European Tax Group Meeting

Rajesh SharmaSmith & Williamson, London

Amsterdam – 6 February 2009Amsterdam – 6 February 2009

Taxation of Foreign Profits

• Dividend exemption (for large and medium sized companies)

• Interest cap for large companies• Anti-avoidance measures• Reform of the controlled foreign company

rules• Treasury consents

Dividend Exemption

• Dividends including portfolio exempt from taxation (UK and non UK dividends)

• Exemption not available where the foreign dividend attracts a tax deduction or dividends where the payer achieved a reduction of UK tax.

• Subject to anti-avoidance provisions covers:– Dividends from controlled subsidiary– Dividends from non-redeemable ordinary shares– Dividends from portfolio holdings

Interest cap for large companies

• Restriction of interrest relief in the UK where UK borrowings from related parties exceed the net external finance cost of the non-UK members of the group.

Disallowed Amount =

• Large company > 250 employees and turnover > €50m or assets > €43m

• Finance costs include derivatives, hedges, finance leases and foreign exchange costs.

Total gross intra-group

finance costs in the

UK

Net external finance costs

(excl. UK expenses) of

worldwide group

Compensating adjustments for

taxable receipts

less less

Interest cap for large companies – cont.

• Interest cap does not apply to banks and insurance companies.

• Interest cap applies to borrowings from related companies.

• ‘Gateway test’ for groups where the intra-group interest deduction of the UK group is less than half the total external interest cost.

• Overall, very complex rules!

Anti-Avoidance rules

• Loan relationships that have an unallowable purpose to be ignored for tax purposes.

• Loans where “the main” purpose for the loan is for tax avoidance purposes.

• Normally, loans on commercial terms should not fall within these provisions.

Controlled Foreign Companies

• Certain exemptions from CFC attribution to be reformed as a result of the new rules.

• Exempt activities test for holding or superior holding companies to be eliminated.

• Further reform anticipated over the next 24 months in light of the decisions in Cadburys and Vodafone cases at the ECJ.

Treasury Consents

• To be replaced with quarterly reporting requirements for transactions/events in excess of €100m.

• Sanctions for failure would be monetary rather than criminal under the current rules!

Initial impact

• Participation Exemption in Europe v UK rules?• Simplification of the DTR rules.• No need to structure capital redemptions or lend cash back

to UK parent. • Withholding taxes may result in tax and cashflow

disadvantages until tax treaties are re-negotiated. This will take some time.

• Depends on the CFC reform package over next 24 months.

Rajesh Sharma Rajesh Sharma Tel: 00 44 (0)20 7131 4181Tel: 00 44 (0)20 7131 4181

Email: Email: rajesh.sharma@smith.williamson.co.uk