Year-End Tax Bulletin 2017
Year-End Tax Bulletin 2017 3
We are pleased to present you our Year-End Tax Bulletin. This Year-End Tax Bulletin summarises the most significant 2017 tax developments in our home markets, the Benelux and Switzerland, and highlights the main legislative changes announced for 2018. It also provides an insight into major international and EU developments. The focus is on the developments and changes relating to internationally operating enterprises. Given the general nature of this Year-End Tax Bulletin, the information contained in this publication should not be regarded as a substitute for detailed legal advice. You are, however, most welcome to contact your regular Loyens & Loeff adviser if you would like to receive more information on any of the topics in this Year-End Tax Bulletin. Kind regards, Loyens & Loeff
In this Year-End Tax Bulletin 2017
International developments Developments in the Netherlands Developments in Belgium Developments in Luxembourg Developments in Switzerland
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Year-End Tax Bulletin 2017 5
Main changes in international taxation in more detail
Harmen van Dam T +31 10 224 63 48 Eharmen.email@example.com
"2017 has been a challenging tax year with uncertainty caused by, amongst other things, the signing of the MLI, dividend withholding tax plans, adoption of ATAD 2 and developments with respect to pending state aid cases like Amazon and Apple.
MNEs' main concern is the practical impact of all measures and developments. As a sparring partner in international tax, we can help to manage that and anticipate future developments. We translate the impact on their business according to their needs, using the profound knowledge of our experts on important topics."
During the course of 2017, the OECD has continued its work on the BEPS project. In addition to the work to update the OECD Model Tax Convention, inter alia the following documents have been published throughout this year:
-On 1 February 2017, the OECD released peer review documents for the assessment of two BEPS minimum standards (BEPS Actions 5 and 13). The BEPS Action 13 standard on Country-by-Country Reporting ("CbCR") and the BEPS Action 5 standard for the compulsory spontaneous exchange of information on tax rulings (the "transparency framework") are two of the four BEPS minimum standards. Each of the four BEPS minimum standards is subject to peer review. These documents form the basis on which the peer review processes are undertaken.
-On 22 June 2017, a discussion draft was released on the attribution of profits to permanent establishments. This discussion draft sets out high-level general principles for the attribution of profits to permanent establishments in the circumstances addressed by the report on BEPS Action 7. Importantly, countries have agreed that these principles are relevant and applicable in attributing profits to permanent establishments. This discussion draft also includes examples illustrating the attribution of profits to permanent establishments arising under article 5(5) (regarding commissionaire structures) and from the anti-fragmentation rules in article 5(4.1) of the OECD Model Tax Convention.
-On 22 June 2017, a draft on the revised guidance on profit splits was released. This draft is intended to clarify the application of the transactional profit split method, in particular, by identifying indicators for its use as the most appropriate transfer pricing method, and providing additional guidance on determining the profits to be split.
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-On 11 July 2017, the OECD released the 2017 update which primarily comprises changes to the OECD Model Tax Convention which: (i) have been approved as part of the BEPS Package; (ii) were foreseen as part of the follow-up work on the treaty-related BEPS measures; and/or (iii) were previously released for comments.
-On 27 July 2017, a report on Neutralising the Effects of Branch Mismatch Arrangements was released. This report sets out recommendations for domestic rules that put an end to the use of hybrid entities to generate multiple deductions for a single expense or deductions without corresponding taxation of the same payments. This report aims at bringing the treatment of these structures in line with the treatment of hybrid mismatch arrangements as set out in the 2015 Report on Neutralising the Effects of Hybrid Mismatch Arrangements (BEPS Action 2).
-On 26 September 2017, the OECD released the first peer reviews on implementation of BEPS minimum standards on improving tax dispute resolution mechanisms (BEPS Action 14). The first six peer review reports relate to implementation by Belgium, Canada, the Netherlands, Switzerland, the United Kingdom and the United States.
Developments on these topics should be monitored as they may impact existing structures.
Anti-Tax Avoidance Directive to neutralise hybrid mismatch structures involving non-EU countries
On 29 May 2017, amendments to the Anti-Tax Avoidance Directive ("ATAD 1") to neutralise hybrid mismatch structures involving non-EU countries ("ATAD 2") were adopted. ATAD 1 contains rules combatting certain hybrid mismatches between Member States. ATAD 2 extends the scope to: (i) a variety of other mismatches between Member States; and (ii) mismatches between Member States and third countries.
The hybrid mismatch rules must be implemented into domestic law by 1 January 2020. As an exception, implementation of a specific provision targeting so-called reverse hybrids can be postponed by Member States until 1 January 2022.
ATAD 2 will have a substantial impact on many existing corporate structures with hybrid entities and instruments,
as well as permanent establishments. For more information see our Tax Flash of 21 February 2017 about political agreement on ATAD 2.
The BEPS project reached a historic milestone on 7 June 2017, when a large number of jurisdictions signed the Multilateral Instrument ("MLI"). In the meantime, 71 jurisdictions signed the MLI and more jurisdictions are expected to do so in the coming period. The MLI is one of the most ambitious components of the BEPS project and it intends to modify existing tax treaties and bring them in line with currently accepted tax standards. Most existing tax treaties are based on the OECD Model Tax Convention or the UN Model Tax Convention and can in principle only be updated by signing new bilateral tax treaties. However, the MLI, which applies alongside existing tax treaties, complements these existing treaties by introducing new provisions or modifying the operation of existing treaty provisions. This allows for a swift and large-scale implementation of various treaty related BEPS measures. The MLI includes a range of mandatory and voluntary rules derived from BEPS Actions 2, 6, 7 and 14 that each country can choose to apply. Mandatory anti-abuse rules include a so-called principle purpose test ("PPT"), from which jurisdictions may deviate under certain conditions by applying a limitation on benefits ("LOB") test instead. Voluntary rules include, for example, the choice not to grant treaty benefits to dual resident entities until the residency of that company is agreed upon between the competent authorities of both jurisdictions involved, and not to grant tax treaty benefits with respect to dividends until the underlying shares are held for a period of over 365 days. Other anti-abuse rules lay down rules aimed at avoiding a permanent establishment by using commissionaire structures and similar arrangements, multiple group entities to perform activities in the same country or multiple contracts for the same project.
In addition to the anti-abuse rules, the MLI also provides for the possibility to include rules on mutual agreement procedures and mandatory binding arbitration procedures in order to improve dispute resolution in tax matters.
The MLI's voluntary rules generally work on the basis of a matching system. Firstly, jurisdictions have to decide whether a tax treaty should be affected by the MLI. If one or both jurisdictions do not list a specific tax treaty
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to which the MLI will apply, then the MLI does not have any effect on that tax treaty. Secondly, jurisdictions have to decide which optional provisions they want to apply. If there is no match, those provisions would in principle not apply. Lastly, jurisdictions may decide to allow that other jurisdictions may one-sidedly apply a provision, even if the jurisdiction itself does not want to use the provision. Jurisdictions have to submit a provisional list of their covered tax treaties and choices at the moment of signature of the MLI, while a final list has to be submitted when the MLI is ratified.
Whether a specific MLI provision applies depends on whether a treaty is listed by both treaty partners, as well as on the choices and reservations made by both of these jurisdictions. For the Netherlands, Belgium, Luxembourg and Switzerland, we catalogued the decisions made by these four jurisdictions in combination with the decisions made by other countries, in order to determine whether and how a provision will apply. The matching database is subsequently used as the basis for our MLI Quick Scan Tool, which can provide a risk analysis on the potential impact of the MLI on a structure or investment via these four jurisdictions, for a range of scenarios.
An overview of the decisions by our four home markets was published earlier this year on our website. In addition, as an example of the impact of specific matches and the various sub-choices that may apply for one provision, the matches for the mandatory minimum standard of the PPT were also published on our website.
The timing of when the MLI applies to specific treaties will depend on when jurisdictions complete their domestic ratification procedures in respect of the MLI. The earliest date the MLI is expected to apply in practice is as of 1 January 2019 (provided both treaty partners ratify the MLI during the first half of 2018) or January 2020 (or later).
Taxation of the digital economy
In the course of 2017, tax policymakers have started focusing on the taxation of companies with a digital business model, notably the "US tech giants". Their perception is that the tech companies do not pay their fair share of corporate tax, regardless of the BEPS deliverables. As a result, the digital economy has become a high priority on the EU and the OECD tax agenda.
Within the EU, the Economic and Financial Affairs Council
("Ecofin") ministers agreed in September 2017 that companies active in the "digital economy" in EU countries, should pay more tax. The European Commission, like several Member States, prefers a global solution negotiated at OECD level, but will publish a legislative proposal early 2018. For this purpose, it also launched a consultation on how to tax the digital economy. This consultation is open until 3 January 2018 to all EU citizens, businesses and organisations interested in the topic. This initiative confirms the EU Commission's and the Member States' intention to move forward, even if an international consensus cannot be achieved quickly. More detailed information on the EU developments in this respect can be found here.
In parallel to the EU initiatives, the OECD plans to issue a further report on the taxation of the digital economy in the first half of 2018, as the report on BEPS Action 1 (Addressing the Tax Challenges of the Digital Economy) left key issues open for further discussions. The OECD Task Force on the Digital Economy requested input from stakeholders on this important subject. Please find a summary of our submission here.
The various long-term initiatives aim to establish a taxable presence for digital goods or services providers in the customers' or users' residence country. This would represent a paradigm shift in international tax principles: so far, taxation rights primarily belong to the country where the business selling goods or services is resident (the "origin country"). The various proposals, including the proposed short-term solutions, all allocate a portion of the tax base to the "destination country" where the recipient of the goods or services is resident.
The more short-term "quick fixes" advocated by several large Member States are to establish a new specific tax or levy. In our view, the introduction of specific taxes contains a substantial risk of arbitrary taxation. Furthermore, several of these proposals would result in another paradigm shift: taxing turnover or gross income from a transaction instead of profits, thereby ignoring the actual contributive capacity of the digital economy enterprise.
It is still too early to determine whether there is sufficient political momentum for the introduction of a specific tax regime on digital companies, but the topic has clearly become a priority. In our view, it will be very difficult, if not impossible, to ringfence the digital economy for tax purposes. Consequently, there is a risk that these taxation
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reform initiatives with regard to digital economy also affect the traditional economy. We are closely monitoring the potential impact of these initiatives for your business and will keep you informed. We published a state of play on this subject here, which we will regularly update.
Council Directive on a Common (Consolidated) Corporate Tax Base
As reported in the 2016 Year-End Tax Bulletin, in 2016 the European Commission published proposals for a Council Directive on a Common Corporate Tax Base ("CCTB") and a Council Directive on a Common Consolidated Corporate Tax Base ("CCCTB"). The CCTB-proposal contains detailed rules establishing a mandatory harmonised EU-wide corporate tax base. The CCTB mandatorily applies to all groups of companies with a total annual turnover in excess of EUR 750 million and conducting business activities in the internal market through a taxable presence in an EU Member State. The CCCTB-proposal adds EU-wide tax consolidation and a tax base apportionment mechanism, as well as an accompanying tax administration system for these groups of companies. Under both proposals Member States can tax companies at their own tax rates. The two proposals are in essence a rebirth of the CCCTB proposal dating back from 2011. This original proposal has been highly controversial from the start. Mainly because of the policy objective of many Member States to keep their corporate income tax ("CIT") system competitive on a stand-alone basis, it was no surprise that the Member States were unable to find unanimity over the past six years.
The question arises what the chances of success are for a Council Directive on a Common (Consolidated) Corporate Tax Base ("C(C)CTB") in the near future. On the one hand it seems a logical move of the European Commission to relaunch its 2011 C(C)CTB project within the new international momentum to combat base erosion and profit shifting. The BEPS project by the OECD has paved the way for international tax coordination. It is no surprise the European Commission tries to benefit from these developments. On the other side, these are challenging times for Europe. In 2017, the European Commission discussed in a white paper five scenarios for the future of Europe. In two of the five scenarios the Member States will cooperate more intensively in the field of direct taxation. In two other scenarios the cooperation in the field of taxation is limited. In the most realistic scenario, which is labelled in the white paper as "carrying
on", any guidance on cooperation in the field of taxation is missing.
What happened with the C(C)CTB proposals in 2017 First, at the Ecofin meeting of 6 February 2017, it was agreed by the Member States that all (technical) efforts should be concentrated on the rules for calculating the tax base. However, the meeting of the Ecofin on 23 May 2017 showed that it will be a major challenge for Member States to choose for a C(C)CTB and give up their tax sovereignty to a high extend. From this meeting it can be derived that some Member States are only willing to compromise on a CCTB if there is enough room for national policy choices. It is obvious that this kind of flexibility would make it more difficult to agree on consolidation and apportionment as a second step (CCCTB). In 2018, the C(C)CTB proposals are expected to be subject to further negotiations between Member States. Further, the European Parliament is expected to deliver its final resolution on the C(C)CTB proposals. The draft resolution calls on the Member States to take the taxation of the digital economy into account. It goes without saying that the recent worldwide policy debate on how to tax the digital economy, could function as an accelerator for a compromise on the C(C)CTB proposals.
In the course of 2017, the Commission has continued its actions concerning state aid. In this context, on 4 October 2017, the Commission concluded that a tax ruling issued by Luxembourg lowered the tax paid by Amazon without any valid justification (see more detailed information in the Luxembourg part of this Year-End Tax Bulletin on page 28 and in our Tax Flash of 4 October 2017). According to the Commission, this was due to the fact that the amount of royalty paid by Amazon was too high and therefore not at arm's length. The Commission found that Luxembourg's tax treatment of Amazon under the tax ruling is illegal under EU state aid rules. On the basis of the information available, the Commission has estimated that the tax benefit to be recovered amounts to around EUR 250 million, plus interest.
Additionally, on 4 October 2017, the Commission has decided to refer Ireland to the Court of Justice of the European Union ("CJEU") for failing to recover from Apple illegal state aid worth up to EUR 13 billion, as required by the Commission on 30 August 2016. The commission concluded that Ireland's tax benefits to Apple were illegal
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Year-End Tax Bulletin 2017 9
under the EU state aid rules. The deadline for Ireland to implement the Commission's decision of 2016 on Apple's tax treatment was 3 January 2017. See for more detail our Tax Flash of 4 October 2017.
Later, on 26 October 2017, the Commission has decided to open in-depth investigations into UK CFC rules as regards the exception for certain financing income of multinational groups active in the UK ("Group Financing Exemption"). The Commission has doubts whether the Group Financing Exemption complies with EU state aid rules. In particular, it questions whether this exemption is consistent with the overall objective of the UK CFC rules. Further developments on this investigation should be closely monitored in the course of next year.
Other EU developments
Agreement on European Council Directive on Dispute Resolution On 23 May 2017, an agreement was reached for the adoption of the Council Directive on Double Taxation Dispute Resolution Mechanisms in the EU. This directive introduces improvements to the existing mechanisms intended to resolve disputes between Member States on the interpretation of bilateral tax treaties. The directive makes dispute resolution mechanisms binding and mandatory. Additionally, it introduces time limits and obliges Member States to resolve disputes related to double taxation. The directive will apply to any complaint submitted from 1 July 2019. For further details we refer to our Tax Flash of 24 May 2017.
CJEU case law During 2017, the CJEU rendered several important decisions in the field of direct taxation. We highlight two decisions issued by the CJEU concerning the application of domestic anti-abuse provisions in the context of the Merger Directive and the Parent-Subsidiary Directive. In both Europark Services (C-14/16 with further details in EU Tax Alert 165 edition) and Eqiom SAS (C-6/16 with further details in EU Tax Alert 171 edition) the CJEU considered that the domestic anti-abuse provisions which create a presumption of abuse without providing for an analysis of the facts and circumstances of each case are not in line with EU law.
In two other decisions the Court clarified the scope of the Parent-Subsidiary Directive. In Wereldhave (C-448/15 with further details in EU Tax Alert 165 edition) the CJEU
declared that this directive is not applicable to a company which is subject to a statutory corporate income tax ("CIT") at a zero rate. In AFEP (C-365/16 with further details in EU Tax Alert 167 edition) the CJEU considered that the levying of tax upon dividend distributions where the assessment is based on the amount of the dividends distributed, is not in line with the Parent-Subsidiary Directive.
In Berlioz (C-682/15, with further details in the Luxembourg part of this Year-End Tax Bulletin on page 28 and EU Tax Alert 167 edition) the CJEU had the opportunity to interpret Directive 2011/16 on the administrative cooperation in the field of taxation. In that decision the Court ruled on the interpretation of the "foreseeable" relevance standard concerning the exchange of information upon request.
International transparency developments
Mandatory disclosure rule On 21 June 2017, the European Commission submitted a proposal for a Council Directive introducing mandatory disclosure rules for intermediaries concerning reportable cross-border tax arrangements. The proposal also provides for an automatic exchange of the reported information to other Member States.
The proposal, which is based on BEPS Action 12, should be seen in the light of the many transparency initiatives that have been launched by the EU, such as the exchange of rulings, the principal goal of which is to curb the use of alleged aggressive tax planning arrangements. The proposal does not provide for a definition of aggressive tax planning. Instead it includes a long list of features and elements of transactions that present, according to the Commission, a strong indication of tax avoidance or abuse. These features and elements are referred to as "hallmarks", both generic and specific, and it suffices that an arrangement falls within the scope of one of these, to be treated as reportable to the tax authorities.
The disclosure obligation applies to "intermediaries". The definition of intermediaries comprises any person responsible for designing, marketing, organising and managing the implementation of the tax aspects of a reportable cross-border arrangement. Also persons who provide, directly or indirectly, material aid or assistance in connection with the arrangement fall within the scope of the definition of intermediaries.
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According to the text of the proposal, the entry into force is scheduled for 1 January 2019. The proposal, which takes the form of an amendment to the Directive for Administration Cooperation ("DAC"), has been submitted to the European Parliament for consultation and to the Council for adoption.
See for more details our Tax Flash of 21 June 2017.
Country-by-Country Reporting A large number of OECD and G20 member states implemented Country-by-Country Reporting ("CbCR") obligations in their domestic legislation, effective as of 2016. Several countries have introduced voluntary filing for 2016 and 2017.
Based on the Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU, EU Member States are obliged to implement CbCR for ultimate parents for fiscal year 2016 and implement surrogate parent filing obligations per 2017. For an up-to-date overview of the countries that implemented CbCR, please refer to our website. Large Multinational Enterprises ("MNEs") are getting themselves prepared for filing their first CbC report.
So far, the CbC reports are not meant to be public, although on 12 April 2016, the European Commission proposed introducing public CbCR. Please refer to our Tax Flash of 12 April 2016. On 4 July 2017, the European Parliament adopted amendments to the European Commission's proposal. The proposal is subject to adoption by the Economic and Financial Affairs Council ("Ecofin").
Besides the further implementation of local CbCR filing obligations, the international focus in 2017 has been on establishing means for exchanging CbC reports among countries and practical aspects of CbCR.
Per July 2017, 65 countries signed the Multilateral Competent Authority Agreement ("MCAA") for the automatic exchange of CbC reports. The MCAA is an important milestone towards effectuation of the BEPS project. Parties to the MCAA will exchange CbC reports only if they have an "activated relationship". The amended EU directive 2011/16/EU (as per May 2016) also provides for the mandatory automatic exchange of CbC reports among Member States within 15 months after the last day of the fiscal year of the group, with an 18-month term for 2016 reports. Furthermore, in order to facilitate
the swift and uniform global implementation of CbCR and to accommodate the electronic preparation, filing and exchange of CbC reports, the OECD published an updated CbCR XML User Guide for Tax Administrations in September 2017. The OECD frequently has been issuing guidance on the implementation of CbCR obligations and practical implications and is expected to continue doing so in the next months.
For MNEs that have their Ultimate Parent Entity ("UPE") in a country that has not yet introduced obligatory CbCR filing for 2016, it could be considered to appoint a Surrogate Parent Entity ("SPE") in a country that has concluded an extensive network covering the exchange of CbC reports. In that way, the MNE can minimise the number of local filings that it would have to do.
New EU VAT system and quick fixes for cross-border trade On 4 October 2017, the European Commission set out a process to come to a new VAT regime for crossborder trade, expected to enter into force in 2022. The cornerstone of the proposal is the "destination"-principle according to which transactions will be taxed with VAT in the Member State of destination rather than in the Member State of the supplier or origin. To improve the functioning of the current system, the European Commission has announced some "quick fixes" applicable as of 2019.
The reform of the EU VAT system answers to the growing demand to tackle cross-border VAT fraud and to make the VAT system more business-friendly. The current rules for cross-border goods transactions "exempt" the supplier from charging VAT, but impose the obligation to self-assess for the VAT on the business recipient of the goods.
The change to a destination-based VAT system will substantially impact all businesses trading or providing services in the EU. In the future, the supplier will have to charge VAT at the rate applicable in the Member State of destination. The supplier does not necessarily have to be registered in the Member State of destination to declare and pay this VAT, but can make use of a "one-stop-shop" digital portal. Using this portal taxpayers can declare all VAT on cross-border transactions in a single VAT return in their Member State of establishment.
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If, in the new system, the customer is recognised as a Certified Taxable Person ("CTP"), no VAT should be charged by the supplier on cross-border supplies. Instead, the CTP would, under a reverse charge mechanism, be liable for the VAT on goods or services purchased from abroad. This certification, comparable to the already existing Authorised Economic Operator certification ("AEO-certification") for customs purposes, will be done by the competent tax authority in the country of establishment of that taxable person. For determining whether or not a customer is recognised as a CTP with the result that a supplier can invoice without VAT, the VAT Information Exchange System ("VIES") can be consulted. In anticipation of the changes in 2022, taxable persons can already obtain the status of CTP as of 2019.
Some proposed short-term measures aim to improve the functioning of the current system. CTPs can benefit from the following "quick fixes" as of 2019:
-Simplification of VAT rules for "call-off stock arrangements", i.e. arrangements in which companies move goods from one Member State to another where they are to be stored before being supplied to a customer known in advance;
-Simplification provided for chain transaction situations identifying the supply with which the intra-Community transport of goods should be linked; and
-Simplification of the proof of transport of goods between two Member States needed for the application of the exemption to intra-Community supplies.
We refer to our Tax Flash on new VAT system and quick fixes of 4 October 2017.
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Developments in the Netherlands
Main changes in Dutch tax in more detail
Marcel Buur T +31 10 224 65 07 Emarcel.firstname.lastname@example.org
"The Dutch tax environment is subject to important changes based on the implementation of ATAD, MLI, case law of the CJEU and the plans of the new government.
For example, dividend withholding tax and non-resident taxation rules will change as of 1 January 2018. A full abolishment of dividend withholding tax is expected as of 2020 (except in abuse cases), with CIT rates gradually decreasing to 21% in 2021. The introduction of the earnings stripping rules and CFC rules as of 1 January 2019, as well as a possible emergency repair of the Dutch tax consolidation regime, may have a significant impact on the Dutch tax position of MNEs. This combined with rapidly approaching deadlines for CbCR, master file and local file obligations means that MNEs should really prepare themselves.
For this purpose, clients need a trusted adviser who has the full picture, is pragmatic and experienced in working alongside the client's team. We fit that profile perfectly."
Anti-Tax Avoidance Directive implementation
On 10 July 2017, the Netherlands published a preliminary proposal for consultation to implement the Anti-Tax Avoidance Directive ("ATAD 1"), as adopted by the EU in 2016. This proposal addresses interest deductibility, exit taxation, general anti-abuse ("GAAR") and Controlled Foreign Companies ("CFC"). Implementation must be completed by 1 January 2019.
The proposal contains new rules to limit the deduction of interest on the basis of earnings stripping and CFC rules. In addition, it provides for minor adjustments to the exit taxation rules. The GAAR will not be implemented separately, based on the view that the abuse of lawdoctrine as developed in Dutch case law achieves the same goal.
For more detailed information see our Tax Flash of 11 July 2017.
The proposal was published for consultation by the previous government. The official proposal is expected to be released in the first quarter of 2018. In the meantime, the new government announced that it will implement the earnings stripping rules without the group escape and with a threshold of EUR 1 million (see our Tax Flash of 10 October 2017). Choices to be made upon implementation of the CFC rules have not yet been communicated by the new government.
The Netherlands signed the Multilateral Instrument ("MLI") as one of the initial signatories and it intends to adopt the MLI so that it becomes effective as of 2019. The Netherlands intends to bring as many tax treaties as possible within the scope of the MLI, but may exclude
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tax treaties on which negations are currently pending. Currently, the Netherlands listed 82 out of its 94 tax treaties. Furthermore, the Netherlands in principle accepts all substantial MLI provisions, subject to certain technical reservations. The Netherlands made use of the option to amend the provisional list of MLI provisions chosen in the course of the domestic ratification process, so the provisional list of choices is potentially subject to change.
In addition to the anti-abuse rules, the Netherlands also chose to apply provisions with respect to mutual agreement procedures and mandatory binding arbitration, in order to improve dispute resolution. Whether or not both provisions will apply depends on whether the other jurisdiction also elected to apply them. If so, this would improve the protection of taxpayers in the Netherlands against unresolved double taxation.
The Netherlands' position in the MLI is in line with its general position taken in the BEPS project. The Netherlands intends to be fully transparent on tax matters and will allow for stricter rules in international settings. On the other hand, as a safeguard against foreign tax authorities that use the BEPS project to deny treaty benefits or impose taxes not allowed under the tax treaties, the Netherlands pushes for mechanisms to resolve double taxation and protect Dutch taxpayers.
Mandatory disclosure rule The Dutch government has published its view on the mandatory disclosure rules as proposed by the European Commission (see the general paragraph about transparency on page 9. The Dutch government is in principle in favour of transparency and is supportive in respect of the proposal. However, the Dutch government is of the view that the current proposal is much too broad as a result of which it may not be very effective. In the publication, some possible improvements are described, such as limiting the disclosure to structures that will be implemented. Furthermore, the Dutch government would limit the disclosure rule to structures that do not have to be disclosed based on other rules, such as through the exchange of tax rulings. The government is further of the view that the hallmarks need to be more specific.
Common Reporting Standard Based on Common Reporting Standard ("CRS"), Dutch financial institutions as defined under CRS need to identify
their accountholders in order to determine if the accounts are reportable for CRS purposes. Accounts opened on or after 1 January 2016 needed to be identified immediately in line with the new rules. Accounts of individuals already existing on 1 January 2016 with a value exceeding USD 1 million needed to be identified prior to 31 December 2016. The CRS identification process of all other accounts needs to be completed before 31 December 2017.
Ultimate Beneficial Owner register Although, according to the fourth Anti-Money Laundering Directive, the Ultimate Beneficial Owner ("UBO") register needed to be implemented in the EU Member States before 26 June 2017, the implementation process has not yet been completed in the Netherlands. A legislative proposal to implement the directive has been put forward on 13 October 2017. This proposal does not yet contain the details of the UBO register, since these will be included in a separate legislative proposal and in a decree. These have not been published yet. A draft of the proposal to implement the UBO register was submitted on 31 March 2017 for consultation purposes (see our Tax Flash dated 3 April 2017)
Access to information held by financial institutions On 6 December 2016, the European Council agreed on Directive 2016/2258 to implement measures requiring EU Member States to grant local tax authorities access to information held by financial institutions regarding the beneficial ownership of companies. A legislative proposal to implement Directive 2016/2258 into Dutch law has been sent to parliament on 6 September 2017. The proposal will enter into force on 1 January 2018.
Country-by-Country Reporting The Netherlands was one of the first countries to implement Country-by-Country Reporting ("CbCR") filing obligations as of 1 January 2016 in accordance with the CbCR Implementation Package of the OECD. It also was among the first 31 countries to sign the Multilateral Competent Authority Agreement ("MCAA"). As of 5 June 2017, the Netherlands implemented the provisions from the Directive (EU) 2016/881 of 25 May 2016, covering the automatic exchange of CbC reports among EU Member States. Furthermore, the Netherlands was the first country to conclude a Competent Authority Arrangement for the automatic exchange of CbC reports with the US in April 2017. This agreement will enable the exchange of CbC reports between the Netherlands and the US.
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Also, the September 2017 Budget Day proposals contained provisions to rely on temporary voluntary filing of a CbC report by an Ultimate Parent Entity ("UPE") in which case a Dutch subsidiary of this UPE can be discharged from CbCR filing obligations in the Netherlands. Dutch CbCR entities are getting ready for submitting their first CbC report by year-end 2017. Furthermore, by 31 December 2017, Dutch entities forming part of an MNE group (with consolidated group revenues of at least EUR 750 million for financial year 2016) will have to notify the tax authorities for reporting year 2017:
-whether or not these entities are a so-called "reporting entity" under the Dutch CbCR legislation; and
-which group entity is the reporting entity.
A special digital application form should be used for notifying the Dutch tax authorities of the identity of the reporting entity.
For groups that do not have a UPE established in a country that has implemented CbCR obligations as per fiscal year 2016, careful consideration should be taken in appointing another qualifying group company to substitute the UPE, a so-called Surrogate Parent Entity ("SPE"), to file a CbC report in its country of residence. Elements that should be taken into account when determining which entity should be the SPE are the number of CbCR exchange agreements concluded by its country of residence and to what extent local implementation of the CbCR obligations deviates from the template legislation prescribed by the OECD. These elements should be considered in order to limit the number of local filings. Per October 2017, the Netherlands had concluded the largest number of CbCR exchange relationships globally.
Master file and local file As of the fiscal book year 2016, Dutch taxpayers that are part of a multinational group with consolidated revenues of at least EUR 50 million in the preceding year should prepare an OECD-based master file and local file for transfer pricing and branch profit allocation documentation purposes. For Dutch taxpayers, the master file and local file should be available in the administration of the taxpayer by the due date of filing the corporate income tax return of the relevant year, for book year equal to calendar year generally by 30 April 2018 at the latest (after extension).
Tax treaty changes
Only a few changes occurred in the Dutch tax treaty network during 2017:
-Protocol to the Dutch-Ghana tax treaty signed by the Netherlands on 10 March 2017, not yet entered into force;
-Protocol to the Dutch-Indonesia tax treaty entered into force on 1 August 2017;
-Protocol to the Dutch-Uzbekistan tax treaty signed by the Netherlands on 6 February 2017, not yet entered into force.
For a complete overview of tax treaties concluded by the Netherlands click here.
The Dutch government announced it wants to start treaty negotiations with Andorra, Liechtenstein and Panama as soon as possible. Furthermore, negotiations with Belgium, France, India, Iran and the United States of America will be continued.
Conclusion Advocate General on Dutch tax consolidation regime and subsequent changes announced by Dutch government
On 25 October 2017 an Advocate General ("AG") of the Court of Justice of the European Union ("CJEU") delivered his opinion in two Dutch cases about the consequences of the CJEU judgment in the French Groupe Steria case for the Dutch tax consolidation regime (fiscal unity) in situations concerning: (i) the Dutch interest deduction limitation rule to prevent base erosion; and (ii) the nondeductibility of currency losses on a participation in a non-Dutch/EU subsidiary. In general, the AG is of the opinion that the "per-element approach" adopted by the CJEU in the Groupe Steria judgment is also applicable for the Dutch tax consolidation regime. If this approach is followed in the final judgment of the CJEU, this could have a major impact on the Dutch tax consolidation regime.
The Dutch Government immediately announced legislation with retroactive effect (from Wednesday, 25 October, 2017, 11:00 am) and a new company tax group regime in the near future if the CJEU is to follow the conclusion of the AG.
For more information see our Tax Flash of 25 October 2017.
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Dividend withholding tax changes
On 19 September 2017, as part of the 2018 Budget, the Dutch Ministry of Finance published proposals to change the dividend withholding tax ("DWT") rules and the non-resident corporate income tax ("CIT") rules for substantial shareholdings. In short, the following changes were proposed:
-Distributions by so-called holding cooperatives on qualifying membership rights will in principle become subject to DWT.
-A new attractive DWT exemption will be introduced for distributions to treaty resident companies, next to the existing intra EU/EEA DWT exemption.
-Both exemptions will be subject to a revised antiabuse rule.
-The scope of the non-resident CIT rules for substantial shareholdings (in general 5% or more) in Dutch entities will be changed.
The changes are proposed to enter into force on 1 January 2018. More detailed information can be found in our Tax Flash of 19 September 2017.
It should be noted that the legislative changes may invalidate existing tax rulings. As a result, all tax rulings that cover the non-resident tax aspects and DWT aspects will have to be reviewed and renewed, if necessary and desired.
In the meantime, the new government announced abolishment of DWT (subject to certain anti-abuse related exceptions) as from 1 January 2020. Please also see below under the heading "Plans of the new government".
Plans of the new government
On 10 October 2017, the new government of the Netherlands presented its plans, including some important CIT changes. The main changes are:
- The headline CIT rate will decrease from 25% to 21%, in three stages: a reduction to 24% in 2019, a reduction to 22.5% in 2020 and a reduction to 21% in 2021;
-DWT is withheld by Dutch companies on distributions of profits, at a rate of 15%. The new government intends to abolish it as of 2020, except in cases of abuse and for dividend payments made to low-tax jurisdictions;
-The Netherlands currently does not levy a withholding tax on interest and royalties. The new Dutch government announced the introduction of a withholding tax on interest and royalty payments made to low-tax jurisdictions with an aim to discourage the use of "letter-box" companies.
For more detailed information and other proposed changes please see our Tax Flash of 10 October 2017.
Landmark decision on interest deduction
On 21 April 2017, the Dutch Supreme Court issued rulings on the interest deduction limitation of article 10a of the CIT Act in which it applied the doctrine of "fraus legis" (abuse of law) on certain structures in which interest deduction was the main driver, but also clarified that on intragroup loans that are ultimately third party funded article 10a cannot apply. It has to be noted that as part of the 2018 Budget the Dutch government proposed changes to article 10a overruling this last part of the decision. See our Tax Flash of 21 April 2017 and our Tax Flash of 19 September 2017.
Introduction VAT adjustment period for costly services On 18 May 2017, the Dutch Ministry of Finance published a proposal to extend the adjustment of refunded input VAT to costly services. An adjustment period currently only applies to investment goods. The adjustment will have severe consequences in practice as the administrative burden for certain taxpayers will increase. Major implications are foreseen in the real estate sector and for taxpayers in the financial and healthcare industry who only have a limited right to deduct input VAT.
Under the current rules, the refund of VAT on purchased investment goods is reviewed during five years in case of movable goods, and ten years in case of real estate. In the proposal, the review will also apply to costly services. A ten year period will apply to costly services related to real estate and a five year period to other costly services. It concerns (investment) services that are acquired by a taxable person and used for a longer period within its business. According to the Ministry of Finance, the aim of the proposed measure is to take away the deemed
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Year-End Tax Bulletin 2017 17
imbalance between the VAT refund for investment goods on one side, and investment services on the other.
Based on the proposal, an adjustment period will apply to services which the taxpayer could depreciate for (corporate) income tax purposes. One can think of redevelopment, intellectual property rights and IT services (like the purchase of tailor-made software). Under the current rules, the VAT refund on costs for costly services is ultimately determined at the end of the financial year in which the costs are made and this refund is not adjusted in later periods. With the new measures, this will change as taxpayers will have to review their initial VAT refund in later years.
It was intended that the new measures would apply as of 1 January 2018. However, very recently the Ministry of Finance indicated that the measure will not apply as of 1 January 2018. A new intended date has not been disclosed as a consequence of which it is unclear if and when the measure will enter into force. Moreover, it is unclear how services purchased before the date of entry into force are affected by this measure as transitional rules have not yet been announced.
New rules for VAT treatment of vouchers On 10 July 2017, the Dutch Ministry of Finance has presented a legislative proposal on the VAT treatment of vouchers. Upon approval, the new rules will come into force as of 1 January 2019 and will be applicable to vouchers that are issued after 31 December 2018.
In the legislative proposal, vouchers are defined as instruments that can serve as (partial) consideration for goods and services. Among vouchers are also codes which can be "redeemed" in an online shop as consideration for goods or services. The proposal makes a distinction between vouchers for single use (single purpose vouchers ("SPVs")) and vouchers for multiple use (multi purpose vouchers ("MPVs")). The issuance of an SPV against a remuneration is treated as if the goods or services are supplied at that moment and therefore VAT taxed. The moment that the voucher is handed over for a supply of goods or services is not considered a taxed supply. The issuance of an MPV against a remuneration is not VAT taxed. The supply of goods or services in exchange for the MPV, however, is a VAT taxed supply. The VAT taxable amount in that case is the amount paid by the consumer at the purchase of the voucher or the amount the voucher represents (nominal value) minus VAT.
Application of Dutch reduced VAT rate for medicines sharpened On 19 September 2017, the government has proposed to considerably reduce the number of products that is subject to the reduced VAT rate as of 1 January 2018. Once the legislative proposal has been approved, the reduced VAT rate for medicines, in principle, will only be applicable to medicines for which a (parallel) trade licence has been granted and products which explicitly have been exempt therefrom. We refer to our Tax Flash of 18 July 2017 for further information.
Cosmetics, cleansing and care products and other products which are presented as suited for and helpful in preventing or curing illness, wounds or pains, but for which not a (parallel) trade licence is issued, will no longer qualify as medicines for VAT purposes. Although the approval aims at taxing these products at the general rate of 21% as of 1 January 2018, the political parties which form part of the new government have indicated that they are sympathetic towards postponement of this change. Therefore this change is still uncertain.
Employment taxes & pensions
Abolishment of payroll obligations for non-executive directors of listed companies According to a legislative proposal, as of 1 January 2018, non-executive directors in a one-tier board of a listed company will no longer be considered deemed employees for Dutch wage tax and social security purposes. A parallel can be drawn with supervisory board members in a two-tier board who, since 1 January 2017, no longer qualify as deemed employees.
Under Dutch civil law, the engagement of a director of a listed company is not considered an employment agreement. For tax and social security purposes, however, such engagement is currently regarded as a deemed employment. No distinction is made between executive and non-executive directors. Consequently, the company must currently deduct wage tax and pay social security contributions for all directors. The proposal implies that a non-executive director of a listed company will have to report the income in his or her annual tax return, either as business income (winst uit onderneming) or as other income from work (resultaat overige werkzaamheden) as of 1 January 2018.
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It is noted that Dutch tax law already provides for the possibility to voluntarily opt for wage tax withholding (opting-in) in certain situations. Apart from the administrative ease, another reason for this may be the application of the favourable expat regime which can only be applied to employees who are subject to wage tax withholding.
New legislation announced for hiring self-employed individuals Until 1 May 2016, no wage tax and social security withholding obligations existed for companies who hired self-employed individuals that were in the possession of a valid statement from the Dutch tax authorities, confirming their self-employed status (so-called VAR). As per that date, the VAR-statement was replaced by new legislation on the basis whereof it has become necessary to determine if a (deemed) employment relationship exists for each separate work relationship. Since companies became hesitant to hire self-employed individuals and because of the recommendations of an independent committee, the government promised to thoroughly review the new system and amend it where necessary.
On 10 October 2017, the new government announced that they intend to abolish the current system and introduce new legislation again, which will include criteria to determine whether an individual qualifies as self-employed (among others based on the hourly rate) as well as the introduction of a Principal Declaration (opdrachtgeversverklaring) to obtain clarity and certainty in advance when hiring self-employed individuals. It is not clear yet when this new legislation will enter into effect, but it was announced that companies will be granted time to adapt to the new system.
Reduction of maximum term of the expat regime Under certain conditions, employees coming from abroad may be entitled to the favourable expat regime (the so called "30%-ruling"). When the ruling is granted, these employees may receive a fixed tax-free allowance for extraterritorial expenses, amounting to 30% of the qualifying employment income. The expat regime can currently be granted for eight years at most. The new government announced that they aim to reduce the maximum term to five years as from 2019. It is not clear yet if transitional rules will be introduced for existing cases.
Increase of legal retirement age: review pension schemes required As of 1 January 2018, the legal retirement age for collective pension schemes (second pillar pension) will increase from 67 to 68. The increase of the legal retirement age has consequences for the maximum pension accrual permitted and, without changing it, will likely result in pension schemes exceeding the maximum pension accrual. Exceeding the maximum pension accrual rates will lead to the taxation of the total pension rights, as a lump sum at once. Employers will therefore have to review (and amend) their pension schemes before 1 January 2018 to avoid this outcome.
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Year-End Tax Bulletin 2017 21
Developments in Belgium
Main changes in Belgian tax in more detail
Natalie Reypens T +32 2 743 43 43 Enatalie.email@example.com
"The Belgian tax landscape has undergone many changes in 2017, amongst others due to the implementation of several OECD and EU transparency measures that intend to combat aggressive tax planning. Examples are the exchange of rulings and APAs, the exchange of country-by-country reports, the transfer pricing documentation requirements and the introduction of the UBO register.
Taking into account that these measures require a greater degree of disclosure by companies, we expect that companies will continue to face a higher level of scrutiny from the tax authorities in the future. With this in mind, MNEs may want to develop a strategy for compliance and risk management and to align their existing structure with such strategy. In doing so, the implications of the announced tax reform should be considered as well."
Implementation ATAD 1 and 2: hybrid mismatches, CFC, interest limitation and exit taxation
As a member of the EU, Belgium is obliged to implement the measures included in the Anti-Tax Avoidance Directives ("ATAD 1 and 2"). As part of the corporate income tax reform (see page 24), measures neutralising hybrid mismatches (within the EU and towards third countries), CFC legislation, exit taxation and the interest limitation rule will be implemented as from 2020.
Since Belgium currently does not have CFC rules, the impact of ATAD 1 in that respect is expected to be important. The government recently announced that Belgium will opt for the transactional approach. This implies that Belgium will be able to tax the (nondistributed) income of a CFC if this income arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. The arrangement will be considered non-genuine to the extent that the most important decisions regarding the assets and risks that generate the income are taken in Belgium.
The impact of ATAD 1 on the existing rules on exit taxation will be rather limited. Last year, Belgium introduced a deferred payment regime of 5 years for companies subject to exit taxes on outbound crossborder transfer of assets/business, tax residence and restructuring. The Belgian legislation is therefore largely in line with ATAD 1. It does not, however, currently cover outbound internal dealings (i.e. outbound transfers from a Belgian head office to a foreign permanent establishment). This will be amended accordingly. The current rules regarding inbound transfers will be adjusted as well, since these rules generally provide that assets entering the Belgian territory should be registered at their pre-transaction foreign book value, i.e. no step-up in the tax base is provided, which is not in line with ATAD 1.
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The interest limitation rule in ATAD 1 foresees that exceeding borrowing costs will be deductible in the tax period in which they are incurred only up to 30 % of the taxpayer's EBITDA. ATAD 1 provides the possibility to derogate from this rule and to allow an interest deduction up to EUR 3 million. The government announced that Belgium will make use of this possibility. For Belgian companies that form part of a group according to national tax law, both the EBIDA as well as the 30% escape rule will be calculated at the level of the group. Interest that cannot be deducted pursuant to this new interest limitation rule, can be carried forward indefinitely. Belgium will also opt for the possibility to only apply this new rule to loans which were concluded after 17 June 2016. For loans concluded prior to this date, the current 5:1 thin capitalization rule will remain applicable. This 5:1 thin capitalization rule will nonetheless also remain applicable for loans concluded after 17 June 2016 if the interest is paid to tax havens. Stand-alone companies and financial undertakings will be excluded from this new interest limitation rule.
The Belgian Minister of Finance signed the Multilateral Instrument ("MLI") on 7 June 2017 on behalf of the federal government and the governments of the regions and communities (six in total). Pursuant to the constitution, the MLI can only be ratified via legislation to be adopted in the six parliaments (i.e. the federal parliament and the parliaments of the regions and communities). It is therefore unlikely that the MLI will be ratified prior to 2020.
Belgium entered into 104 tax treaties of which 93 are currently in force. Belgium submitted a list of 98 of its 104 tax treaties (and corresponding amending instruments) that it designated as "Covered Tax Agreements", i.e. tax treaties to be modified through the MLI. The tax treaties concluded with Germany, Japan (including the new treaty signed but not yet in force), Norway (including the new treaty signed but not yet in force) and the Netherlands were not notified.
Belgium mainly took the position to only implement the BEPS minimum standards through the MLI. This implies for example that Belgium did not opt for the possibility to address the artificial avoidance of the permanent establishment status through commissionaire arrangements. Since Belgium considers an effective mechanism of dispute resolution of primary importance
in order to mitigate any double taxation, it has been willing to implement the mandatory binding arbitration clause. For a complete overview of the choices and reservations made by Belgium, we refer to our website page "Overview: MLI choices made by the Netherlands, Belgium, Luxembourg and Switzerland".
On 27 July 2017, The European Commission required Belgium to abolish the corporate income tax exemptions granted to the port in order to be in conformity with state aid rules. It is expected that the Corporate Income Tax Act will be amended accordingly.
Mandatory disclosure rule The Belgian Minister of Finance has clarified its position on the mandatory disclosure rules as proposed by the European Commission (see the general paragraph about transparency on page 9). The minister emphasized that Belgium supports the objectives of the proposal. The Minister intends to rapidly provide the Belgian tax administration with the necessary tools to identify potential harmful constructions and to audit in a more efficient manner. Belgium has however also raised some concerns, such as the need to only exchange useful information. In this respect, Belgium has proposed a phased implementation, with a focus on the most important aggressive tax planning structures.
Automatic exchange of the Country-by-Country Report The Country-by-Country Report ("CbCR") obligation for Belgian taxpayers belonging to a multinational group was already introduced by the Belgian Act of 1 July 2016. However, the corresponding automatic exchange of the CbCR was not yet foreseen. The Act of 31 July 2017 transposing various EU Directives regarding the mandatory automatic exchange of information in the field of taxation was published in the Belgian Official Gazette on 11 August 2017. The act implements a mandatory automatic exchange of CbCRs within the EU. The Belgium Parliament also approved the Act of 17 May 2017 implementing the Multilateral Competent Authority Agreement ("MCAA") for the automatic exchange of CbCRs, which is signed by 65 countries. The ratification of the agreement is subject to final approval by the
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Year-End Tax Bulletin 2017 23
King. Finally, Belgium concluded a Competent Authority Arrangement for the automatic exchange of CbCRs with the US on 1 August 2017. This agreement will enable the exchange of CbCRs between Belgium and the US.
Automatic exchange of rulings The EU Directive of 8 December 2015 on the automatic exchange of information has been transposed into national law via the Belgian Act of 31 July 2017. Prior to this Act, Belgium already had a system in place to exchange information (including rulings) spontaneously. However, this system was not applied in practice and was therefore not effective.
Belgium will now exchange information automatically on advance cross-border tax rulings and Advance Pricing Agreements ("APAs") in conformity with the EU directive. The Belgian legislator has not made use of the de minimis-exception provided by the directive which allows Member States to disregard rulings issued, amended or renewed before 1 April 2016 in the hands of companies with an annual net turnover of less than EUR 40 million at group level. Concerning rulings issued before 2017, the following will apply:
-In case of advance cross-border rulings and APAs issued, amended or renewed between 1 January 2012 and 31 December 2013, the exchange will occur provided that they are still valid on 1 January 2014; and
-In case of advance cross-border rulings and APAs issued, amended or renewed between 1 January 2014 and 31 December 2016, the exchange will occur whether or not they are still valid.
The exchange of rulings and APAs that were issued, amended or renewed as of 2017, needed to be exchanged by the end of September 2017. The rulings and APAs that were issued, amended or renewed before 2017 will be exchanged by 31 December 2017 at the latest.
Ultimate Beneficial Owner register The fourth anti-money laundering directive obliges the Member States of the EU to install a register in which the Ultimate Beneficial Owners ("UBOs") of legal entities are identified. UBOs of Belgian companies will need to be identified in the Belgian UBO register. The natural persons who either (i) directly hold more than 25% of: the shares, the share capital, or the voting rights of a Belgian company, (ii) control a holding company that
holds more than 25% of the shares or the share capital of a Belgian company, or (iii) control the Belgian company by other means, are considered as UBOs. At least the name, the date of birth, the nationality and the address will need to be reported, as well as the nature and the extent of the beneficial interest held. A similar obligation applies to UBOs of foundations, (international) non-profit organisations, trusts and fiduciaries. The directors of the entity will need to comply with the obligation to report the aforesaid information to the Belgian UBO register.
The Act of 18 September 2017, introducing the UBO register, has been published in the Belgian Official Gazette on 6 October 2017. A Royal Decree still needs to be published before the aforesaid information can actually be reported to the Belgian UBO register.
Master file and local file Belgian taxpayers belonging to a multinational group are required to submit a master file and a local file when exceeding one of the following criteria on an unconsolidated basis during the previous financial year:
-Total amount of revenue including financial but excluding non-recurrent income of EUR 50 million;
-Balance sheet total of EUR 1 billion; or -Annual average of 100 full-time employees.
Belgian taxpayers, who are required to submit a master file with respect to the Multinational Enterprise ("MNE")'s financial year ending on 31 December 2016, must submit the master file on 31 December 2017 at the latest. Part A of the local file with respect to the Belgian taxpayer's financial year ending on 31 December 2016 should already have been submitted (unless an extension of the deadline for filing the CIT return was obtained). Part B of the local file, containing a more detailed questionnaire, should only be completed for financial years starting on or after 1 January 2017. It needs to be filed together with the CIT return.
The Belgian local file requires MNEs to disclose more figures than initially suggested by the OECD. On the other hand, MNEs are not required to enclose transfer pricing policies, transfer pricing studies and intercompany agreements (those documents can however voluntarily be included). MNEs only have to indicate whether such documentation is available. It follows that Belgian taxpayers are not explicitly required to provide for transfer pricing documentation containing a functional analysis, economic analysis and benchmark studies. However in
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practice, it is highly recommended to have transfer pricing documentation (in line with OECD guidance) available as indicating that no such documentation is available will increase the odds of triggering an audit. In addition, even though it is not explicitly required, it is recommended to prepare a reconciliation between the local file and the financial statements.
The following changes occurred in the Belgian tax treaty network:
-Belgium signed a tax treaty with Uruguay on 23 August 2013, which will take effect as of 1 January 2018.
-Belgium signed a new tax treaty with Macedonia on 6 July 2010, which will be applicable as of 1 January 2018;
-The new protocol that Belgium signed to the tax treaties with Greece, Mexico, Switzerland respectively will equally take effect as of 1 January 2018. The protocol that Belgium signed to the tax treaty with Greece mainly contains an exchange of information provision in line with article 26 of the OECD Model Tax Convention. The protocols to the treaties with Mexico and Switzerland amend several provisions of the existing tax treaties, amongst others with respect to withholding taxes on dividends and interests.
The exchange of information agreement that Belgium signed with Jersey on 13 March 2014 has entered into force on 26 July 2017. This implies that information can be exchanged between both parties upon request and that the contracting states may be allowed to perform a tax audit on the territory of the other state.
Corporate income tax
Corporate income tax reform On 26 July 2017, the Belgian government reached an agreement on the corporate income tax ("CIT") reform that aims to simplify the CIT regime and to increase Belgium's attractiveness by reducing the Belgian CIT rate. Since the reform has to be "budget-neutral", a range of compensatory measures will be adopted that broaden the taxable basis.
No legislative proposal has been published to date. Below, we have summarized the major measures of the
reform that have been announced. Unless indicated otherwise, the measures are expected to enter into force in 2018:
-The nominal CIT rate will gradually be reduced from 33.99% to 29.58% in 2018 and to 25% in 2020. Under certain conditions, medium-sized enterprises ("SMEs") benefit from a reduced rate of 20.4% on the first tranche of EUR 100,000 taxable income as of 2018 (further decreased to 20% by 2020). A specific anti-abuse rule is introduced aimed at avoiding the conversion of some pre-2018 or pre-2020 tax-free reserves into taxed reserves at the new lower rates.
-A minimum effective taxable base equal to 30% of the taxable income exceeding a first tranche of EUR 1,000,000 will be introduced. The measure implies an effective tax rate of 7.5% on the taxable income exceeding EUR 1,000,000.
-The minimum capital gains tax of 0.412% that is currently applicable to non-SMEs qualifying for the participation exemption will be abolished. On the other hand, the conditions to benefit from the exemption for capital gains on shares would be aligned with the conditions for applying the dividends received deduction. The reform thus extends the minimum participation threshold requirement of either 10% or EUR 2,500,000 acquisition value to the participation exemption for capital gains on shares.
-The Belgian participation exemption regime for dividends received by a Belgian company will increase from 95% to 100%.
-The notional interest deduction will no longer be calculated on the company's total amount of (qualifying) equity but only on the average equity increase in the past 5 years. The higher notional interest deduction rate applying to small companies will be maintained. The rates applicable for assessment year 2019 (taxable period ending on 31 December 2018) would be 0.746% for large companies and 1.246% for small companies.
-Several measures will be introduced in order to stimulate taxpayers to fulfil their duties in the field of CIT compliance. One of these measures entails that no deduction of current year net operating losses and deferred tax assets (e.g. carried forward tax losses) will in principle be allowed against a taxable basis determined as a result of a tax audit. Some exceptions would apply though. In an M&A environment, an increased need for a thorough due diligence may arise.
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-As of 2020, Belgium will introduce a CIT consolidation regime allowing the deduction of one Belgian group entity's tax loss from another Belgian group entity's taxable profits of a given fiscal year.
-Companies will be encouraged to make more tax prepayments since the base percentage that is used to calculate the tax increase due to insufficient prepayments will increase from 1% to 3%.
Fairness tax On 17 May 2017, the Court of Justice of the European Union ("CJEU") has ruled that the Belgian fairness tax is not fully in accordance with EU law. For more detailed information reference can be made to our Tax Flash of 31 may 2017.
At this stage, it remains uncertain whether the fairness tax will be abolished or amended. The Minister of Finance announced that the fairness tax will be part of the tax reform but no further details are available yet.
Currently, no withholding tax is due on capital reimbursements. As part of the tax reform, the government has announced that for (withholding) tax purposes, a capital reimbursement will be deemed to relate proportionally to taxed reserves. Withholding tax will then become due on part of the amount of the capital reimbursement that is deemed to relate to taxed reserves. The rule would also apply to foreign companies. It is expected that this rule will be introduced for capital reimbursements as of 1 January 2018. Taxpayers may therefore want to consider a capital reimbursement before year-end.
VAT exemption for cost sharing groups no longer applicable in banking and insurance sector Under certain conditions, services provided by cost sharing groups ("CSGs") to their members, whose activities are VAT exempt or out of scope of VAT, can benefit from a specific VAT exemption (the CSGs scheme). In Belgium, the CSGs scheme currently covers services provided by CSGs to their members that are directly necessary for the VAT exempt or out-of-scope activities of these members, regardless of the type of VAT exempt or out-of-scope activities provided by the members.
Three CJEU rulings dated 21 September 2017 brought concern to the VAT community as the CJEU decided that the CSGs scheme should be limited to CSGs whose members conduct activities in the public interest (e.g. healthcare, education). This would exclude the banking and insurance sector where the CSGs scheme is often used to mitigate VAT leakages.
One cannot exclude that in the future the Belgian legislator would adapt the current wording of the VAT exemption in the Belgian VAT Code and/or would adapt the implementing circular letter in line with the position that the CJEU has taken, but until then the principle of legal certainty and non-retroactivity should guarantee that Belgian CSGs can invoke the CSGs scheme, even if their members do not conduct activities in the public interest.
Meanwhile, CSGs that would be affected by the CJEU rulings could always consider alternatives like VAT grouping.
Claims settlement services As of 1 January 2018, the VAT exemption for insurance transactions as described in article 44, 3, 4 of the Belgian VAT Code will no longer be applicable to claims settlement services provided by a third party in the name and on behalf of an insurance company if that third party did not intervene in the conclusion or modification of the insurance contract.
Claims settlement services may include one or more of the following services: receiving insurance claims, settling substantive claims, making technical assessments and any additional damage assessments in case of insurance claims, considering appeals and complaints in respect of claim settlements, sending and receiving correspondence relating to claims settlement, etc.
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Year-End Tax Bulletin 2017 27
Developments in Luxembourg
Main developments in Luxembourg tax law in more detail
Jochem van der Wal T +352 466 230 235 Ejochem.firstname.lastname@example.org
"In 2017, we have seen many MNEs further increasing their presence in Luxembourg by allocating assets, people and functions. In the context of the rapidly changing tax environment, there is a general trend towards increased economic substance. It is strongly advised that MNEs assess, address (if needed) and manage their substance in Luxembourg so to anticipate the impact of the various initiatives that have been launched at OECD and EU levels.
The Luxembourg government's commitment to implement the BEPS project continued to materialise in 2017 (and will continue to do so in the years to come), notably by the introduction of a new domestic provision further substantiating the OECD transfer pricing principles as well as by the announcement of a new "BEPS-compliant" intellectual property regime."
Implementation of Anti-Tax Avoidance Directive
At this stage, the Luxembourg government and tax authorities have not revealed how they plan to implement the provisions of the Anti-Tax Avoidance Directive ("ATAD") in Luxembourg domestic law. The implementation of the interest limitation rule, general antiabuse rule and CFC rules is in principle due by 1 January 2019 at latest. An early implementation is not expected.
In June 2017, Luxembourg formally signed the OECD's Multilateral Instrument ("MLI") developed as part of BEPS Action 15. The MLI will implement in the tax treaties (between its signatories) certain recommendations arising from the BEPS project, e.g. the prevention of treaty abuse and anti-hybrid rules.
Luxembourg has not excluded any of its bilateral tax treaties from the scope of the MLI, but made a series of reservations regarding specific provisions. The government has not yet submitted a legislative proposal to ratify the MLI with the Parliament.
Mandatory minimum standards All parties to the MLI must agree to implement an antiabuse rule in their tax treaties with another MLI party. Luxembourg opted for the principal purpose test ("PPT"), in line with the European Commission's recommended approach. The PPT denies tax treaty benefits if "it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the [covered tax treaty]."
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The other two main minimum standards implemented by the MLI concern the mutual agreement procedure to improve the resolution of double taxation situations and the implementation of corresponding adjustments (if one of the treaty jurisdictions makes a transfer pricing adjustment to bring an income or expense in line with the arm's length principle). These two minimum standards are based on the recommendations made in the BEPS Action 14 final report.
Other provisions to be applied by Luxembourg Luxembourg also announced its intention to implement in its tax treaties a limited number of optional provisions, in particular:
-An anti-hybrid provision: income derived by or through an entity that is tax transparent under the laws of either treaty countries will qualify under the tax treaty as income of a resident of a treaty jurisdiction only if that jurisdiction treats it as income of a resident also for purposes of its domestic taxation.
-A provision to prevent double taxation that continues to apply the exemption method but denies the exemption if the other treaty jurisdiction applies the provisions of the covered tax treaty to exempt the same income or capital from tax or to limit the rate at which such income or capital may be taxed. In such case, the first jurisdiction shall allow the taxpayer to credit the tax applied in the second jurisdiction against the tax paid in the first jurisdiction (which denies the exemption).
-A provision to address the artificial avoidance of permanent establishment status while maintaining some flexibility as regards the exclusion of certain activities from the definition of permanent establishment, regardless whether they are or not of auxiliary or preparatory nature.
-Mandatory arbitration, subject to certain limitations.
Entry into force Five signatories must ratify the MLI for it to enter into force. For the MLI to have an impact on a given tax treaty, first both parties (Luxembourg and the other jurisdiction) must ratify the MLI and inform the OECD of this. After an additional delay of approximately 3 months after the latest of the two ratifications, the MLI enters into force. The date on which it starts producing effects depends on the nature of the tax.
The choices (opt-ins/outs) of Luxembourg and the other party must be compared. The MLI modifies the provisions
of the bilateral tax treaty only if the choices concur. Otherwise, the tax treaty remains unchanged.
New rights for taxpayers in case of a request to exchange tax information
In November 2014, Luxembourg had abolished all possibilities for a taxpayer and the holder of information to challenge an injunction of the Luxembourg tax authorities to provide information requested by a foreign tax authority under a procedure of exchange of information upon request. The Court of Justice of the European Union ("CJEU") decided in the Berlioz case that this stance was not compatible with EU law. In the 2018 Budget legislative proposal, the Luxembourg government proposes to reintroduce the possibility to seek annulment of the injunction to provide information before the Luxembourg administrative courts. Both the person receiving the injunction and any interested third party may act.
The tax authorities will have to check the likely relevance of the requested information, considering the identity of the taxpayer concerned and of the holder of the information, as well as the needs of the tax investigation at hand. The tribunal will have access to the foreign tax authorities' request to verify compliance with this requirement. The recipient of the injunction will also be informed of the purpose of the exchange of information request during the court proceedings.
The recourse before the administrative courts will be suspensive. In addition, there will be a special accelerated procedure. The procedure will be the same against the tax authorities' decision to impose a fine for noncompliance with the injunction.
In October 2017, the Commission concluded a 3-year investigation into a tax ruling given to Amazon in 2003 and ordered Luxembourg to recover the unlawful aid. Both Luxembourg and Amazon are reviewing with the Commission's assessment and have reserved their right to appeal (see our Tax Flash of 4 October 2017). The formal investigations into tax rulings granted to McDonald's and ENGIE remain pending. Several appeals against Commission decisions in tax state aid cases are pending before the CJEU, including the appeals by Luxembourg and Fiat against the October 2015 decision.
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Year-End Tax Bulletin 2017 29
As of 1 January 2017, the following bilateral tax treaties entered into force:
-Luxembourg-Andorra; - Luxembourg-Serbia; and -Luxembourg-Croatia.
Furthermore, the fourth amendment to the LuxembourgFrance bilateral tax treaty became effective: it introduced a so-called "real estate rich" company clause, whereby the right to tax capital gains on a disposal of shares in predominantly real estate entities is allocated to the country where the immovable property is situated.
Lastly, the first amendment to the Luxembourg-Tunisia bilateral tax treaty entered into effect. This protocol brought about changes to article 26 of that treaty in relation to the procedure under which information on taxpayers is exchanged between both jurisdictions.
As a result, as of 1 October 2017, Luxembourg is party to 81 bilateral tax treaties which are in force. Furthermore, 16 bilateral tax treaties are currently under negotiation, amongst which the following 13 countries: Albania, Argentina, Botswana, Cyprus, Egypt, Kirghizstan, Kuwait, Lebanon, New Zealand, Oman, Pakistan, Senegal and Syria. Luxembourg is also renegotiating the existing bilateral tax treaties with the United Kingdom and the United States.
A new BEPS-compliant intellectual property tax regime
On 4 August 2017, the Luxembourg government submitted a legislative proposal introducing a new intellectual property ("IP") tax regime (see our Tax Flash of 8 August 2017).
Under the proposal, up to 80% of the net income and capital gains derived from specific IP assets would be exempt from corporate income tax ("CIT") and municipal business tax ("MBT"), and these eligible IP assets would be fully exempt from net wealth tax. Marketing-related IP assets (e.g., trademarks, domain names, designs and models) are excluded from the scope of the proposed regime. The Luxembourg government intends to guide the proposal through parliament this year, with an entry into force scheduled for 1 January 2018.
In order to be compliant with BEPS Action 5, which requires substantial activity for any preferential regime, Luxembourg phased out its previous IP tax regime with a five-year grandfathering period ending on 30 June 2021. Where the IP assets still benefit from the former IP tax regime, but could also qualify under the new IP tax regime, the taxpayer will have to choose which regime to apply until 30 June 2021.
The income and gains qualifying for the 80% income tax exemption would equal the Net Eligible Income (subject to certain specific adjustments) stemming from Eligible Assets, multiplied by a specific ratio. The ratio equals the Eligible Costs (with an uplift of 30% but capped at the Total Costs) over the Total Costs.
This ratio implements the modified nexus approach, i.e. only the R&D activities having a nexus with the Luxembourg taxpayer benefit from the IP tax regime. The key parameters for the IP tax regime are as follows:
-Eligible Assets: (i) patents, (ii) utility models, (iii) supplementary protection certificates for patents for medicine and plant protection products, (iv) extensions of a supplementary protection certificate for paediatric medicines, (v) plant variety certificates, (vi) orphan drug designations, and (vii) software protected by copyrights. Eligible Assets must have been constituted, developed or improved after 31 December 2007. The filing date for registration is decisive.
-Net Eligible Income: royalties, income embedded in sold products or services, capital gains and certain indemnities, all in relation to Eligible Assets, minus all costs directly and indirectly linked to Eligible Assets.
-Eligible Costs: the costs (excluding acquisition costs of Eligible Assets, financing and real estate costs) in direct relation to R&D for the constitution, development or improvement of an Eligible Asset conducted by the taxpayer (including its permanent establishment located in the EEA) or outsourced to third parties.
-Total Costs: Eligible Costs plus acquisition costs of an Eligible Asset and costs of R&D outsourced to related parties in relation to an Eligible Asset.
The IP tax regime should in principle be applied on an IPasset-per-IP-asset basis. In case of multiple IP assets and complex R&D activities, a product-based approach could be applied for the purpose of the allocation.
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Revised Luxembourg transfer pricing rules
Introduction of article 56bis Income Tax Law As of 1 January 2017, transfer pricing rules in the Income Tax Law ("LIR") were further strengthened with the entry in force of article 56bis LIR. This provision aims at implementing the core principles of transfer pricing rules laid down in the final report of the BEPS Actions 8 to 10 into Luxembourg domestic law. More specifically, article 56bis LIR defines how and when a comparability analysis needs to be carried out and provides indications on when a specific transfer pricing method is preferred over another. It also allows the non-recognition of elements of a transaction in the absence of valid commercial reasons, provided these elements have a significant impact on the determination of an arm's length price.
Circular LIR n 56-56bis/1 on intra-group financing activities To complement article 56bis LIR, the Luxembourg tax authorities issued new transfer pricing guidelines on 27 December 2016 by way of circular LIR n 56-56bis/1, regarding the tax treatment applicable to Luxembourg companies carrying out intra-group financing transactions. This circular repeals as per 1 January 2017 the previously applicable circulars of 2011 and clarifies the interpretation by the Luxembourg tax authorities of the rules applicable to intra-group financing activities (see our Tax Flash of 28 December 2016).
In arm's length transactions, risks shall be allocated to the party which has the better capacity to assume and manage those risks. Accordingly, intra-group financing companies need to have the financial capacity to assume risks and the ability to control and manage such risks:
-Risk assumption. The requirement to have an amount of equity at risk equal to the lower of either 1% of the intra-group financing amount or EUR 2 million has been abandoned. Going forward, the appropriate amount of equity at risk needs to be benchmarked on a case-by-case basis.
-Risk management. The capacity to manage the risk is assessed based on substance, in particular significant people functions (e.g. skills of managers and/or employees, actual decision-making process, etc.).
Finally, the circular states that all individual administrative decisions relating to the arm's length principle and based on legislation prior to the entry into force of article 56bis LIR are no longer binding on the Luxembourg tax
authorities as from 1 January 2017 in relation to tax years starting after 2016.
Country-by-Country Reporting On 27 December 2016, the Luxembourg law of 23 December 2016 on Country-by-Country Reporting (the "CbCR Act") was officially published.
Under the CbCR Act, a Luxembourg tax resident ultimate parent entity of a multinational group with a consolidated turnover amounting to at least EUR 750 million in the preceding year, must annually file a CbC report with the Luxembourg tax authorities. Further, any other Luxembourg tax resident entity or an in Luxembourg situated permanent establishment of a CbCR group, must file a CbC report with the Luxembourg tax authorities if Luxembourg does not receive a CbC report from another country or from a relevant designated Luxembourg entity (e.g. if the ultimate parent entity is tax resident in a jurisdiction that does not (yet) oblige it to file a CbC report). CbC reports must be filed within 12 months after the end of the relevant fiscal year for which the CbC report is prepared. The first CbC report needs to be filed for fiscal years starting on or after 1 January 2016 and will therefore need to be filed in 2017 if the fiscal year of the relevant taxpayer coincides with the calendar year.
Based on the CbCR Act, a Luxembourg group entity of a multinational group qualifying for the CbCR requirements needs to notify the Luxembourg tax authorities of the identity and the tax residence of the entity filing the CbC report by the last day of their reporting fiscal year (i.e. by 31 December 2016 for multinational groups having a financial year ending 31 December 2016). Failure to comply with the deadlines triggers a fine of up to EUR 250,000.
Given the short headroom for the reporting year 2016, the deadline for filing the notification for the first CbC report was extended to 31 March 2017. For the reporting year 2017, the notification deadline is again in line with the principle set out in the law, i.e. the last day of the reporting fiscal year.
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Year-End Tax Bulletin 2017 31
2017 Tax Reform
On 1 January 2017, a series of new tax measures for individuals and corporations entered into force.
Corporate income tax reduction In order to strengthen the competitiveness and the attractiveness of Luxembourg in light of a downward trend in terms of tax rates in various EU Member States, the CIT has been reduced from 21% to 19% in 2017 and will be further reduced to 18% in 2018 (not including the 7% surcharge which is a contribution to the Luxembourg unemployment fund).
As a result, for corporate taxpayers resident in Luxembourg City, the combined tax rate is 27.08% and will be 26.01% in 2018, with Luxembourg City having a MBT rate of 6.75%.
In addition, companies that have an annual taxable income of maximum EUR 25,000 are subject to CIT at a reduced rate of 15%.
Investment tax credit increase In order to encourage innovation and investments, the rate of the investment tax credit has been increased from 12% to 13% for complementary investments and from 7% to 8% for global investments for the tranche not exceeding EUR 150,000. These credits are imputable on the CIT charge and can be carried forward during 10 years.
The rate of the investment tax credit for global investments that qualify for the special amortization regime under article 32bis LIR has been increased from 7% to 9% for the tranche not exceeding EUR 150,000.
Time limitation for tax losses carried forward The loss carry forward has been limited to 17 years for losses realised as from the financial years closing after 31 December 2016. Losses that were realised before 2017 may still be carried forward indefinitely. Losses are offset against taxable profits based on the "first in, first out" principle.
Temporary neutralisation of exchange gains related to certain assets denominated in a foreign currency The deferral of taxation of foreign exchange gains resulting from assets denominated in a currency other than EUR, but in the same currency as the share capital of a company has become applicable upon request to any type of taxpayer.
Possibility to apply deferred depreciation Taxpayers may opt for an annual depreciation that is lower than the straight-line depreciation, i.e. they can accelerate, but not postpone, their income tax liability over the useful lifetime of a depreciable asset. Combined with the net wealth tax ("NWT") reduction opportunities, deferred depreciation enables to shift (part of) the NWT liability to CIT.
Minimum net wealth tax The amount of minimum NWT, which replaced minimum CIT as of 1 January 2016, has been increased from EUR 3,210 to EUR 4,815 for companies whose balance sheet total is composed of financial assets for at least 90% and whose total gross assets exceed EUR 350,000. In all other cases, the minimum NWT remains unchanged and ranges from EUR 535 to EUR 32,100, depending on the balance sheet size of the taxpayer.
Mandatory electronic filing of the corporate tax returns As from the fiscal year 2017, Luxembourg corporate taxpayers have to file their CIT, MBT and NWT returns electronically.
Increase of fines for late filings of tax returns Upon late filing of the CIT, MBT and NWT returns, the Luxembourg tax authorities may impose a lump sum penalty amounting up to EUR 25,000 (instead of currently approximately EUR 1,240).
Personal income taxation As regards personal taxation, the withholding tax on interest payments by certain paying agents established in the European Union to a resident natural person has been increased from 10% to 20%. The 20% withholding tax will constitute definitive taxation of the interest payments in the hands of the resident natural person.
Furthermore, the progressive tax scale applicable to individuals has been reshuffled and the top marginal rate increased from 40% to 42% for annual income in excess of EUR 200,004.
Extension of the definition of tax fraud In order to comply with the recommendations of the Financial Action Task Force ("FATF") and the 4th AntiMoney Laundering Directive, the tax reform has included tax swindle as well as aggravated tax fraud as a primary offence for acts committed as of 1 January 2017.
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As of 2017, a distinction has to be made between: (i) simple tax fraud; (ii) aggravated tax fraud, qualified as such depending on the amount of annual tax evaded; and (iii) tax swindle, defined as fraud involving a significant amount of taxes, which has been committed by the systematic use of fraudulent practices intended to conceal pertinent facts from the Luxembourg tax authorities.
While simple tax fraud is only subject to administrative sanctions, both the aggravated tax fraud and tax swindle constitute criminal offences for acts committed as of 1 January 2017.
CJEU VAT exemption for Independent Grouping of Persons jeopardised On 4 May 2017, the CJEU released its decision in European Commission v. Grand Duchy of Luxembourg (C-274/15). Luxembourg's implementation of the Independent Grouping of Persons ("IGP") mechanism was ruled to be non-compliant with EU law because of the following reasons:
-Luxembourg allowed the application of the VAT exemption, even when the services supplied by the IGP were used for the purposes of taxable supplies;
-Members of the IGP were entitled to benefit from an input VAT deduction right and deduct input VAT incurred on goods and services acquired by the IGP; and
-Luxembourg treated as VAT exempt the on-charge of goods and services from members of an IGP to the IGP itself, when the latter did not avail of legal personality and therefore had to rely on its members to acquire goods and services.
In addition, on 21 September 2017, the CJEU ruled that the VAT exemption provided in article 132, 1, f) could only benefit IGPs whose members carry out activities of public interest, therefore ruling out the application of IGPs for the financial, insurance or banking sectors (see also DNB Banka, C-326/15; Aviva, C-605/15; Commission v Germany, C-616/15).
Luxembourg is therefore expected to adapt its legislation, taking into account both decisions. Discussions are being held on the potential implementation of a VAT grouping provision.
Directors' fees subject to VAT On 30 September 2016, the Luxembourg VAT authorities released VAT circular letter n781, which is to be strictly respected as from 1 January 2017. Pursuant to this circular, activities of a company director qualify as economic activities falling within the scope of VAT taxation. As a result, company directors are to be considered as taxable persons for Luxembourg VAT purposes, hence their supply of services being subject to Luxembourg VAT, should they be deemed to be located in Luxembourg.
The circular provides for exceptions, in particular for honorary directors, directors acting on behalf of their employer, or those falling under the small enterprises regime.
Although not mentioned in the circular, it would appear that these services may benefit from the VAT exemption provided in article 44, 1, d) of the Luxembourg VAT Act, should they be supplied to regulated funds or securitization vehicles. As for the supplies of directorship services to alternative investment fund managers, one may argue that they should benefit from the same VAT exemption, to the extent however that the services supplied are specific to, and essential for, the management of the alternative investment fund itself.
Luxembourg raises the threshold for Small and Medium Enterprises Luxembourg raised its threshold for Small and Medium Enterprises ("SMEs") from EUR 25,000 to EUR 30,000. This regime allows taxable persons whose worldwide turnover is under EUR 30,000 not to apply VAT on their supply of goods and services.
Breach of VAT obligations - personal liability for CEOs, managers and directors Since 1 January 2017, CEOs, managers and directors de jure or de facto in charge of the day-to-day management ("the Managers") are required to ensure that the company which they manage complies with its VAT obligations, and in particular that it remits VAT to the VAT authorities, where applicable. Wrongful non-performance of these obligations can lead to the Managers being held jointly and severally liable for the payment of VAT. Guarantee calls may also be issued, allowing the VAT authorities to directly collect the VAT from the Managers.
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Complementary investment tax credit for software acquisitions
In the 2018 Budget legislative proposal, the government proposes an investment tax credit for the acquisition of software from third parties. The rate will be 8% up to EUR 150,000 acquisition costs and 2% for the acquisition costs in excess of that threshold. In addition, the credit is capped at 10% of the CIT charge incurred in relation to the book year in which the software is acquired. The benefit of this complementary investment tax credit may not be cumulated with the benefit of the proposed new IP regime.
Year-End Tax Bulletin 2017 33
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Year-End Tax Bulletin 2017 35
Developments in Switzerland
Main changes in Swiss tax in more detail
Beat Baumgartner T +41 43 434 67 10 Ebeat.email@example.com
"In 2017, we have seen many MNEs with Swiss operations preparing plans for the new Swiss tax landscape that will be enacted with the Swiss corporate tax reform package, the Swiss Tax Proposal 17 ("TP 17"). We are currently working with clients on inbound restructuring projects, transfer of functions, tax neutral step-up models as well as transfer pricing reviews.
In the course of 2018, MNEs will have to review and adapt their Swiss trading, licensing, financing and holding structures in view of the Swiss TP 17 and international developments. Developments on EU level such as mandatory CFC rules will likely outpace the timing for TP 17 with the consequence that MNEs will have to adapt to these rules before the Swiss tax reform is finalised. We are ready to assist our clients with tailor-made multi-jurisdictional solutions in order to ensure a smooth and efficient transition from the current Swiss tax environment to a post-2019/2020 world."
Exchange of tax rulings
Switzerland's legislation on spontaneous exchange of information of advance tax rulings entered into force on 1 January 2017 and provides for exchange of certain tax rulings as of 1 January 2018 if such tax ruling was issued on or after 1 January 2010 and is still in force on 1 January 2018. The spontaneous exchange, inter alia, covers tax rulings on preferential tax regimes such as the Swiss mixed company or finance branch regime, cross-border transfer pricing rulings as well as rulings on permanent establishments. Rulings on corporate income tax ("CIT"), annual capital tax and Swiss withholding tax are in scope of the framework for spontaneous exchange.
Swiss cantonal tax authorities have started to contact taxpayers about rulings which they believe are subject to exchange. Taxpayers still have the possibility to revoke such rulings until 31 December 2017, meaning that such information will not be exchanged by Switzerland. It is recommended to check for any existing tax rulings and analyse the possibility to revoke such rulings until 31 December 2017. Any ruling which is in scope of the framework and is still applicable as of 1 January 2018 will be subject to spontaneous exchange.
Automatic exchange of information
In Switzerland, the voluntary self-disclosure, inter alia, requires that the tax authorities are not yet aware of the tax evasion. In connection with the delivery of bank account information in the context of the automatic exchange of information ("AEOI"), the question arises at which point the tax authorities become aware of such information.
As published in a recent statement by the Swiss federal tax administration with respect to the impact of AEOI on self-disclosures, Swiss tax authorities should be deemed
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to be aware of missing information as of 30 September of the year following the introduction of AEOI with a specific country. In other words, after this date a voluntary self-disclosure will no longer be possible due to the fiction that the local tax authorities are fully aware of any missing information of a taxpayer.
Considering that Switzerland introduced AEOI with all EU Member States as of 1 January 2017, voluntary disclosure in Switzerland concerning undeclared bank accounts located in an EU Member State to the Swiss tax authorities will only be possible until 30 September 2018. Therefore, Swiss tax resident individuals should carefully analyse whether there are any undisclosed accounts that will be part of an AEOI and in timely manner contact their Swiss tax adviser for the preparation of a voluntary self-disclosure.
In 2017, the Swiss parliament approved the ratification of the Multilateral Competent Authority Agreement ("MCAA") for Country-by-country Reporting ("CbCR") as well as the respective domestic legislation. On 29 September 2017, the Swiss federal government also released the ordinance on CbCR. The package on CbCR will enter into force on 1 December 2017 thus allowing Swiss Multinational Enterprises ("MNEs") to implement voluntary filing of CbC reports in Switzerland for financial years 2016 and 2017, e.g. filing of the first CbC report before the end of 2017 with respect to the financial year 2016. Voluntary filing is only available to MNEs with a Swiss ultimate parent entity. The entry into force in 2017 also solves issues for Swiss MNEs with respect to the Swiss blocking statutes which, to some extent, prohibit a direct filing of a CbC report by a Swiss entity with a foreign tax authority. It does, however, not fully solve any legal issues with respect to potential transmission of information for the filing of a master file in another jurisdiction.
The filing threshold for CbCR obligations in Switzerland was set at CHF 900 million, corresponding to EUR 750 million as at 1 January 2015 (i.e. before the Swiss national bank decided to remove the cap against the EUR). The federal government noted that the threshold could be lowered after the OECD peer review on CbCR. Given the development of the CHF to EUR exchange rate after the historic January 2015 benchmark, the CbCR threshold would be closer to CHF 820 million under current rates.
It is therefore likely that the threshold will be lowered in the future.
With respect to the filing obligation the Swiss government takes the position (in line with the OECD guidance) that a group should not be required to file a CbC report in another jurisdiction if it does not meet the CHF 900 million threshold in Switzerland (provided its ultimate parent entity is in Switzerland), even if the group exceeds EUR 750 million in that other jurisdiction. However, many EU member states do not follow the OECD recommendations and nonetheless require filing of a CbC report if the domestic threshold is reached. MNEs not required to report in Switzerland are therefore generally required to file a CbC report in another jurisdiction. The first exchange of CbC reports is expected to trigger cross-border transfer pricing litigation in the coming years.
Master file and local file
As Switzerland adheres to its policy to implement minimum standards only, it has opted not to introduce mandatory local and master file obligations. However, transfer pricing documentation is still required in order to defend the local transfer pricing position and the Swiss tax authorities generally request transfer pricing documentation when conducting a tax audit.
Corporate income tax
On 6 September 2017, the Swiss government published the discussion draft on a revised Swiss CIT reform package, the Tax Proposal 17 ("TP 17"), which replaces the previously rejected Swiss CIT reform III.
TP 17 aims to replace current preferential tax regimes such as holding, principal, mixed company and finance branch regimes with new tax measures in line with international standards. Although not formally part of the proposal, many cantons already announced significant tax rate reductions. The most important aspects of TP 17 can be summarised as follows:
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Year-End Tax Bulletin 2017 37
Measures Patent Box
R&D super-deduction Step-up in asset basis in general Step-up in asset basis for regimes
Capital tax relief Base-erosion limitation Abolishment of tax regimes Cantonal tax rate reductions
TP 17 - Discussion Draft
- 9 0% reduction (modified nexus approach) - E xcluding software but including income from outsourced activities to
related parties in Switzerland or third parties
- 5 0% super-deduction on R&D (salary) expenses - Includes outsourced activities
- T ax neutral step-up on immigration or transfer of business operations/ functions to Switzerland
- Depreciation model on built-in gains/goodwill if tax regime ends - Separate rate model applies once TP 17 enters into force - C antons may introduce separate rate model instead of depreciation model
- Capital tax relief on qualifying investments (i.e. 10%) and patents
- P atent box, R&D deduction and step-up for regimes combined cannot exceed 70% of total income
- Preferential tax regimes are abolished
- Cantons to significantly reduce tax rates (e.g. 12-12.5%)
The legislative proposal does not contain a notional interest deduction. In order to maintain an attractive tax environment for financing activities, interested parties have stepped-up their efforts to have such a measure reintroduced into the package. The results from the public consultation are expected to be published in December 2017 and will be discussed in the Swiss parliament in spring 2018. Whereas the government currently expects the reform to enter into force in 2020, some of the rules may already have an impact in 2018/2019.
For instance, most cantons allow for a tax neutral step-up on built-in gains/goodwill up to the amount of the tax free quota under the regime once a tax regime is no longer applied. Depending on the timing, Swiss business operations may benefit (i) from a tax neutral step-up in basis followed by a tax effective depreciation for a period of five to ten years; or (ii) from a separate taxation of built-in gains/goodwill at a significantly reduced rate for a period of five years. Due to timing restraints, it is recommended to analyse the impact of such step-up mechanism on their Swiss operations as soon as possible.
Switzerland will reduce its VAT rates as of 1 January 2018. The new rates will be as follows:
- Regular rate: 7.7% (current: 8.0%) - Reduced rate: 2.5% (current: 2.5%) - Special rate for hotels, etc.: 3.7% (current: 3.8%)
Swiss taxpayers will have to amend their IT systems and will have to carefully analyse whether to charge the current 2017 VAT rate or the new VAT rate applicable as of 1 January 2018. This concerns supply of goods or services rendered during the phase in between the end of 2017 and the beginning of 2018. The relevant VAT rate is determined by the time of the supply of goods or services and not by the date of the invoice, nor the actual payment. Non-compliance can lead to costly tax leakage.
Finally, the Swiss federal tax administration issued guidance in view of the revised Swiss VAT rules as of 1 January 2018. In essence, these new rules will require any foreign entity to register for Swiss VAT if its global turnover from supply of goods or services exceeds CHF 100,000. The change will mainly affect non-resident entities, which: (i) supply goods to Switzerland; and/or (ii) provide telecommunications/electronic services to Swiss consumers. We recommend to analyse the potential impact of these changes.
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About Loyens & Loeff
Loyens & Loeff N.V. is an independent full-service firm of civil lawyers, tax advisers and notaries, where civil law and tax services are provided on an integrated basis. The civil lawyers and notaries on the one hand, and the tax advisers on the other, have an equal position within the firm. Its size and purpose make Loyens & Loeff N.V. unique in the Benelux countries and Switzerland.
The practice is primarily focused on the business sector (national and international) and the public sector. Loyens & Loeff N.V. is seen as a firm with extensive knowledge and experience in the area of, inter alia, tax law, corporate law, mergers and acquisitions, stock exchange listings, privatisations, banking and securities law, commercial real estate, employment law, administrative law, technology, media and procedural law, EU and competition, construction law, energy law, insolvency, environmental law, pensions law and spatial planning.
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You are most welcome to contact your regular Loyens & Loeff adviser if you would like to receive more information on any of the topics in this Year-End Tax Bulletin.
Beat Baumgartner, Alexander Bosman, Linda Brosens, Yves van Brussel, Marcel Buur, Harmen van Dam, Bert Gevers, Tom Hamen, Pierre-Antoine Klethi, Heiko Lohuis, Bert van der Poel, Jelmer Post, Natalie Reypens, Lucia Sahin, Daniel Schfer, Bruno da Silva, Georges Simon, Jan van de Streek, Fabian Sutter, Maxime Vermeesch, Wies Verstraaten, Patrick Vettenburg, Jochem van der Wal and Ruben van der Wilt.
Closing date of publication This publication closed at 13 November 2017. This means that later developments have not been included in this publication. Please note, that many of the developments and changes addressed in this Year-End Tax Bulletin are based on relevant legislative proposals, some of which are expected to enter into force on 1 January 2018 and others at a later date. As some of these proposals still need to be adopted by the relevant legislative bodies in Belgium, Luxembourg, the Netherlands and Switzerland, it is uncertain whether and which of these proposals will enter into force. Moreover, if these proposals do enter into force, this may be in an amended form.
Disclaimer Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name "Loyens & Loeff", cannot accept any liability for the consequences of making use of this issue without their cooperation. The information provided is intended as general information and cannot be regarded as advice.
As a leading firm, Loyens & Loeff is the logical choice as a legal and tax partner if you do business in or from the Netherlands, Belgium, Luxembourg or Switzerland, our home markets. You can count on personal advice from any of our 900 advisers based in one of our offices in the Benelux and Switzerland or in key financial centres around the world. Thanks to our full-service practice, specific sector experience and thorough understanding of the market, our advisers comprehend exactly what you need. Amsterdam, Arnhem, Brussels, Hong Kong, London, Luxembourg, New York, Paris, Rotterdam, Singapore, Tokyo, Zurich