2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019
tax.kpmg.us
Spotlight on Foreign Taxes – Europe
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The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Notices
AgendaForeign country planning: The U.S. perspective
First things first: Manage double taxation
Next step: Tax grouping & patent boxesand R&D
Country planning
Discussion/questions
01
02
03
04
05
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Today’s presentersName Title Firm/Company Name EmailAroen Rambhadjan Partner KPMG Meijburg & Co [email protected]
Sarah Churton Partner KPMG LLP (U.K.) [email protected]
Philipp Reer Partner KPMG AG Wirtschaftsprüfungsgesellschaft [email protected]
Patrick Seroin Partner KPMG Avocats [email protected]
Foreign country planning:The U.S. perspective
Setting the landscape
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The United State has a worldwide tax system
—Annual determination of whether and how offshore income is taxed in the United States- GILTI is very broad; territoriality is very limited- More non-U.S. income is subject to immediate U.S. tax at
varying statutory and effective rates
—Foreign tax credits remain the primary mechanism to address double taxation
U.S. tax reform prompts foreign ETR planning
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More chances for foreign taxes to be a permanent cost
—Lower U.S. tax rates result in more “excess” foreign taxes from higher-tax jurisdictions
—Increased risk of double taxation- Numerous new and old limitations on the foreign tax credit- Mismatches between U.S. and non-U.S. timing rules
can strand tax credits
U.S. tax reform prompts foreign ETR planning, cont.
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The best way to manage double taxation is not paying foreign taxes
—In light of BEPS/ATAD, there may be less reliance on offshore cross-border financing and IP planning and more reliance on:
- In-country planning
- Incentives
—Focus on both income and withholding taxes
U.S. tax reform prompts foreign ETR planning, cont.
AgendaForeign country planning: The U.S. perspective
First things first: Manage double taxation
Next step: Tax grouping & patent boxesand R&D
Country planning
Discussion/questions
01
02
03
04
05
First things first:Manage double taxation
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Hybrids
Implementation of anti-hybrid rules requires restructuring within U.S.-EU structures to manage double taxationWhat if:—EU = UK—EU = Germany—EU = France—EU = Netherlands
From 2020 ATAD 2
U.S.
EU 1
EU 2
Interest
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CFC
Implementation of CFC rules requires restructuring to manage double taxationEffect on structure for:—Germany —France—Netherlands—UK—U.S.
UK
NL
FR DE
U.S.
Cayman Samoa
Interest
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Withholding tax – Europe
Two landmark decisions in CJEU Case Law (03/26/2019) for Parent-Subsidiary Directive and Directive on Interest and Royalties :Place of establishment of the ultimate parent irrelevant even if tax treaty provided for a 0% rate concluded with France. Indication of the existence of an arrangement intended to obtain improper entitlement to the exemption:
1. Very soon after their receipt, all or almost all dividends are passed on by EU HoldCo to U.S.
2. Sole activity of the EU HoldCo is the receipt of dividends and their transmission to the U.S.
3. Absence of actual economic activity: analysis of the management of the company, balance sheet, structure of its costs and expenditure actually incurred, staff and premises and equipment
U.S.
UK / NL
FR DE
Dividend distribution
Dividend distribution
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Withholding tax – France
Exemption from French WHT on dividends can be sought on basis of EU Parent/Sub Directive Case Law: Focus on Place of Effective Management— Interposed NL HoldCo did not have its place
of effective management in the Netherlands— “Place where individuals exercising the most
elevated functions make strategic decisions, which determine the conduct of the overall business of the entity”
— Benefit from WHT exemption denied
Revisit Holding Structures
U.S.
NL
FR
Dividend distribution
Dividend distribution
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Withholding tax – Germany
WHT optimized repatriation via share buyback (short-term approach)1. GmbH acquires its own shares leading
to a purchase price payment instead of a dividend to ForCo.
2. Purchase price payment is not subject to WHT.
3. Suitable (one-time effect) option for e.g. a UK Corp as an investor (in reference to the Brexit).
4. Can be combined with a debt push-down.
ForCo
GmbH
GermanyForeign country
Acquisition of own shares
Purchase price without WHT
AgendaForeign country planning: The U.S. perspective
First things first: Manage double taxation
Next step: Tax grouping & patent boxesand R&D
Country planning
Discussion/questions
01
02
03
04
05
Tax grouping
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Tax grouping within the EU
Vertical and horizontal tax grouping—FR—UK—NL
EU FR 2 FR 3
U.S.
EU
FR 4
EU
FR 1
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Tax grouping – Germany
“Worst Case” Structure Tax inefficiencies1. No full tax consolidation.
2. Unused debt capacity available.
3. Profit repatriations through UK Ltd. triggers WHT after Brexit.
4. Royalty payments to the U.S. Inc. may be partially non-deductible in Germany if FDII is a harmful IP Box.
-
BV
Inc
GmbH (1)
Germany
Ltd
U.S.
EU
LossGmbH
(3) Profit
IP
GmbH (2)
Royalty payment
+
+
Profit
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Tax grouping – Germany
“Tax designed” structure chart Tax benefits1. Full tax consolidation in Germany.2. NOLs of GmbH (1) may also shelter
profits from GmbHs (2) & (3).3. Transfer of GmbH (3) can be used
for a debt push down into Germany. No purpose test is required. No interest WHT.
4. No WHT leakage for dividends paid to Dutch BV subject to anti treaty shopping rules.
-
BV
Inc
GmbH (1)
Germany
Ltd
U.S.
EU
Loss
GmbH (3) Profit
IP
GmbH (2)
Royalty payment
+ +Profit
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Cross-border utilization of losses
EU Co(loss making)
UK Co (profitable)
UK1. EU Co has exhausted all
possibilities of utilising the losses in its home state
2. There is no possibility for EU Co’s losses to be taken into account in its home state for future periods
Dutch Co (profitable)
French Co (profitable)
>75% holding
Loss surrender
Netherlands1. EU Co has exhausted all
possibilities of utilising the losses in its home state
2. Liquidation must be completed (or PE must be terminated)
France Applicable following Marks & Spencer case law
EU Co(loss making)
EU Co(loss making)
Loss surrender
Loss surrender
Patent boxes and R&D
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EU patent box matrix
Country Corporatetax rate
Patent Box rate Qualifying IP Acquired IP Year of
introductionNexus
approach
Netherlands 25% (20.5%) 7% Self-developed +patent software
Not in general
2007(Renewed in
2017)Yes
UK 19% ( 17%) 10% Patents or certain rights Possible
2013(Renewed in
2016)Yes
France 34.43% ( 25.83%) 10%
Patent and copyrighted
Software
Subject to conditions
1980’s (Renewed in
2019)Yes
Other EU countries with patent box regimes
• Belgium• Cyprus• Hungary
• Ireland• Italy• Luxembourg
• Malta• Portugal• Spain
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R&D tax credits
Benefitting from R&D credits in:France (CIT)— 30% up to €100m in basis (and 5% above)— offsetable against CIT chargeUK (CIT)— ‘RDEC’ of 12% of qualifying R&D
expenditure— Science and technology (software)— Qualifying categories of costsNetherlands (wage tax)— ‘WBSO’ of 32% up to 350k and 16% above
that discount on wage tax— R&D activities performed by employees
U.S.
IP Co
EU
R&D service
AgendaForeign country planning: The U.S. perspective
First things first: Manage double taxation
Next step: Tax grouping & patent boxesand R&D
Country planning
Discussion/questions
01
02
03
04
05
Country planning
27© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
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Financing planning post ATAD - general
1. Interest free loans
2. Territorial regimes
3. NID regimes
4. Loss planning
Non-US HoldCo
U.S.
NL / UK
Interest bearing loan
Non-Interest bearing loan
FinCo TBD
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Financing planning – Germany (1)
Enhanced debt capacity -Deemed “interest” deduction—Substitution of currently
disallowed interest expenses or insertion of new “interest expenses”.
—German Holding’s “deemed deduction” may not be affected by earning stripping rules.
—Instead of German FinCo, a ForCo may be used.
Inc.
GermanyU.S.
German Holding(Tax Group
Head)
German Subsidiary
(Tax Group Sub)German FinCo
(1) Arm‘slength
loan(€50m @5%)
(2) Loans €50m @ 0.1%
(3) Constructivedividend @4.9% (95% tax free)
(4) Deemed deduction @4.9% not qualifying asinterest
-
+
+
-
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Financing planning – Germany (2)
WHT optimized repatriation & debt push-down via TopCo KG as holding company (long-term approach)— Interposing of a German KG (partnership) between
GmbH and ForCo and additionally, implementing a tax group between the KG and GmbH. (Alternative: conversion of existing GmbH)
— Repatriation from partnership is not subject to WHT according to domestic law.
— KG requires sufficient operational business activities and a place of management in Germany.
— Suitable option for perpetual profit repatriation, e.g. if the parent company is a UK Co (in reference to the Brexit), or if the LoBclause cannot be satisfied.
ForCo
GmbH
100%
KG
Germany
Foreign countryRepatriation without WTH
Acquisition financing (external or I/C)
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Use of participation exemption to avoid CFC - Netherlands
2. Stop the bleeding
4. Indirect PE exclusion
Convert CFC into an indirect PE, which is excluded from Dutch CFC rules
Non-CFC
NL
CFC
CFC income taxed in NL
CFC
NL
1. Easy escape
Unless distributed within FY
CFC
NL
Change tax residency to a non-
CFC jurisdiction
Non-CFC
3. Transfer CFC income
CFC
NL
Transfer only the CFC type income to a
non-CFC jurisdiction
Non-CFC
CFC
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Innovation hub
MV IP step-up
AmortisationPatent box
R&D credits Treaties
Funding
WHT
U.S.
EU IP Co EU / RoW
CSA
License
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R&D models post BEPS action 5
3rd
PartiesRelated Parties
IP Owner
Under OECD compliant IP regimes, IP benefits are diluted by:—R&D subcontracted to related parties—Expenditure on the acquisition of IP rights
?
The following are common structures :
IP Owner
Related Parties
3rd
Parties
IP Owner
3rd
Parties
R&D branch
?
Questions
Thank you
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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