spotlight on foreign taxes - europe · 2019 u.s. cross-border tax conference may 14 – 16, 2019...

2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019

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Spotlight on Foreign Taxes – Europe

2© 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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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

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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.




Country planning


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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



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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




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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




Country planning


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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




Country planning


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Country planning


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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

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The following are common structures :

IP Owner

Related Parties

3rd

Parties

IP Owner

3rd

Parties

R&D branch

?

Questions

Thank you

© 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

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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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Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

spotlight on foreign taxes - europe · 2019 u.s. cross-border tax conference may 14 – 16, 2019...

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