Tax

Corporate Income TaxCorporate Income Tax

– Distinction between Distinction between Legal EntitiesLegal Entities and and IndividualsIndividuals

– Corporate Income vs. Personal Income TaxCorporate Income vs. Personal Income Tax

May 2003May 2003

Common Law SystemsCommon Law Systems(Characteristics)(Characteristics)

Fear for strong Administration resulted in:Fear for strong Administration resulted in:

Extensive Legislative TextsExtensive Legislative Texts(due to implementation of case law)(due to implementation of case law)

Extensive Set of DefinitionsExtensive Set of Definitions(textual interpretation)(textual interpretation)

Separate Set of Tax ProvisionsSeparate Set of Tax Provisions(due to confiscatory character)(due to confiscatory character)

Separate Capital Gains TaxSeparate Capital Gains Tax(capital gains vs. ordinary income)(capital gains vs. ordinary income)

May 2003May 2003








May 2003May 2003

Measuring Business IncomeMeasuring Business Income

How are tax laws related to How are tax laws related to accounting practice?accounting practice?

What are the main issues that What are the main issues that need to be determined in need to be determined in measuring the income of a measuring the income of a business in its accounts?business in its accounts?

In what areas do the principal In what areas do the principal problems arise in practice?problems arise in practice?

May 2003May 2003

Balance SheetBalance Sheet

Commercial Balance SheetCommercial Balance Sheet– information instrumentinformation instrument

e.g. to shareholders / debtorse.g. to shareholders / debtors– management toolmanagement tool

tendency to tendency to overvalueovervalue

Fiscal Balance SheetFiscal Balance Sheet– state revenue instrumentstate revenue instrument

tendency to tendency to undervalueundervalue

May 2003May 2003

Fiscal AccountsFiscal Accounts(current EU Member States)(current EU Member States)

‘‘Autonomy of Fiscal Accounts’ ConceptAutonomy of Fiscal Accounts’ Concept Separate legal provisionsSeparate legal provisions

FIN, GBR and IRLFIN, GBR and IRL

Jurisprudence (‘sound business practice’)Jurisprudence (‘sound business practice’) NLDNLD

‘‘Unity of Law’ Concept (i.e. business Unity of Law’ Concept (i.e. business accounts)accounts)

AUT, BEL, DEU, DNK, ESP, FRA, GRC, ITA, LUX, PRT AUT, BEL, DEU, DNK, ESP, FRA, GRC, ITA, LUX, PRT and SWEand SWE

May 2003May 2003

‘‘Unity of Law’ ConceptUnity of Law’ Concept(arguments pro)(arguments pro)

Sound Business Practice &Sound Business Practice &General Accepted Accounting General Accepted Accounting PrinciplesPrinciples

No decisive reason to deviateNo decisive reason to deviate

Measurement of ‘distributable’ profitMeasurement of ‘distributable’ profit

Juridical process can be streamlinedJuridical process can be streamlined

More in line with continental viewMore in line with continental view

May 2003May 2003

‘‘Unity of Law’ ConceptUnity of Law’ Concept(arguments contra)(arguments contra)

End of traditional freedom to choose End of traditional freedom to choose a fiscal system and to revoke that a fiscal system and to revoke that choicechoice

Treasury becomes a direct interested Treasury becomes a direct interested party in the application of GAAPparty in the application of GAAP

Linkage is not unquestionedLinkage is not unquestioned

Different objectives / purposesDifferent objectives / purposes

May 2003May 2003

‘‘Sound Business Practice’Sound Business Practice’(Netherlands)(Netherlands)

Starting Point:Starting Point:– Principles of Business EconomicsPrinciples of Business Economics

Exceptions, when conflicting with:Exceptions, when conflicting with:– any Regulation in Tax Law;any Regulation in Tax Law;

– a General Intention; ora General Intention; or

– Principle of the Relevant Tax Law.Principle of the Relevant Tax Law.

May 2003May 2003

Commercial CodeCommercial Code(Germany and Austria)(Germany and Austria)

‘‘Maßgelichkeit’ Principle:Maßgelichkeit’ Principle:

Assets and LiabilitiesAssets and Liabilities– Materielle Maßgeblichkeit (DEU)Materielle Maßgeblichkeit (DEU)

Commercial ValuationCommercial Valuation– Formelle Maßgeblichkeit (AUT)Formelle Maßgeblichkeit (AUT)

May 2003May 2003

General Accounting PlanGeneral Accounting Plan(France)(France)

Accounting Boards (‘tableaux Accounting Boards (‘tableaux comptables’) used in Tax Declaration comptables’) used in Tax Declaration must be established in accordance with must be established in accordance with accounting rulesaccounting rules

andand

If no contrary tax law or regulation If no contrary tax law or regulation provides a different solution, accounting provides a different solution, accounting rules are appliedrules are applied

May 2003May 2003

Profit-and-Loss Account MethodProfit-and-Loss Account Method(Latvia)(Latvia)

Article 4(1):Article 4(1):

““The taxable income … shall be the The taxable income … shall be the amount of annual profit (loss) as amount of annual profit (loss) as stated in the profit and loss statement stated in the profit and loss statement … calculated in accordance with [the … calculated in accordance with [the provisions] of the law provisions] of the law On Annual On Annual Reports of EnterprisesReports of Enterprises, … . Taxable , … . Taxable income shall be adjusted … in income shall be adjusted … in accordance with this Law.”accordance with this Law.”

May 2003May 2003


Balance SheetBalance Sheet– measuring of income by comparison measuring of income by comparison

of two financial statementsof two financial statements

Profit-and-Loss AccountProfit-and-Loss Account– measuring of income for a period of measuring of income for a period of

timetime

May 2003May 2003

Profit-and-Loss AccountProfit-and-Loss Account

General Rule: Financial StatementsGeneral Rule: Financial Statements

Tax Provisions:Tax Provisions:

Increased by e.g.:Increased by e.g.: Non-deductible expensesNon-deductible expenses Provisions and reservesProvisions and reserves

Decreased by e.g.:Decreased by e.g.: Exempt dividendsExempt dividends Deferred capital gainsDeferred capital gains

May 2003May 2003

Balance SheetBalance Sheet

Net Equity Balance Sheet Ending 2002Net Equity Balance Sheet Ending 2002

Net Equity Balance Sheet Beginning Net Equity Balance Sheet Beginning

2002 -/-2002 -/-

Net Equity Accretion during 2002Net Equity Accretion during 2002

Profit Distributions / Private Expenses +Profit Distributions / Private Expenses +

Taxable Business IncomeTaxable Business Income

May 2003May 2003


How are tax laws related to How are tax laws related to accounting practice?accounting practice?

What are the main issues that What are the main issues that need to be determined in need to be determined in measuring the income of a measuring the income of a business in its accounts?business in its accounts?

In what areas do the principal In what areas do the principal problems arise in practice?problems arise in practice?

May 2003May 2003

Fiscal / Commercial ProfitFiscal / Commercial Profit(typical areas of deviation)(typical areas of deviation)

Non-deductible ExpensesNon-deductible Expenses DepreciationDepreciation Provisions and ReservesProvisions and Reserves Bad DebtsBad Debts LossesLosses InflationInflation Capital Gains and LossesCapital Gains and Losses Tax IncentivesTax Incentives

May 2003May 2003

Non-Deductible ExpensesNon-Deductible Expenses

General rule excludes private expensesGeneral rule excludes private expenses

Technical (legislative)Technical (legislative) dividend distributions, recoverable VATdividend distributions, recoverable VAT

Private ElementsPrivate Elements representation, entertainmentrepresentation, entertainment

AvoidanceAvoidance thin capitalizationthin capitalization

Political unwantedPolitical unwanted bribes, penaltiesbribes, penalties

May 2003May 2003

Provisions / ReservesProvisions / Reserves(EU Member States)(EU Member States)

Risks and Future ExpensesRisks and Future Expenses AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRTAUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRT

Bad DebtsBad Debts GeneralGeneral: DNK (limited), ESP (only for SME’s), GRC, ITA : DNK (limited), ESP (only for SME’s), GRC, ITA

and NLDand NLD SpecificSpecific: all other Member States, including those : all other Member States, including those

aboveabove

PensionsPensions AUT, BEL, DEU, GRC, ITA, LUX, NLD and SWEAUT, BEL, DEU, GRC, ITA, LUX, NLD and SWE

RepairsRepairs FIN, DEU (substantial maintenance), ESP (if plan FIN, DEU (substantial maintenance), ESP (if plan

approved), FRA, IRL, ITA, NLD and SWEapproved), FRA, IRL, ITA, NLD and SWE

May 2003May 2003

Risks and Future ExpensesRisks and Future Expenses(AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and (AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRT)PRT)

Common conditionalities:Common conditionalities:– Taxpayer’s estimation (e.g. in AUT and ESP)Taxpayer’s estimation (e.g. in AUT and ESP)– Objective facts and circumstances (e.g. in AUT and Objective facts and circumstances (e.g. in AUT and

ESP)ESP)– Business experience (e.g. in AUT)Business experience (e.g. in AUT)– Cause in current tax year (e.g. in BEL, DEU and GBR)Cause in current tax year (e.g. in BEL, DEU and GBR)– Mandatory under commercial code (e.g. in DEU)Mandatory under commercial code (e.g. in DEU)– Claim lodged or very possible (e.g. in BEL and DEU)Claim lodged or very possible (e.g. in BEL and DEU)

Some countries (e.g. DNK and SWE) allow only Some countries (e.g. DNK and SWE) allow only a provision for guaranteesa provision for guarantees

May 2003May 2003

Bad DebtsBad Debts(all EU Member States)(all EU Member States)

General ProvisionGeneral Provision(allowed in DNK, ESP, GRC, ITA and NLD)(allowed in DNK, ESP, GRC, ITA and NLD)– Typically limited, e.g. max. 5% of trade Typically limited, e.g. max. 5% of trade

receivables (GRC and ITA) or only available receivables (GRC and ITA) or only available for SME’s (ESP)for SME’s (ESP)

Specific ProvisionSpecific Provision(allowed in AUT, BEL, DEU, DNK, ESP, (allowed in AUT, BEL, DEU, DNK, ESP, FIN, FRA, GBR, IRL, LUX, NLD, PRT and FIN, FRA, GBR, IRL, LUX, NLD, PRT and SWE)SWE)– Based on loan-by-loan approachBased on loan-by-loan approach

May 2003May 2003

PensionsPensions(AUT, BEL, DEU, GRC, ITA, LUX, NLD and (AUT, BEL, DEU, GRC, ITA, LUX, NLD and SWE)SWE)

Main Characteristics:Main Characteristics:

Obligation to pay future pensionsObligation to pay future pensions Legally ‘qualified’ pension schemeLegally ‘qualified’ pension scheme Actuarial computationActuarial computation Mandatory inclusion in commercial Mandatory inclusion in commercial

balance sheet (BEL)balance sheet (BEL) Discount rate (AUT: 20%, DEU: 6%)Discount rate (AUT: 20%, DEU: 6%)

May 2003May 2003

RepairsRepairs(FIN, DEU, ESP, FRA, IRL, ITA, NLD and (FIN, DEU, ESP, FRA, IRL, ITA, NLD and SWE)SWE)

Replacement Reserve (FIN, NLD and SWE)Replacement Reserve (FIN, NLD and SWE) max. 2 years (FIN)max. 2 years (FIN) max. 3 years (SWE)max. 3 years (SWE) max. 4 years (NLD)max. 4 years (NLD)

Substantial maintenance and repair (DEU)Substantial maintenance and repair (DEU)

Approved Repair Plan (ESP)Approved Repair Plan (ESP)

Limited to 5% of book value (ITA)Limited to 5% of book value (ITA)

May 2003May 2003

Ordinary LossesOrdinary Losses(EU Member States)(EU Member States)

Carry ForwardCarry Forward– Unlimited:Unlimited:

AUT, BEL, DEU, DNK, GBR, IRL, ITA (only for AUT, BEL, DEU, DNK, GBR, IRL, ITA (only for start-up losses), LUX, NLD and SWEstart-up losses), LUX, NLD and SWE

– Limited:Limited: 5 years: FRA, GRC and ITA5 years: FRA, GRC and ITA 6 years: PRT6 years: PRT 10 years: ESP and FIN10 years: ESP and FIN

Carry BackCarry BackDEU (1 year + max), FRA (3 years), GBR (1 DEU (1 year + max), FRA (3 years), GBR (1 year), IRL (1 year) and NLD (3 years)year), IRL (1 year) and NLD (3 years)

May 2003May 2003








May 2003May 2003

Treatment of Interest Treatment of Interest ExpensesExpenses

Limitation of Interest related to Exempt Limitation of Interest related to Exempt IncomeIncome

Obligation to Pay Subscribed Capital in FullObligation to Pay Subscribed Capital in Full

Limitation of Interest RateLimitation of Interest Rate

Debt-to-Equity RatioDebt-to-Equity Ratio

Tax Haven CreditorsTax Haven Creditors

General Anti-Avoidance RulesGeneral Anti-Avoidance Rules

Thin Capitalization RulesThin Capitalization Rules(EU Member States)(EU Member States)

Loans AffectedLoans Affected RatioRatio ResultResult

BELBEL Directors andDirectors and

ShareholdersShareholders1:11:1 Re-characterizationRe-characterization

DEUDEU Substantial Substantial shareholders (>25%)shareholders (>25%)

1.5:11.5:1 Re-characterizationRe-characterization

DNKDNK Controlling Controlling shareholders (>50%)shareholders (>50%)

4:14:1 Non-deductibilityNon-deductibility

ESPESP Non-residentNon-resident related related companiescompanies

3:13:1 Re-characterizationRe-characterization

FRAFRA Controlling Controlling shareholders (>50%)shareholders (>50%)

1.5:11.5:1 Non-deductibilityNon-deductibility

GBRGBR 75% 75% non-residentnon-resident parent companiesparent companies

1:11:1 Re-characterizationRe-characterization

IRLIRL 75% 75% non-residentnon-resident parent companiesparent companies

n/an/a Re-characterizationRe-characterization

LUXLUX ShareholdersShareholders undisclosundiscloseded

Re-characterizationRe-characterization

PRTPRT Related parties Related parties (>25%)(>25%)


May 2003May 2003

Thin Capitalization RulesThin Capitalization Rules(Central & East European Countries)(Central & East European Countries)

Loans Loans AffectedAffected

RatioRatio ResultResult

BGRBGR AllAll 1:11:1 Non-deductibilityNon-deductibility

CZECZE Non-residentNon-resident related related partiesparties


HUNHUN Related Related partiesparties


LVALVA AllAll 2:12:1 Non-deductibilityNon-deductibility

POLPOL Substantial Substantial shareholdersshareholders


ROMROM AllAll 1:11:1 Limited deductibility (50% Limited deductibility (50% of profits)of profits)

SVKSVK Related Related partiesparties


SVNSVN Substantial Substantial shareholdersshareholders


May 2003May 2003

Thin CapitalizationThin Capitalization(technical issues)(technical issues)

Equity definitionEquity definition– Revaluation reserveRevaluation reserve– Negative equity positionNegative equity position

Back-to-back loans / Guaranteed loansBack-to-back loans / Guaranteed loans

Non-deductibility vs. Re-characterizationNon-deductibility vs. Re-characterization

Non-discriminationNon-discrimination

May 2003May 2003

Equity DefinitionEquity Definition(Germany)(Germany)

Para. 8a, Abs. 2 Kist:Para. 8a, Abs. 2 Kist:

““Anteiliges EigenkapitalAnteiliges Eigenkapital des Anteilseigners ist des Anteilseigners ist der Teil des Eigenkapitalsder Teil des Eigenkapitals der der

Kapitalgesellschaft Kapitalgesellschaft zum Schluß des vorangegangenen Wirtschaftsjahrszum Schluß des vorangegangenen Wirtschaftsjahrs, , der dem der dem

Anteil des Anteilseigners am gezeichneten Kapital entsprichtAnteil des Anteilseigners am gezeichneten Kapital entspricht . . EigenkapitalEigenkapital ist ist das das

gezeichnete Kapital gezeichnete Kapital abzüglichabzüglich der der ausstehenden Einlagenausstehenden Einlagen, , zuzüglichzuzüglich der der

KapitalrücklageKapitalrücklage, der , der GewinnrücklagenGewinnrücklagen, eines , eines GewinnvortragsGewinnvortrags und eines und eines

JahresüberschussesJahresüberschusses sowie sowie abzüglichabzüglich eines eines VerlustvortragsVerlustvortrags und eines und eines

JahresfehlbetragsJahresfehlbetrags (§ 266 Abs. 3 Abschnitt A, § 272 des Handelsgesetzbuches) (§ 266 Abs. 3 Abschnitt A, § 272 des Handelsgesetzbuches) in der in der

HandelsbilanzHandelsbilanz zum Schluß des vorangegangenen Wirtschaftsjahrs; Sonderposten mit zum Schluß des vorangegangenen Wirtschaftsjahrs; Sonderposten mit

Rücklageanteil (§ 273 des Handelsgesetzbuches) sind zur Hälfte hinzuzurechnen. Eine Rücklageanteil (§ 273 des Handelsgesetzbuches) sind zur Hälfte hinzuzurechnen. Eine

vorübergehende Minderung des Eigenkapitalsvorübergehende Minderung des Eigenkapitals durch einen Jahresfehlbetrag ist durch einen Jahresfehlbetrag ist

unbeachtlichunbeachtlich, wenn , wenn bis zum Ablauf des drittenbis zum Ablauf des dritten auf das auf das WirtschaftsjahrWirtschaftsjahr des des

Verlustes folgenden Wirtschaftsjahrs Verlustes folgenden Wirtschaftsjahrs das ursprüngliche Eigenkapitaldas ursprüngliche Eigenkapital durch durch

Gewinnrücklagen oder Einlagen Gewinnrücklagen oder Einlagen wieder hergestelltwieder hergestellt wird.” wird.”

May 2003May 2003

Back-to-Back LoansBack-to-Back Loans

Example provision:Example provision:

““If a loan is received from a third party and an associated person of the recipient If a loan is received from a third party and an associated person of the recipient gives a guarantee on this loan, para. … shall be applicable as if the associated gives a guarantee on this loan, para. … shall be applicable as if the associated person made the loan directly.”person made the loan directly.”

ParentCompany

CommercialBank

SubsidiaryCompany

bank deposit

loan

or guarantee

May 2003May 2003

Re-characterization vs. Non-Re-characterization vs. Non-deductibilitydeductibility

Re-characterizationRe-characterization interest re-characterized as dividendinterest re-characterized as dividend debt re-characterized as equitydebt re-characterized as equity

profit allocationprofit allocation

Non-deductibilityNon-deductibility

profit profit determinationdetermination

May 2003May 2003

International Withholding International Withholding TaxTax

Re-characterizationRe-characterization Art. 10(3) OECD refers to domestic definition of source stateArt. 10(3) OECD refers to domestic definition of source state Art. 23 OECD requires relief for dividend w/hArt. 23 OECD requires relief for dividend w/h

no double no double taxationtaxation

Non-deductibilityNon-deductibility Art. 11(2) OECDArt. 11(2) OECD Art. 23 OECD requires relief for interest w/hArt. 23 OECD requires relief for interest w/h

no double no double taxationtaxation

May 2003May 2003

International Economic Double International Economic Double TaxationTaxation

RecharacterizationRecharacterization OECD-Commentary: Art. 9 applicableOECD-Commentary: Art. 9 applicable IFA-Resolution: arm’s length approach preferredIFA-Resolution: arm’s length approach preferred Michielse: nonsense, Art. 9 cannot applyMichielse: nonsense, Art. 9 cannot apply Art. 9(2) OECD: no obligation for corresponding Art. 9(2) OECD: no obligation for corresponding

adjustmentadjustment

danger of double taxationdanger of double taxation

Non-deductibilitNon-deductibilityy profit determination is not profit allocationprofit determination is not profit allocation

double taxationdouble taxation

May 2003May 2003

Non-discriminationNon-discrimination

Article 24(4) OECDArticle 24(4) OECDinterest payments to non-residents shall interest payments to non-residents shall be treated under the same conditions for be treated under the same conditions for tax purposes as interest payments to tax purposes as interest payments to residents (except for Art. 9(1) and Art. residents (except for Art. 9(1) and Art. 11(6) OECD)11(6) OECD)

Article 24(5) OECDArticle 24(5) OECDresident companies shall be treated under resident companies shall be treated under the same conditions for tax purposes the same conditions for tax purposes irrespective whether its shareholders are irrespective whether its shareholders are residents or non-residentsresidents or non-residents

May 2003May 2003








May 2003May 2003

Intercompany DividendsIntercompany Dividends(parent company)(parent company)

Domestic subsidiaryDomestic subsidiary

Qualifying EU subsidiaryQualifying EU subsidiary– At least 25% shareholdingAt least 25% shareholding– Minimum holding period of (maximum) 2 Minimum holding period of (maximum) 2

yearsyears

Other subsidiaryOther subsidiary

May 2003May 2003

Intercompany Dividends Intercompany Dividends ReceivedReceived(EU Member States)(EU Member States)

ExemptionExemption Method Method– Full exemptionFull exemption

AUT, DEU(r), DNK, FIN(nr), GBR(r), GRC(r), AUT, DEU(r), DNK, FIN(nr), GBR(r), GRC(r), IRL(r), LUX, NLD and SWEIRL(r), LUX, NLD and SWE

– 95% exemption95% exemptionBEL, DEU(nr), FRA, ITA(nr) and PRTBEL, DEU(nr), FRA, ITA(nr) and PRT

CreditCredit Method MethodESP, ESP, FIN(r)FIN(r), GBR(nr), GRC(nr), IRL(nr) and , GBR(nr), GRC(nr), IRL(nr) and ITA(r)ITA(r)

May 2003May 2003

Intercompany Dividends Intercompany Dividends ReceivedReceived(Central & East European (Central & East European Countries)Countries) Domestic subsidiariesDomestic subsidiaries

– ExemptionExemption method methodBGR, HUN, LTU, LVA and SVNBGR, HUN, LTU, LVA and SVN

– ‘‘Separate tax base’Separate tax base’ method methodCZE, PLN, ROM(fwh) and SVK(fwh)CZE, PLN, ROM(fwh) and SVK(fwh)

Foreign subsidiariesForeign subsidiaries– ExemptionExemption method method

HUN, LTU and LVAHUN, LTU and LVA– ‘‘Separate tax base’Separate tax base’ method method

CZECZE

May 2003May 2003

Intercompany Dividends PaidIntercompany Dividends Paid(EU Member States)(EU Member States)

Domestic Parent CompanyDomestic Parent CompanyExemption (except ESP: 25%)Exemption (except ESP: 25%)

Qualifying EU Parent CompanyQualifying EU Parent CompanyExemption, if:Exemption, if:

- At least 25% shareholding; andAt least 25% shareholding; and- Minimum holding period (BEL, DEU, DNK, ESP, ITA and Minimum holding period (BEL, DEU, DNK, ESP, ITA and

NLD: 1 year – AUT,FRA and PRT: 2 years)NLD: 1 year – AUT,FRA and PRT: 2 years)

Other Foreign Parent CompanyOther Foreign Parent Company Exemption (DNK and SWE)Exemption (DNK and SWE) 25% (IRL 24%, ITA 27%, FIN 29%)25% (IRL 24%, ITA 27%, FIN 29%)

May 2003May 2003

Intercompany Dividends PaidIntercompany Dividends Paid(Central & East European (Central & East European Countries)Countries)

Domestic Parent CompanyDomestic Parent Company– Exemption (BGR, EST, HUN, LVA and Exemption (BGR, EST, HUN, LVA and

SVN)SVN)– General WHT (CZE, POL, ROM and SVK)General WHT (CZE, POL, ROM and SVK)

Foreign Parent CompanyForeign Parent Company– WHT rates (10-20%) applyWHT rates (10-20%) apply

May 2003May 2003





Intercompany Dividends (EU Parent-Subsidiary)Intercompany Dividends (EU Parent-Subsidiary)



May 2003May 2003

Capital Gains on SharesCapital Gains on Shares

Common LawCommon Law– Separate Capital Gains Tax (basis Separate Capital Gains Tax (basis

and rate)and rate)

Civil LawCivil Law– Shares are business assetsShares are business assets– Substantial shareholdingSubstantial shareholding– Speculative transactionsSpeculative transactions

May 2003May 2003

Common Law RegimeCommon Law Regime(assets / liabilities)(assets / liabilities)

Distinction between income and capital Distinction between income and capital gainsgains

Capital allowances for depreciationCapital allowances for depreciation Only capital gains on assets (!)Only capital gains on assets (!)

At disposal of assetsAt disposal of assets:: Recapture of capital allowances in Recapture of capital allowances in

Income TaxIncome Tax Capital Gains Tax on difference between Capital Gains Tax on difference between

market valuemarket value and and acquisition priceacquisition price

May 2003May 2003

Civil Law RegimeCivil Law Regime(assets / liabilities)(assets / liabilities)

Capital gains are treated as ordinary Capital gains are treated as ordinary incomeincome

Depreciation (business expense)Depreciation (business expense) Capital gains on both assets and liabilitiesCapital gains on both assets and liabilities

At disposal of assetsAt disposal of assets:: Capital gain / loss taxable at normal rate Capital gain / loss taxable at normal rate

on difference between on difference between market valuemarket value and and book valuebook value

May 2003May 2003

Mergers & ReorganizationsMergers & Reorganizations

Capital Gains / LossesCapital Gains / Losses– Depreciation BasisDepreciation Basis– Transfer of Provisions / ReservesTransfer of Provisions / Reserves

Transfer of Loss Carry ForwardTransfer of Loss Carry Forward

Liquidation ProceedsLiquidation Proceeds

May 2003May 2003

ReorganizationsReorganizations(covered by EU Merger (covered by EU Merger Directive)Directive) Transfers of AssetsTransfers of Assets

Exchanges of SharesExchanges of Shares

MergersMergers

DivisionDivision

May 2003May 2003 BeforeBefore AfterAfter

Sh RSh RSh TSh T Sh RSh R Sh TSh T

TransferringTransferringentityentity

ReceivingReceivingentityentity



Transfer of AssetsTransfer of Assets


Sh AGSh AGSh ADSh AD Sh AGSh AG Sh ADSh AD

AcquiringAcquiringentityentity

AcquiredAcquiredentityentity

AcquiringAcquiringentityentity

AcquiredAcquiredentityentity

Exchange of SharesExchange of Shares

May 2003May 2003

MergersMergers

into an existing companyinto an existing company

into a newly established companyinto a newly established company

into the parent companyinto the parent company

May 2003May 2003BeforeBefore AfterAfter

Sh RSh RSh TSh T Sh RSh R Sh TSh T




MergerMerger


Sh TSh T Sh TSh T




DivisionDivision

May 2003May 2003

EU Merger DirectiveEU Merger Directive

Introduction of cross-border Introduction of cross-border mergers within EU Member Statesmergers within EU Member States

Loss carry-over facility extended – Loss carry-over facility extended – if available – to cross-border if available – to cross-border mergersmergers

Roll-over-relief for capital gains Roll-over-relief for capital gains realizedrealized

May 2003May 2003

EU Merger DirectiveEU Merger Directive(problem areas)(problem areas)

Issuance of new shares /Issuance of new shares /Transfer of existing sharesTransfer of existing shares

Omission of certain valuation rulesOmission of certain valuation rules– Shares received as consideration (both States)Shares received as consideration (both States)– Shares / Assets received in State of residenceShares / Assets received in State of residence

Interpretation issuesInterpretation issues– 10% cash payment10% cash payment– Anti-avoidance ruleAnti-avoidance rule

May 2003May 2003

Transfer of AssetsTransfer of Assets(valuation issues)(valuation issues)

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

AA BB

CCDD

May 2003May 2003

Exchange of SharesExchange of Shares(valuation issues)(valuation issues)

Sh ADSh AD

AcquiringAcquiringCompanyCompany

AcquiredAcquiredCompanyCompany

EE FF

GGHH

May 2003May 2003

MergerMerger(valuation issues)(valuation issues)

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

Sh TSh T Sh RSh R

FFEE

BB

EE

AA

May 2003May 2003

Omission of Valuation RulesOmission of Valuation Rules

Shares received in consideration Shares received in consideration [[company T or shareholder ADcompany T or shareholder AD]](a) in State of residence [(a) in State of residence [DD]](b) in State of source [(b) in State of source [CC] or [] or [FF][][HH]]– Nonresidents (corporate entities) exemptNonresidents (corporate entities) exempt– Tax treaty protectionTax treaty protection

Shares / assets received in State of Shares / assets received in State of residence [residence [company R or AGcompany R or AG] [] [BB] or ] or [[GG]]– (Participation) exemption(Participation) exemption

May 2003May 2003

FranceFrance

Prior approval of MoE&F in several casesPrior approval of MoE&F in several cases

Reporting requirementsReporting requirements

Revaluation gain [Revaluation gain [company Rcompany R]]

Business purpose test / 5 years holding Business purpose test / 5 years holding periodperiod

May 2003May 2003

GermanyGermany

““BuchwertverknBuchwertverknüpfung”üpfung”i.e. double tax claim on both assets i.e. double tax claim on both assets transferred and shares receivedtransferred and shares received

PE merger questionablePE merger questionableCondition for merger = German Condition for merger = German unlimited tax liabilityunlimited tax liability

May 2003May 2003

The NetherlandsThe Netherlands

Motivated by valid commercial Motivated by valid commercial reasonsreasons– RestructuringRestructuring– Rationalization of business activitiesRationalization of business activities

Same tax regime requirementSame tax regime requirement

3-years holding period3-years holding period

May 2003May 2003

United KingdomUnited Kingdom

No implementation of No implementation of Merger / DivisionMerger / Division Special EU provisions:Special EU provisions:

(a) (a) Transfers of AssetsTransfers of Assets– ‘‘ownership’ test (Sec. 343 ICTA)ownership’ test (Sec. 343 ICTA)– ‘‘bona fide commercial transaction’ bona fide commercial transaction’

requirementrequirement

(b) (b) Exchanges of SharesExchanges of Shares– Limited to Secs. 126-138 TCGALimited to Secs. 126-138 TCGA– ‘‘business purpose’ test (Sec. 139-5 TCGA)business purpose’ test (Sec. 139-5 TCGA)

May 2003May 2003





Intercompany Dividends (EU Parent-Subsidiary)Intercompany Dividends (EU Parent-Subsidiary)



May 2003May 2003

Corporate LiquidationsCorporate Liquidations

Last opportunity to tax shareholders on Last opportunity to tax shareholders on undistributed profitsundistributed profits

Dividend distributionDividend distribution

Occasion to tax shareholder on Occasion to tax shareholder on appreciation in value of his investmentappreciation in value of his investment

Capital Gain on sharesCapital Gain on shares

May 2003May 2003

Corporate LiquidationsCorporate Liquidations(dividend distribution)(dividend distribution)

Liquidation paymentsLiquidation paymentsLess: nominal value of sharesLess: nominal value of shares

(or – if higher)(or – if higher)

acquisition price of sharesacquisition price of sharesDividend distributionDividend distribution

Difference between acquisition price and Difference between acquisition price and nominal value of shares might be treated as nominal value of shares might be treated as Capital LossCapital Loss

comparative corporate income taxes in europe prof. dr. geerten m.m. michielse technical assistance...

Documents

lithuanian profit tax

cze advanced profit

ltu advanced profit

final withholding slide

eu parent company

corporate level dds

dividend distribution

corporate level apts