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International Tax NewsEdition 17June 2014

WelcomeKeeping 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.

Tony Clemens Global Leader International Tax Services Network T: +61 2 8266 2953 E: [email protected]

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In this issue

Administration & case law EU LawProposed legislative changesTax legislation Treaties



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Tax Legislation

Peter Collins David EarlMelbourne MelbourneT: +61 3 8603 6247E: [email protected]

T: +61 3 8603 6856E: [email protected]

Tax LegislationAustralia

Reform of the thin capitalisation regime and amendments to the foreign dividend exemption

The Government has released exposure draft legislation which proposes to give effect to a number of international tax reforms that originated in last year’s Federal Budget.

Specifically, this includes proposed changes to the thin capitalisation rules and to the tax exemption for foreign dividends. The following proposed changes are intended to apply from as early as July 1, 2014, and would:

• reduce the safe harbour debt limit for general entities from 75% to 60% of adjusted Australian assets (from 3:1 to 1.5:1 on a debt-to-equity basis)

• reduce the safe harbour debt limit for non-bank financial entities from 20:1 to 15:1 on a debt-to-equity basis

• increase the safe harbour capital for banks from 4% to 6% of the risk weighted assets of their Australian operations

• reduce the worldwide gearing ratio from 120% to 100% and make it available to qualifying inbound investors

• increase the de minimis threshold from 250,000 Australian dollars (AUD) to AUD 2 million of debt deductions, and

• remove the exemption for dividends paid on legal form shares that are classified as debt for Australian tax purposes (e.g. certain mandatorily redeemable preference shares), and extend the exemption to non-share equity (e.g. certain convertible notes) and dividends received indirectly via trusts and partnerships.

PwC observation:The tightened thin capitalisation rules are likely to affect most foreign companies with Australian investment and we expect this will require many companies to review their capital structure in the next few months.



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Renaud Jouffroy Emmanuelle VerasParis MarseilleT: +33 1 56 57 42 29E: [email protected]

T: +33 4 91 99 30 36E: [email protected]

France

Draft guidelines on new hybrid mismatch rules released

The French tax authorities (FTA) released draft guidelines regarding French legislation enacted on December 30, 2013, targeting hybrid mismatch arrangements on April 15, 2014.

Under the new rule, interest deductions are allowed only if the French borrower demonstrates that the lender is, for the current tax year, subject to corporate tax on the interest income that equals 25% or more of the corporate tax that would be due under French tax rules.

When the lender is not domiciled or established in France, the corporate tax that would be due under French standard tax rules is deemed to be the corporate tax, increased according to the FTA by the additional surtaxes, if applicable, that the lender would have been subject to if it had been a French tax resident. Therefore, the minimum local tax rate for purposes of this test would range from 8.33% to 9.5% depending whether the lender is subject to additional surtaxes.

The draft guidelines provide that the test addresses only taxation of the gross interest income regardless of any expenses that would reduce the lender’s taxable income. The test thus focuses on specific local rules that may reduce or limit the amount of taxable interest.

The draft guidelines confirm that the test applies only to gross interest and not to the global effective taxation of the lender. A lender that is in a loss position can meet the test if it demonstrates that the gross interest income is effectively included in its tax base.

The analysis of the lender’s tax rate must be available for each tax year in which the borrower claims an interest deduction under French rules. In case of a discrepancy between the tax year during which the borrower claims a deduction and the tax year during which the income is included in the lender’s taxable income for example, when there is a difference in accounting or tax rules between countries the interest expense will not be deductible. However, the borrower may take an interest deduction in the later tax year during which the interest income is effectively included in the lender’s taxable income.

The draft guidelines do not address whether interest that would be disallowed as a result of the new hybrid mismatch rule should be treated as a deemed distribution and possibly be subject to French dividend withholding tax (WHT) and 3% distribution tax.

PwC observation:The new rule applies retroactively to interest booked during tax years ending on or after September 25, 2013. Multinational enterprises should review their existing financing structures involving French entities as well as the documentation required to demonstrate that the gross interest income is subject to a statutory rate of at least 25% of the standard French tax rate.

Tax Legislation



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Proposed Legislative Changes

Proposed legislative changesAustralia

Australian government announces 2014-15 Federal Budget

On February 26, 2014, House Ways and Means Committee Chairman Dave Camp released the ‘Tax Reform Act of 2014,’ a discussion draft for comprehensive tax reform of the Internal Revenue Code which would lower the corporate tax rate from 35% to 25% and which includes several international tax proposals.

On May 13, 2014, the Australian government announced the 2014-15 Federal Budget.

Of relevant note, the Government announced that:

• The Government will amend the integrity measures for foreign resident capital gains tax announced in last year’s Federal Budget. Exposure draft legislation has been released.

• It has not made a decision on a targeted anti-avoidance provision in relation to interest deductions for foreign investments and is still seeking advice on this matter.

The Government also announced that it will not proceed with certain changes to the multiple entry consolidated group (MEC group) provisions announced by the previous government in last year’s Federal Budget.



PwC observation:The exposure draft legislation in relation to the foreign resident capital gains tax (CGT) significantly enhances the scope of the asset duplication measure. With regard to the announcement relating to interest deductions for foreign investments, despite previously indicating that a targeted anti-avoidance measure would be introduced, the Government has not yet made a decision on this and is seeking further advice. The Government has not indicated expected timing for their decision or the proposed operative date (originally stated to be July 1, 2014).



Australia

Investment Manager Regime exposure draft released

The Australian government has released an exposure draft for the third and final measure of the Australian Investment Manager Regime (IMR).

The measures, if enacted, would extend the existing exemption from Australian income tax to a wider range of portfolio and some non-portfolio investments. The exemption would be available only to foreign funds resident in countries with which Australia has an effective exchange of information agreement.

The exposure draft also contains amendments to the first two elements of the IMR, including modifications to the widely held test and closely held test (now part of the widely held test), as well as other technical amendments.

PwC observation:Foreign funds should reconfirm that they qualify as IMR foreign funds and which of their investments are protected. Based on the exposure draft, not all funds will qualify.



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Franco Boga Pasquale A Salvatore Alessandro MarzoratiMilan Milan MilanT: +39 02 91605400E: [email protected]

T: +39 02 91605810E: [email protected]


Italy

Italian government to raise WHTs rate on financial income from 20% to 26%

The new Italian government has made clear its intention to increase the tax rate on financial income, from the current 20% to 26%.

The increase should be effective from July 1, 2014. Dividends, interest on loans, and capital gains will be affected on a cash basis.

What is going to change

• Domestic withholding taxes (WHT) on interest paid after July 1, 2014, will be raised from 20% to 26%; however, most bond interest will be affected on an accrual basis.

• Tax on capital gains on the sale of a non-qualified participation derived after July 1, 2014, will be raised from 20% to 26%. A participation is qualified if exceeding either 20% voting rights or 25% of capital of company not listed in a regulated market (2% and 5% for listed companies); a participation is non-qualified if not exceeding any of the above thresholds.

What is NOT going to change

• Dividend WHT under a treaty, European Union (EU) parent/subsidiary directive or EU primary 1.375% regime will not be affected.

• Interest WHT under a treaty or EU interest & royalty directive regime will not be affected.

• Capital gains on the sale of a qualified participation are not going to be affected.

• Capital gains on the sale of a non-qualified participation, which are exempted under domestic law or under a treaty, will not be affected.

• Income deriving from Governmental bonds issued by Italy and other countries granting an exchange of information will not be affected.

• The WHT on interest on such securities would be 12.5%.

PwC observation:In light of the foreseen WHT rate increase on financial income, it will be crucial for non-resident parties to review their investment structure to duly address the impact of such prospected law changes.




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New Zealand

Changes to the thin capitalisation rules

The Finance and Expenditure Committee has reported back to the New Zealand Parliament on the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill, which was introduced in November 2013.

The bill includes proposed changes to strengthen the New Zealand thin capitalisation rules.

Proposed changes to the thin capitalisation regime are:

• extension of the ‘inbound’ thin capitalisation rules to situations where a company is controlled by a group of non-residents holding 50% or more of the shares in a company, or who control the company by any other means, and appear to be ‘acting together’ in relation to the New Zealand entity

• exclusion of debt linked to an owner of the worldwide group when calculating the worldwide group debt percentage

• extension of the rules to more trusts, and

• exclusion of increases in asset values arising from the transfer of assets between group entities when calculating the value of assets for thin capitalisation purposes.

PwC submitted on several proposals in relation to the proposed changes to the thin capitalisation rules, including a successful submission suggesting that the asset uplift proposals should only apply prospectively from the date the rules apply.

Once enacted, the new rules will apply from the 2015-16 income years.

PwC observation:It is pleasing to see that officials have taken submissions on board and refined the rules, particularly in relation to the asset uplift proposal, to provide more certainty for taxpayers. The long lead in time will give taxpayers sufficient time to plan and prepare for the implications of the new rules.

Elizabeth A Elvy Nicola J Jones Stewart McCullochAuckland Auckland AucklandT: +64 93 558683E: [email protected]






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Tim AnsonWashingtonT: +1 202 414 1664E: [email protected]

United States

House Ways and Means approves permanent extension of CFC look-through, active financing; Senate Finance reports out extenders bill

On April 29, 2014, the House Ways and Means Committee approved six separate, bipartisan bills to permanently extend certain expired business tax provisions.

These bills address two Section 954 subpart F exceptions - ‘look-through’ treatment for certain payments between controlled foreign corporations (CFCs) (HR 4464) and the exclusion for active financing income (HR 4429) - as well as the Section 41 research and experimentation credit (HR 4438) and three matters related to small businesses and S corporations. On the same day, the Senate Finance Committee reported out to the full Senate its temporary tax extender bill (S 2260).

The Finance Committee bill would extend the two subpart F exceptions and more than 50 other expired and expiring business and individual provisions, including the research credit, through the end of 2015. The Joint Committee on Taxation (JCT) staff has estimated that the S 2260 package would reduce federal revenues by approximately 85 billion United States dollars (USD) over the ten-year budget window.

The additional Ways and Means bills would increase Section 179 ‘small business’ expensing limits (HR 4457), reduce the recognition period for S corporations’ built-in gains (HR 4453), and adjust the basis of S corporations’ stock for charitable contributions of property (HR 4454). The Ways and Means Committee approved its six permanent ‘tax extenders’ without revenue offsets. The JCT staff has estimated that the bills would reduce federal revenues in the aggregate by USD 310 billion over ten years.

Senate Majority Leader Harry Reid has said he hopes to schedule a Senate floor vote in May on S 2260. House Majority Leader Eric Cantor has announced that the full House will vote in May on HR 4438 (the research credit bill), with additional votes in the months ahead on the other tax extender bills.

PwC observation:Congress will need to reconcile differences between the tax extender bills approved by the House Ways and Means Committee and the Senate Finance Committee before enacting final legislation. In the past, Congress has generally passed temporary two-year extensions similar to S 2260. It remains unclear when Congress may take final action to address tax extenders legislation, although such action may be unlikely before the November 2014 elections.




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Administration & Case Law

Administration and case lawAustralia

Appeal allowed in Commissioner of Taxation vs. Resource Capital Fund III LP

The Full Federal Court allowed the Commissioner’s appeal in the case Commissioner of Taxation vs. Resource Capital Fund III LP (RCF).

In a joint decision, the Full Court held that the United States-Australia double tax treaty (DTT) did not preclude Australia from taxing RCF (a limited partnership) on the gain made on disposal of shares in an Australian mining company, and that for the purpose of applying Australia’s non-resident capital gains tax exemption rules in Division 855 (particularly, relating to the principal asset test), the assets should be valued as though they are to be sold as a bundle simultaneously to the same ‘hypothetical’ buyer, not on a stand-alone basis. It remains to be seen whether RCF will seek special leave to appeal to the High Court of Australia.

Prior to this finding, the Government announced legislative amendments that would treat mining, quarrying and prospecting information, and goodwill together with mining rights as real property for the purposes of the ‘principal asset test’ which is relevant in working out whether a foreign resident has an indirect Australian real property interest and is subject to capital gains tax on disposal of taxation Australian property. The Government has indicated that it will await the conclusion of the RCF litigation to determine whether, and in what form, changes are needed.



PwC observation:The key observation here is that limited partnerships treated as fiscally transparent in the resident investor’s treaty country and deemed to be companies under Australian law may now be subject to primary tax in Australia on gains derived from Australian sources. Treaty resident partners in the limited partnership may be able to seek a refund from the Australian tax authority on their individual share.



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Ken Buttenham Maria LopesToronto TorontoT: +1 416 869 2600E: [email protected]


Canada

Developments regarding CFC anti-avoidance provision

On April 23, 2014, the Federal Court of Appeal (FCA) released an important decision on the scope of a specific anti-avoidance provision found in paragraph 95(6)(b) of the Income Tax Act (Canada) that governs the tax treatment of foreign affiliates (FAs) of Canadian corporations. When this provision applies, the subject non-resident corporation may be determined not to be a FA of the Canadian taxpayer when it would otherwise qualify as such.

In turn, its application can result in a denial of a deduction taken by the Canadian taxpayer for dividends received from the subject non-resident corporation.

Although the earlier decision by the Tax Court of Canada (TCC) had found in favour of the taxpayer, it was problematic as it generally supported the Canada Revenue Agency’s (CRA’s) view that paragraph 95(6)(b) should in fact be interpreted as a very broad anti-avoidance rule.

The FCA upheld the decision for the Canadian taxpayer but came to this view by applying a very different interpretation of the rule than had been adopted by the TCC. The FCA found that the purpose of this specific anti-avoidance provision is to address the manipulation of share ownership of a non-resident corporation to meet or fail the relevant tests for FA or controlled FA status, and was not intended to act as a broad general anti-avoidance rule. The FCA also rejected the view that in interpreting the provision, words could be read into the rule that permitted an entire series of transactions to be considered in discerning a tax avoidance purpose that is not the specific target of paragraph 95(6)(b).

PwC observation:The FCA reasoning is consistent with principles of statutory interpretation developed by the Supreme Court of Canada and is generally consistent with the long-held views of many Canadian tax practitioners. At this time, it is unclear whether further leave to appeal will be sought by the Crown. The CRA is currently considering the implications of this decision to files under audit and future assessing practice. If this decision stands, it should provide taxpayers with more certainty with respect to the limits of acceptable tax planning involving FAs. Taxpayers currently in discussions with the CRA relating to paragraph 95(6)(b) issues should contact their advisors and the CRA to understand how this decision will affect them.




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Netherlands

Landmark Supreme Court decisions regarding the fiscal qualification of funds as debt or equity

The Dutch Supreme Court has decided two cases concerning the fiscal qualification of funds as debt or equity.

These two judgments are important because the Supreme Court confirms its course adopted in previous case law, stating that the civil form of funding is in principle decisive for its fiscal qualification. In addition, it is important that making use of the freedom of choice taxpayers have when funding a company in which they participate, does not violate the aim and purpose of the law (fraus legis).

In its judgments, the Supreme Court underlined two basic principles. As a first basic principle, the Supreme Court decided in both cases that for the determination whether funding of a subsidiary by its parent company is to be considered a loan or a capital contribution for tax purposes the civil form is, in principle, decisive. Exceptions to this main rule may, under certain circumstances, be applicable.

Secondly, the Supreme Court considered in both cases that it is inherent in the system of the law that taxpayers have a free choice in the way they fund a company in which they participate. Making use of this freedom of choice does not imply acting in violation of the aim and purpose of the law.

The first case dealt with a debt restructuring by a banking consortium where the restructured funding was provided through a participation in the capital of the intermediate holding company. The funding bore several similarities to a loan, but was yet to be considered risk capital. The (subordinated) creditors would prevail in case of winding up of the company. The Supreme Court therefore decided that there was no room for an exception to the main rule. The funding qualified as equity.

In the second case, there was a conversion of a long-term loan into Australian redeemable preference shares (RPS). The RPS were taken into account as equity for purpose of the Dutch participation exemption. The Supreme Court decided that the features of the Australian RPS also occur with cumulative preferential shares with limited voting rights issued by Dutch companies. As these Dutch cumulative preferential shares qualify as shares for the participation exemption, this also applies to the Australian RPS.

PwC observation:The decisions are welcomed by taxpayers, since current and future planning possibilities with respect to such financial instruments remain intact.

Jeroen Schmitz Ramon Hogenboom Pieter RuigeAmsterdam Amsterdam AmsterdamT: +31 8879 27 352E: [email protected]






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Jorge Figueiredo Catarina NunesPortugal PortugalT: +35 1213 599 618E: [email protected]


Portugal

Certification of tax residency of partnerships under a tax treaty

On April 14, 2014, the Portuguese tax authorities published two rulings regarding the certification of tax residency of partnerships under the UK tax treaty.

These rulings were issued following the denial by the UK tax authorities in certifying the Portuguese standard form 21-RFI (certificate of residence under a tax treaty) in respect of UK partnerships.

The Portuguese tax authorities have ruled that partners of a partnership which are resident and subject to tax in the contracting state are the effective beneficiaries of the income obtained through partnerships with legal personality (limited liability partnerships) and without legal personality (ordinary partnerships and limited partnerships).

To benefit from the provisions of the applicable tax treaty (with the UK, in both cases at hand), partners are required to present the following documents:

• A standard form 21-RFI.

• A list of all partners/effective beneficiaries (resident and non-resident).

• A statement that the beneficiaries are partners of the partnership,and respective ownership percentage (statement to be issued by the tax authorities or by the taxpayer itself).

• A certificate stating that the partnership itself is not a resident in the other state under the tax treaty (in case of limited liability partnerships), and which partners of the list provided are resident and subject to tax in that state (as only those will be entitled to the benefits of the tax treaty).

PwC observation:This ruling is quite important because taxation of non-resident tax transparent partnerships is poorly ruled and, to a certain extent, because it in essence shifts the tax residency treaty certification requirements from the partnership to each of its partners. This can be more burdensome, depending on the number of partners.

Peter Cussons Chloe PatersonLondon, Embankment Place London, Embankment PlaceT: +44 207 804 5260E: [email protected]


United Kingdom

CJEU holds consortium relief link company provisions to be in breach of EU law

The Court of Justice of the European Union (CJEU) published its judgment in the case of Felixstowe Dock and Railway Company Ltd and Others vs Her Majesty’s Revenue & Customs (HMRC) (C-80/12) on April 1, 2014.

The CJEU held that the former UK consortium relief requirement that a link company (a company which is both a member of the group and a member of the consortium) be either UK resident or chargeable to UK corporation tax is an unlawful restriction of an European Union (EU)/European Economic Area (EEA) link company’s freedom of establishment, irrespective of the fact that there are third (non-EU/EEA) country companies in the chain of ownership of both the link company and the claimant UK companies, and that the ultimate parent of the group is also a third country company.

PwC observation:This case now returns to the UK Upper Tribunal to determine how to apply the CJEU decision to Felixstowe’s facts.

Corporate groups with similar structures should now consider the implications for them and consider whether they should be making claims for relief if they have not already done so.




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United States

IRS significantly modifies the taxation of cross-border triangular reorganisations

On April 25, 2014, the Internal Revenue Service (IRS) issued Notice 2014-32 significantly changing the results of cross-border triangular reorganisations.

Historically taxpayers have used cross-border triangular reorganisations to integrate an acquired target corporation. The IRS, in notices in 2006 and 2007, temporary regulations in 2008 (former Reg. sec. 1.367(b)-14T), and final regulations in 2011 (Reg. sec. 1.367(b)-10), has issued rules imposing potential taxation in certain cross-border triangular reorganisations.

For example, if a foreign corporation (S) transferred property to its US corporate owner (P) in exchange for P stock or securities, and then used the P stock or securities as currency to acquire the stock or assets of a target corporation (T) in a triangular reorganisation, the rules create a deemed Section 301(c) distribution from S to P immediately before the P stock or securities acquisition in the amount of the property used to acquire the P stock or securities. Without the deemed distribution, the IRS believes these triangular reorganisations facilitate inappropriate repatriations of foreign earnings without dividend taxation. In inbound structures where P is foreign and S is domestic, the IRS is concerned that such transactions facilitate movements of cash without the appropriate imposition of US withholding tax (WHT). Based on these concerns, the government issued the aforementioned notices and regulations implementing the deemed distribution and related rules.

Notice 2014-32 keeps the deemed distribution construct intact, but provides that the government will issue new regulations, generally effective from April 25, 2014, onwards that will significantly change the ancillary consequences of the rules, when the rules apply, and the anti-abuse rule.

The Notice eliminates the deemed contribution but clearly provides that P adjusts its basis in its S stock under Reg. sec. 1.358-6 ‘as if P provided the P stock or securities pursuant to the plan of reorganisation, notwithstanding that S in fact acquired the P stock or securities in exchange for property.’ This will generally result in P increasing its basis in the S stock by the historic basis T’s shareholders had in their T stock, increased by any gain recognized by T’s shareholders in the transaction.

In addition, the government expressed concern that taxpayers are interpreting the current anti-abuse rule too narrowly. Among other changes, the Notice provides that the anti-abuse rule will be modified to provide that the earnings and profits of the target corporation can be taken into account for purposes of determining the amount of the earnings and profits subject to the deemed distribution, even if the target was unrelated to P and S prior to the reorganisation. Also, the Notice provides that a funding of S occurring after the triangular reorganisation, including by capital contributions, loans, and distributions, can be taken into account in determining which earnings and profits can drawn upon for purposes of the deemed distribution. Further, the Notice provides an example where the ‘transaction’ engaged in with a view to avoid the purposes of the regulation is the purchase of P stock by S with a note.

Prior to the Notice, the regulations provided priority rules coordinating the application of Section 367(a) and Reg. sec. 1.367(b)-10 to triangular reorganisations. Generally, if the amount of income and gain recognised under the deemed distribution exceeded the amount of Section 367(a) gain realized on the transfer by the T shareholders, Section 367(a) did not apply to the transfer. Similarly, if the amount of Section 367(a) gain recognised by the T shareholders equalled or exceeded the amount of Section 301(c)(1) and (c)(3) income and gain recognised on the deemed distribution, Reg. sec. 1.367(b)-10 did not apply to the transfer.

In the Notice, the IRS expresses concern that the regulations do not adequately account for situations where the Section 301(c)(3) gain is not subject to tax in the United States. The Notice provides that only Section 301(c)(1) dividends and Section 301(c)(3) gain that are subject to tax in the United States or give rise to an income inclusion under Section 951(a)(1)(A) will be considered for purposes of applying the priority rules.

Tim Anson Mark BoyerWashington WashingtonT: +1 202 414 1664E: [email protected]

T: + 1 202 414 1629E: [email protected]

PwC observation:The Notice announces the IRS’ intent to write regulations that will dramatically change the US tax consequences in certain cross-border triangular reorganisations. Unfortunately, the Notice continues an undesirable pattern of tax administration in which the IRS has issued formal or informal guidance that significantly departs from prior, and recently issued, guidance in the context of cross-border transactions.

With the dramatic and frequent changes in this area, corporations simply trying to undertake routine acquisition and integration planning are presented with tremendous uncertainty. Compounding this uncertainty, the IRS has regularly announced its intent to issue regulations through informal and non-binding notices that generally describe their concerns and then set forth rules that are overbroad, results-oriented, and/or inconsistent with other existing rules.

In the end, companies considering cross-border restructurings will need to reassess their transactions and consider the application of the Notice if they are contemplating triangular reorganisations. More broadly, companies need to be aware that the IRS has been aggressively trying to curtail any cross-border transactions that they perceive as abusive, even when the tax results of the transaction clearly follow from existing regulations or prior administrative guidance.




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EU Law

EU lawNetherlands

Advocate General Opinion in ECJ case with respect to the application for a Dutch fiscal unity in cross-border situations

Advocate General (AG) Kokott of the European Court of Justice (ECJ) gave her opinion in three joined cases (ECJ C-39/13 – C-41/13) regarding the application for a Dutch fiscal unity in cross-border situations. In her opinion, the AG concluded that the Dutch fiscal regime breaches the freedom of establishment of Article 49 Treaty on the Functioning of the European Union (EU).

Two of the Dutch cases are comparable to the situation that led to the 2008 decision of the ECJ in the Papillon case (ECJ C-418/07), i.e. the formation of a fiscal unity between a Dutch resident company and its Dutch sub-subsidiary which in turn is held via intermediate EU-resident subsidiaries. The third case considers the formation of a fiscal unity between two Dutch sister companies with an EU-resident parent company.

Under Article 15 of the Dutch Corporate Income Tax Act 1969 (CITA) such fiscal unities would only have been possible if the intermediate EU subsidiary or parent company would have been a Dutch resident company or if the non-Dutch companies had carried on business in the Netherlands through a permanent establishment (PE), to which the shares in the Dutch resident subsidiaries could have been allocated.

AG Kokott concluded that Article 15 CITA creates a restriction of the freedom of establishment, for not offering taxpayers with non-resident parents/subsidiaries the option to form a fiscal unity between the Dutch-resident companies, while giving such a possibility if the intermediate entities would have been subject to Dutch corporate income tax (in which case the intermediate subsidiaries also would have been included in the fiscal unity).

AG Kokott concluded that both situations are comparable in light of the objective of the Dutch fiscal unity regime. AG Kokott also distinguished this case from the X Holdingcase (C-337/08), which also concerned the Dutch fiscal unity regime, but in that case the taxpayer sought to include the non-resident subsidiary in a fiscal unity.

AG Kokott concluded that the restriction cannot be justified by the need to prevent a double use of losses nor by the need to prevent tax avoidance.

Jeroen Schmitz Ramon Hogenboom Pieter RuigeAmsterdam Amsterdam AmsterdamT: +31 8879 27 352E: [email protected]



PwC observation:If the ECJ agrees with AG Kokott, the Dutch fiscal unity regime would have to be opened up for ‘Papillon’ fiscal unities such as those in the case at hand. Importantly, all three joined cases involve situations where the relevant non-resident entities are resident within the EU.



Portugal

Convention on mutual administrative assistance in tax matters

On April 14, 2014, the Portuguese government presented to the Parliament a proposal of resolution aiming at adhering to the Convention on Mutual Administrative Assistance in Tax Matters as amended by the Protocol of May 27, 2010.

The convention is a comprehensive multilateral instrument jointly developed by the Organisation for Economic Co-operation and Development (OECD) and the Council of the European Union, available for all forms of tax cooperation to tackle tax evasion and avoidance. It was amended following the G-20’s April 2009 London summit in order to align it to the international standard on exchange of information on request and to open it to all countries, ensuring that developing countries could benefit from the new more transparent environment. The amended convention was opened for signature on June 1, 2011. Portugal will now adhere to the amended convention. Among other reserves and statements, Portugal states that the convention will apply to corporate income tax (CIT), state surtax, municipal surtax, and stamp duty, besides property, individual and indirect taxes.

PwC observation:Being part of this convention will allow Portugal to increase its cooperation with foreign tax authorities, improving the mechanisms of communication and exchange of information between the authorities of the member countries.



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Portugal

Deadline for the issuance of Madeira International Business Centre licences extended to December 31, 2014

On May 8, 2014, the European Commission (EC) approved the extension to December 31, 2014, of the deadline for the issuance of licences to operate under the Madeira International Business Centre (MIBC).

The MIBC is a duly authorised state aid regime that foresees among other tax benefits a reduced corporate income tax rate of 5% on income derived from transactions with non-resident entities, in the case of companies licensed to operate in the international service centre. The regime applies until December 31, 2020.



PwC observation:The MIBC provides for an interesting set of tax benefits, being a hub to invest in EU (European Union) and emerging African countries, in particular when combined with the new participation exemption regime on dividends and capital gains which fully applies to MIBC licensed entities.

EU Law



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Treaties

TreatiesBelgium

Protocol to Belgium-Switzerland tax treaty signed

On April 10, 2014, the Belgian and Swiss authorities signed the protocol to the Belgium-Switzerland Income and Capital Tax Treaty of 1978.

This protocol enacts important changes to the withholding tax (WHT) rates on dividends and interest payments, including:

• 0% WHT on dividends between companies if the receiving company owns a participation in the capital of the distributing company of at least 10% held during an uninterrupted period of at least 12 months

• 0% WHT on interest paid on loans granted by a company of the other state.

Other important changes to the treaty include the following:

• The residence article (article 4) of the treaty has been amended to add that the term ‘resident of a contracting state’ does not include any person who is liable to tax in a contracting state in respect only of income from sources in that state or capital situated therein.

• Several articles of the treaty have been aligned with the Convention on the Organisation for economic co-operation and development (OECD) Model Treaty.

• Gains from the alienation of shares of a real estate company, deriving more than 50% of their value (directly or indirectly) from real estate situated in the other state, may be taxed in that other state. Certain exceptions apply.

• A general anti-abuse provision has been inserted in the treaty, replacing the provision of article 22 on the prevention of abuse of the treaty.

After ratification (and notification thereof) in both states, the protocol will have effect, with respect to WHTs, on income credited or payable on or after January 1 following the year of ratification. For other taxes the protocol will have direct effect on income and elements of capital pertaining to the taxable period of the year of ratification in the case of Belgium. In the case of Switzerland, the protocol will have effect on the income and elements of capital pertaining to the taxable periods beginning on or after January 1 following the year of ratification.

Axel Smits Pascal JanssensBrussels TorontoT: +32 3 259 31 20E: [email protected]

T: +32 3 259 31 19E: [email protected]

PwC observation:As the above mentioned changes on the protocol can potentially have an important impact in practice, we invite clients with activities in Switzerland to discuss the content of these new measures in more detail in order to anticipate on how this could affect their business going forward.



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China

China and Germany sign new double taxation treaty

On March 28, 2014, China and Germany signed a new double taxation treaty (DTT) and an accompanying protocol. The new DTT contains an extensive revision of the currently applicable DTT signed in 1985.

The key changes are:

• The permanent establishment (PE) policy is adjusted by extending the time threshold of construction PEs and service PEs from six months to 12 months and 183 days, respectively, and further refining the application of the independent agent exemption according to the United Nations Model Double Taxation Convention.

• The coverage of international transportation income is clarified to include rental on bare-boat basis of ships/aircraft and the use of containers where other criteria are met.

• Withholding tax rates (WHT) are reduced. In particular, the WHT rate for dividends is reduced form 10% to 5% where other criteria are met.

• The capital gains article is amended to offer more relief on source taxation.

• An anti-abuse article is added to deny treaty benefits on arrangements or transactions entered into mainly for the purpose of obtaining such benefits.

• Tax sparing credit is no longer available in the new DTT.

If diplomatic procedures are completed within 2014, the new DTT would apply to income derived on or after January 1, 2015.

PwC observation:The new DTT may affect companies with cross-border businesses in Germany and China, given it revises some key tax allocation principles on capital gains. In addition, the lowered WHT rate for dividends is a welcome change, which aligns Germany with other European countries in terms of tax efficiency in profit repatriation from China.

Matthew MuiChinaT: +86 10 6533 3028E: [email protected]

China

China clarifies beneficial ownership assessment under entrusted investment arrangements

In April 2014, China’s State Administration of Taxation (SAT) released Public Notice [2014] No. 24 (Public Notice 24) to provide clarification on the determination of beneficial ownership for dividend and interest income under an entrusted investment arrangement.

According to Public Notice 24, where certain criteria are met, non-Chinese tax resident investors conducting investment in Chinese equities or debts under an entrusted investment arrangement via overseas professional institutions can be regarded as beneficial owners of the dividend/interest income and apply treaty benefits accordingly. Public Notice 24 does not apply to capital gains on disposal of properties.

A qualified entrusted investment arrangement should fulfil the following criteria:

• A non-tax resident investor entrusts his funds directly with an overseas professional institution for investing in Chinese equities or debts

• During the entrustment period, the overseas professional institution manages such investment as client money under a segregated account.

• The non-tax resident bears the risks and profit and loss of the investments.

Public Notice 24 stipulates that if the service fee or commission charged by the overseas professional institution is ‘related’ to the dividend/interest income, such portion should be excluded from any treaty benefit entitled to the non-tax resident investor.

PwC observation:The narrowly defined ‘qualified entrusted investment arrangement’ makes the applicability of Public Notice 24 quite limited. However, we welcome such attempt by the SAT to provide further clarification on beneficial ownership, which is a fundamental and important concept at the international tax arena.

Matthew MuiChinaT: +86 10 6533 3028E: [email protected]

Treaties



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Hong Kong

Hong Kong and US agree in substance on an IGA for FATCA purposes

As of May 9, 2014, Hong Kong and the US have substantially concluded discussions and agreed in substance on a Model 2 inter-governmental agreement (IGA) to facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by financial institutions in Hong Kong.

A Model 2 IGA is expected to be signed between Hong Kong and the US later this year. Hong Kong is now included on the US Treasury’s ‘in effect’ list and being treated as having an IGA in effect until December 31, 2014.

Hong Kong financial institutions will be permitted to register under the IGA agreed to in substance and will be able to certify their status to withholding agents based on the IGA until December 31, 2014, the date by which the IGA must be signed in order for this status to continue without interruption.

PwC observation:According to the information released by the Hong Kong Government, the HK-US IGA will reduce the reporting burden and facilitate compliance with FATCA by financial institutions in Hong Kong. The IGA will cover exemptions for financial institutions or products which present low risks for tax evasion by US taxpayers. With the effective date of FATCA approaching soon (i.e. July 1, 2014), Hong Kong financial institutions should reassess their potential due diligence, withholding, and reporting obligations under FATCA in light of the HK-US IGA and watch for other FATCA related developments.

Fergus WT WongHong KongT: +852 2289 5818E: [email protected]

Treaties



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New Zealand

Tax treaty update

In recent months, New Zealand has been active in negotiating new double tax treaties (DTTs) and updating its existing DTTs. Lower withholding tax (WHT) rates and an increased focus on the exchange of tax information to combat tax evasion are key features of the new and updated DTTs.

Recent developments include:

New DTT with Vietnam New Zealand’s DTT with Vietnam has been incorporated into New Zealand law. The new treaty includes lower WHT rates on interest, dividend, and royalty payments between the two countries. Unlike other recent DTTs, the treaty does not provide for a 0% withholding tax on dividends. A reduced rate of 5% is available for dividends if the beneficial owner of the dividend holds at least 50% of the voting power in the company (this is in contrast to other DTTs where only 10% voting power is required). The DTT includes a reduced WHT rate of 10% on royalties and interest. The agreement will come into force once both countries give legal effect to it, which in New Zealand’s case occurred through Order in Council on April 24, 2014.

New DTT with Papua New Guinea New Zealand’s DTT with Papua New Guinea entered into force on January 21, 2014. The DTT includes an extended permanent establishment (PE) article to protect taxing rights of the contracting states in relation to natural resources. In New Zealand, the treaty is effective for WHT from March 1, 2014, and effective generally for income years beginning on or after April 1, 2014.

In Papua New Guinea, the DTT is effective for WHT from March 1, 2014, and generally for other provisions for income years beginning on or after January 1, 2015.

New Tax Information Exchange Agreements (TIEA) with Niue New Zealand’s TIEA with Niue entered into force on October 31, 2013. The intention of the TIEA is to assist in the prevention of tax evasion and tax avoidance through facilitating the sharing of information. The agreement is effective from January 1, 2014.

Convention on Mutual Administrative Assistance in Tax Matters The Convention on Mutual Administrative Assistance in Tax Matters became effective for New Zealand on March 1, 2014. The Multilateral Convention is intended to supplement measures being taken by governments in relation to base erosion and profit shifting and the automatic exchange of financial account information.

PwC observation:The recent activity in treaty negotiations is indicative of the New Zealand government’s desire to increase trade between New Zealand and other countries. It is pleasing to see New Zealand extend its treaty network to include more of its key trading partners and to modernise its older treaties.

Elizabeth A Elvy Nicola J Jones Stewart McCullochAuckland Auckland AucklandT: +64 935 58 683E: [email protected]

T: + 64 935 58 459E: [email protected]


Portugal

Tax treaty with Peru enters into force

On April 3, 2014, the Official Gazette published a note on the completion of the necessary formalities for the entering into force of the tax treaty between Portugal and Peru, stating that it entered into force on April 12, 2014.

It is applicable to taxes from January 1, 2015, onwards. The treaty foresees limitation to 15% (10% under certain conditions) of the tax withheld at source on dividends, interest, and royalties. Article 7 on business profits follows Organisation for Economic Co-operation and Development (OECD) Model Tax Convention.

PwC observation:Portugal has been increasing its network of Tax Treaties aiming at fostering the investment and economic transactions between Portuguese and foreign companies, also allowing the communication and exchange of information between tax authorities of the signing countries.



Treaties



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Portugal

Double tax treaty with Qatar enters into force

On May 2, 2014, the Official Gazette published the note on the completion of the necessary formalities for the entering into force of the double tax treaty (DTT) between Portugal and Qatar, stating that it entered into force on April 4, 2014.

It is applicable to taxes from January 1, 2015, onward. The tax treaty foresees a limitation to 10% of the tax withheld at source on dividends (5% under certain conditions), interest, and royalties. Article 7 on business profits follows organisaton for economic co-operation and development (OECD) Model Tax Convention.

PwC observation:Portugal has been increasing its network of DTTs aiming at fostering investment and economic transactions between Portuguese and foreign companies, also allowing the communication and exchange of information between tax authorities of the signing countries.



Singapore

Singapore enters IGA with US and treaty with Barbados

Singapore has initialled a Model 1 Intergovernmental Agreement (IGA) with the US and concluded a comprehensive tax treaty with Barbados.

Singapore added to the list of IGAs agreed in substance.

The Ministry of Finance, Monetary Authority of Singapore and Singapore tax authorities (IRAS) issued a joint press release on May 6, 2014, advising that the two countries have initialled a Model 1 IGA which will facilitate compliance with the US Foreign Account Tax Compliance Act (FATCA) by Singapore-based financial institutions. The IGA is expected to be signed in the second half of 2014.

With effect from May 5, 2014, Singapore has been included in the US Treasury’s list of jurisdictions that are treated as having an IGA in effect. Singapore-based financial institutions may register as a Foreign Financial Institution (FFI) within a Model 1 IGA jurisdiction and obtain a Global Intermediary Identification Number at the US IRS’ online FATCA registration portal until December 31, 2014, to avoid FATCA-related withholding tax (WHT) on payments from the US.

Tax treaty with Barbados Singapore’s treaty with Barbados was ratified and entered into force on April 25, 2014.

The treaty provides for, among others:

• Tax exemption for profits from the operation of shipping and aircraft in international traffic.

• WHT exemption for dividends.

• Reduced WHT rate of 12% for interest.

• Reduced WHT rates of 8% for royalties.

• The internationally agreed Standard for Exchange of Information (EOI) for tax purposes.

PwC observation:Singapore added to the list of IGAs agreed in substance - This is significant and very welcome news for Singapore financial institutions. It should provide certainty and relief as they finalise their FATCA registration plans and compliance programmes. As Singapore institutions will be able to certify their status to their counterparties, they should mitigate the risk that they would be subject to FATCA tax withholding from July 1, 2014.

Tax treaty with Barbados -The treaty provisions are broadly consistent with those recently concluded with other countries as Singapore expands its treaty network to facilitate cross border trade and investments.

David Sandison Paul LauSingapore SingaporeT: +65 6236 3388E: [email protected]


Treaties



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Spain

New Spain-United Kingdom treaty enters into force

On March 14, 2013, Spain and the United Kingdom signed a new treaty which contains amendments to the existing 1975 treaty.

The new tax treaty will enter into force on June 12, 2014, as follows:

• In respect of withholding taxes (WHT), on income derived on or after June 12, 2014;

• In respect of income taxes and other taxes (other than WHT), for any tax year beginning on or after January 1, 2015.

The new treaty has substantial benefits for companies and pension schemes and includes the taxation of income from trusts. It provides for a 0% WHT rate on dividends distributed to a pension scheme which is the beneficial owner of the dividends or if the recipient is the beneficial owner, and controls, directly or indirectly, at least 10% of the company paying the dividends. A 10% WHT rate will apply in all other cases except to dividends distributed by real estate investment trust (REIT) entities (SOCIMIs) which will apply a 15% WHT.

Interest and royalties are only taxed in the state of residence of the beneficial owner. Capital gains arising from the sale of shares are not subject to tax, unless they arise, directly or indirectly, from real estate companies except if they are listed.

PwC observation:Tax residents in both countries may benefit from the changes introduced by the new treaty since the WHT rates for dividends, interest, and royalties are reduced. It also provides guidance on the treatment of income derived through a trust or partnership which is not a common figure in Spain.

Ramon Mullerat Anna Mallol JoverBarcelona BarcelonaT: +34 932 532 748E: [email protected]


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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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