comparative corporate income taxes in europe prof. dr. geerten m.m. michielse technical assistance...
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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
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
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
Measuring Business IncomeMeasuring Business Income
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
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
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
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
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%)
2:12:1 Non-deductibilityNon-deductibility
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
4:14:1 Non-deductibilityNon-deductibility
HUNHUN Related Related partiesparties
3:13:1 Non-deductibilityNon-deductibility
LVALVA AllAll 2:12:1 Non-deductibilityNon-deductibility
POLPOL Substantial Substantial shareholdersshareholders
3:13:1 Non-deductibilityNon-deductibility
ROMROM AllAll 1:11:1 Limited deductibility (50% Limited deductibility (50% of profits)of profits)
SVKSVK Related Related partiesparties
4:14:1 Non-deductibilityNon-deductibility
SVNSVN Substantial Substantial shareholdersshareholders
3:13:1 Non-deductibilityNon-deductibility
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
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
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
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
Intercompany Dividends (EU Parent-Subsidiary)Intercompany Dividends (EU Parent-Subsidiary)
Corporate Reorganizations (EU Merger)Corporate Reorganizations (EU Merger)
LiquidationsLiquidations
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
ReceivingReceivingentityentity
TransferringTransferringentityentity
Transfer of AssetsTransfer of Assets
May 2003May 2003 BeforeBefore AfterAfter
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
ReceivingReceivingentityentity
ReceivingReceivingentityentity
TransferringTransferringentityentity
MergerMerger
May 2003May 2003 BeforeBefore AfterAfter
Sh TSh T Sh TSh T
ReceivingReceivingentityentity
ReceivingReceivingentityentity
TransferringTransferringentityentity
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
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
Intercompany Dividends (EU Parent-Subsidiary)Intercompany Dividends (EU Parent-Subsidiary)
Corporate Reorganizations (EU Merger)Corporate Reorganizations (EU Merger)
LiquidationsLiquidations
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