International Tax Round-up May 2019 1 International Tax Round-up. May 2019 Below is an overview of key international tax developments across the Linklaters network. For further information please get in touch with your usual tax contact. International Developments OECD Model Tax Convention 2017: full version released The OECD has made available the full version of its Model Tax Convention on Income and on Capital 2017. Previously only the condensed version (which does not contain the historical notes and the background reports that are included in the full version) was available. The 2017 update reflects the OECD recommendations to tackle base erosion and profit shifting. < back to top > France Management Package and Social Security Charges – Groupe Lucien Barrière case The Barrière case is the first decision by the French Civil Supreme Court (Cour de cassation) on 4 April 2019 regarding the social security charge analysis of a non-qualifying equity-based plan. In such case, a company (the “Company”) had set up an equity-warrant based incentive plan for the Company’s managers in the context of the investment of a private equity investment fund in the Company. An investment contract provided that the equity warrants would become exercisable if specific conditions were met (listing of the Company or exit of the private equity investment fund). In addition, the equity warrants were not freely transferable, but the beneficiaries of the equity warrant had granted a call option to the investment fund allowing the investment fund to purchase their share warrant upon an exit or in case of a withdrawal of the relevant beneficiary. Contents International Developments .......................................... 1 France ............................... 1 Germany ........................... 2 Luxembourg ...................... 4 Netherlands ...................... 5 Portugal ............................ 6 Sweden ............................. 7 United Kingdom ................ 9 International Tax Round-up May 2019 2 The French social security authorities (Urssaf) took the view that the capital gain realised by the managers upon the disposal of the equity warrant was subject to social security charges and reassessed the employer of the managers accordingly. According to the decision of the French Civil Supreme Court, the gains realised by employees through a non-qualified equity-based plan can be recharacterised as remuneration subject to social security charges (i) each time that there is a link between the employees’ participation in the relevant plan and their employment contracts and, apparently, (ii) regardless as to whether the investment made by the participants in the context of the equity plan is made at arm’s length or not. The French Civil Supreme Court also indicates in its decision that the valuation of such non-qualifying equity-based plan should be made at the time when the equity-based instruments are freely transferable. This decision by the French Civil Supreme Court brings additional complexity to non-qualifying equity-based incentive plans as it does not follow the approach of the French Administrative Supreme Court (Conseil d’Etat) (in charge of income tax), which tends to focus on the financial risk or the nominal investment of the managers to recharacterise their gain as employment income (instead of capital gain), as the case may be. Since the French Civil Supreme Court quashed the decision made by the Paris Court of Appeal, additional granularity regarding this case law may be provided by the further decision to be held regarding this matter. < back to top > Germany The German Annual Tax Act 2019 On 8 May 2019, the Federal Ministry of Finance has published its ministerial draft bill for an Annual Tax Act 2019 (officially named “Act Further Promoting E-Mobility and Amending Further Tax Provisions”). This draft provides for several amendments to various German tax laws which shall come into force as of 1 January 2020. In particular, the ministerial draft bill comprises the first official and specific proposal for a reform of the real estate transfer tax (“RETT”) on share deals which has been subject to political discussions for more than one year. In essence, the proposal follows the decision of the conference of the ministers of finance of 29 November 2018 (see Linklaters Tax Alert of 3 December 2018). The previous relevant thresholds for the transfer and unification of shares in a real estate-holding company shall be reduced from 95% to 90% in the future. In addition, the period within which the transfer of shares in a real estateholding partnership to new partners will trigger RETT shall be extended from International Tax Round-up May 2019 3 5 to 10 years. Likewise, the holding- and lock-up periods which are to be observed inter alia, in case of a tax-exempt transfer of real estate between partnerships and their partners and in case of a transfer of partnership interests will be extended from 5 to 10 years or 15 years, respectively. For example, under current law it is possible to acquire less than 95% (typically 94.9%) of the shares in a real estate-holding partnership in a first step and then, after 5 years have elapsed, to acquire the remaining shares (typically 5.1%). The initial acquisition of less than 95% of the shares does not yet trigger RETT. The subsequent acquisition of the remaining minority shareholding after 5 years is subject only to a pro rata RETT in the amount of such minority shareholding. In the future, this shall be possible only after 15 years. Furthermore, it is intended – corresponding to the provision for partnerships – to introduce a new rule for the direct or indirect transfer of shares in real estateholding corporations. Accordingly, RETT shall be triggered if within 10 years at least 90% of the shares in a corporation, holding German real estate, are transferred to new shareholders. However, for the purpose of protection of a legitimate expectation, acquisitions shall be disregarded if those are based on contracts that have been entered into within one year prior to the official commencement of legislative procedure (i.e. introduction of the draft bill to the Federal Parliament) and provided that the shares are being transferred within one year after that commencement. In order to avoid a loss of tax revenue on share deals that would trigger RETT under the previous law but not under the new law (in particular, because the relevant threshold of 90% under the new law has already been exceeded at the time of the entry into force of the new law, but not the applicable participation quota of at least 95% under the previous law), a subsidiary application of the previous events triggering RETT is anticipated. For example, if a shareholder at the date of the entry into force of the new law holds 94.9% of the shares in a real estate-holding corporation and acquires the remaining 5.1%, this will not trigger RETT under the new law, as the relevant threshold of at least 90% has already been exceeded before. However, by the additional acquisition, the relevant threshold of at least 95% under the previous law will be exceeded for the first time. Hence, only the subsidiary application of the previous law will prevent a RETT-neutral step-up in such cases. It remains to be seen if the amendments described above will ultimately be implemented. The political debate on a tightening of the provisions for share deals is still underway. From a VAT perspective, the draft bill transposes, inter alia, the regulations with respect to consignment stocks as provided by European law. Accordingly, the supply out of a consignment stock shall qualify as an intra-community supply in the future; therefore, the transfer of goods to a consignment stock is disregarded for VAT purposes. This would involve that the goods will remain in the consignation stock for a maximum of one year and that the subsequent buyer is defined already at the time of transfer to the consignation stock. The current draft bill is also supposed to transpose the case law of the ECJ with respect to the refusal of VAT exemptions and of input VAT deduction in International Tax Round-up May 2019 4 case of objectionable participation in a tax evasion into national law. According to the case law of the ECJ, the entitlement to an input VAT deduction and tax exemption will forfeit if the entrepreneur knew or should have known that the respective supply was involved in a VAT evasion. For entrepreneurs, in particular in sectors that are susceptible to fraud (intermediary trade of highpriced, easily portable physical subjects and rights), it will be key to verify if all entrepreneurs involved correctly pay the VAT due on the supplies in the service chain. In addition, such measures are to be clearly documented to serve as evidence vis-à-vis the tax authorities. In addition, it is intended to implement the case law of the ECJ with respect to the limited trade tax reduction for foreign companies. The previous Sec. 9 no. 7 of the German Trade Tax Act (“GewStG”) contains a reduction for profits from shares in foreign companies. For that purpose, a distinction is made between companies meeting the requirements of the Parent-Subsidiary Directive and foreign corporations with their management and registered office outside the EU. With its judgment dated 20 September 2018 (C-685/16 EV), the ECJ had discarded the previously applicable limited trade tax reduction for foreign companies (see Linklaters International Tax Round-up 10/2018). The intended amendments to Sec. 9 no. 7 GewStG shall now take account of the provisions of the ECJ judgment. The limited legal requirements for foreign corporations shall be abolished. At the same time, the previous special provision for EU companies shall be repealed. In effect, no distinction shall be made between companies with their management and registered office in the non-German EU or in other foreign countries in the future. From what we hear, the associations now have the opportunity to submit their views until 5 June 2019. Hence, a government draft could be adopted by the Federal Cabinet even prior to the parliamentary summer recess. < back to top > Luxembourg Multilateral Convention – Multilateral Instrument The Law of 7 March 2019 transposed the Multilateral Convention on the Implementation of Tax Treaty Measures to Prevent the Erosion of the Tax Base and the Transfer of Profits (the "MLI"). On 9 April 2019, Luxembourg submitted to the OECD its instrument of ratification of the MLI, together with a list of reservations and notifications in accordance with Articles 28(6) and 29(3) of said MLI. The MLI will enter into effect on 1 August 2019 in accordance with its Article 34(2). However, its effective applicability and effect on double tax treaties will ultimately depend both on the date of deposit of the instrument of ratification (which has now happened) and on the reservations and notifications of the countries with which Luxembourg has a double tax treaty with. International Tax Round-up May 2019 5 Bill no. 7431 transposing into national law Council Directive (EU) 2017/1852 dated 10 October 2017 on tax dispute resolution mechanisms in the European Union On 11 April 2019, the Luxembourg Government submitted this bill to Parliament. Its purpose is to establish rules for a mechanism to settle disputes between Luxembourg and one or more Member States of the European Union when such disputes arise from the interpretation and application of agreements and conventions concluded by Luxembourg with one or more Member States of the European Union and providing for the elimination of double taxation of income and, where applicable, of capital. The innovation provided by this bill consists in the establishment of mechanisms to unblock the situation, within the strict deadlines applicable at each procedural stage, in order to guarantee the resolution of the tax dispute and consequently the elimination of double taxation. The appointment, at the taxpayer's request, of an advisory committee, composed of representatives of the competent authorities and independent persons, or even of an alternative dispute resolution committee, makes it possible to rule, where appropriate, on the admissibility of the dispute settlement request and/or to decide the dispute in a binding manner on its substance. Luxembourg Budget Law 2019 voted On 26 April 2019, the Luxembourg Budget Law for 2019 was voted. Among other tax measures, it has reduced by one percent the Corporate Income Tax (CIT) rate. Thus, as from 1 January 2019, the CIT rate amounts to 17%. Taking into account the Municipal Business Tax (MBT) prevailing in the territory of Luxembourg City and the unemployment fund contribution, the overall nominal rate is 24.94%, to be compared with the former 26.01% rate. In addition to this measure, the tax bracket to which the reduced 15% CIT rate applies is extended from EUR 25.000 to EUR 175.000. < back to top > Netherlands The Netherlands’ new Decree on international tax rulings On 23 April 2019, the Dutch State Secretary of Finance published a draft Decree outlining the new policy for tax rulings with an international character (the “Decree”), reflecting the announced intention thereto on 22 November 2018. Under the Decree, which is expected to become effective as from 1 July 2019, stricter conditions will apply to qualify for obtaining an international tax ruling. For example, the requesting company must have sufficient ‘economic nexus’ with the Netherlands. International Tax Round-up May 2019 6 The maximum term for new tax rulings will in principle be 5 years. Only in exceptional circumstances (e.g. long-term contracts) and provided that there will be a mid-term evaluation, the maximum term of new rulings will be 10 years. Furthermore, the process of issuing rulings will be more centralised and be assessed by one central team, the new International Tax Certainty Executive (College Internationale Fiscale Zekerheid). Economic Nexus Pursuant to the Decree, certainty in advance in the form of a tax ruling is only given in situations where the requesting taxpayer forms part of a group which has operational business activities in the Netherlands (‘economic nexus’), while in addition operational business activities are carried out for the account and risk of the requesting taxpayer, for which a sufficient number of relevant employees is employed in the Netherlands, either by the requesting taxpayer or the group of which that taxpayer forms part. These business activities in the Netherlands should be in line with the function of the taxpayer within the group. No international tax ruling will be granted if: i) the sole or decisive aim of the transaction for which a ruling is requested is to save Dutch or foreign taxes; or ii) the requested ruling concerns a direct transaction with an entity located in a jurisdiction included on the Dutch list of low-tax and non-cooperative jurisdictions. Transparency To increase transparency, the Decree further states that international tax rulings will be published in anonymised and summarised form. Such summaries of ruling requests that are denied will also be published. In this respect, the Dutch State Secretary for Finance reassures that the summaries will be anonymised in such a way that they cannot be traced back to individual taxpayers. Going forward, it should be monitored how the ‘economic nexus’ concept will be applied in practice, i.e. what level of operational business activities is considered sufficient in this respect. < back to top > Portugal ATAD – Transposition into Portuguese Law On 3 May 2019, Law no. 32/2019 (the “Law”) was published partially transposing Council Directive (EU) 2016/1164 of 12 July 2016 (the “Directive”) into Portuguese law and reinforcing anti-tax evasion measures through amendments to the Corporate Income Tax Code, the General Tax Law and the Tax Procedure Code. International Tax Round-up May 2019 7 The Law entered into force on 4 May 2019 and includes provisions on exit taxation, change of residence, PE assets de-allocation, PE exemption method, controlled foreign companies (“CFCs”), EBITDA limitation on interest deductibility and on the general anti-abuse rule (“GAAR”). No provisions on hybrid mismatches were included at this point. Though amendments are generally in line with the Directive, the new GAAR wording varies from that of the Directive (and as well from the one previously in force in Portugal) to the extent it encompasses the “arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are carried out with abuse of legal forms or are not genuine, having regard to all relevant facts and circumstances” while the Directive´s GAAR wording applied only (assuming remaining conditions were met) to arrangements which “are not genuine” and not as well to those ”carried out with abuse of legal forms”. Amendments to the tax treaty between Sweden and Portugal On 17 May 2019, a new Protocol was signed between the Portuguese and Swedish Finance Ministers on the taxation of Swedish pensioners living in Portugal under the Portuguese non-habitual resident tax regime. The Protocol generally grants Sweden taxing rights on pensions derived by such taxpayers as of 1 January 2020, in opposition to the previous wording which generally granted such taxing rights to the residency country. A transitional period until 1 January 2023 is contemplated, pursuant to which Portugal shall keep such taxing rights provided relevant pensions are not effectively tax exempt, as was the case so far. The Protocol likewise introduces certain BEPS adjustments, e.g. on permanent establishment rules, and is yet to be approved and ratified before it may enter into force. < back to top > Sweden Proposal on the implementation of the tax dispute resolution mechanisms in the EU The Swedish Government has submitted a referral to the Council on Legislation regarding a new act on the dispute resolution procedure in cases concerning tax agreements within the EU. The member states concerned shall, through so-called mutual agreement, try to agree on how to solve double taxation situations. The new act incorporates the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union. The new act is proposed to enter into force on 1 November 2019. International Tax Round-up May 2019 8 Reduced VAT on e-publications The Swedish Parliament has voted through the Swedish Government’s proposal on reduced VAT on e-publications from 25 percent to 6 percent. This means that e-publications will have the same tax rate as books, newspapers, magazines etc. Products that mostly consist of advertising, moving images or music are not covered by the tax reduction. The new rules will enter into force on 1 July 2019. Amendments to the tax treaty between Sweden and Portugal For details please see article above. Ruling from the Swedish Supreme Administrative Court on depreciation deductions after a merger In a ruling from 17 April 2019, the Swedish Supreme Administrative Court (the “Court”) held that a company does not lose the right to use accounting depreciation without interruption, despite a merger with a subsidiary that has used another depreciation method and even though the book value of the transferring company’s assets does not correspond to the tax value. In summary, the Court held that the company may apply accounting depreciation even after the merger, provided that a special deduction is made over five years for the difference between the taxable and the book value of transferring company's assets. Ruling on interest deduction On 10 April 2019, the Council for advance tax rulings (the “Council”) has issued its first ruling in respect of the amended interest deduction limitation rules for related party debt that came into force on 1 January 2019. According to the preparatory work, the purpose of the amended interest deduction limitation rules for related party debt is to prevent aggressive tax planning and abuse. In the case tried, a Swedish company, Sub A, had borrowed funds from its Swedish group parent, Parent B. Parent B had financed the intra-group loan with external financing. Sub A and Parent B where not able to tax consolidate and the intra-group loan was granted on market terms. Parent B had historic tax losses, meaning that the interest received on the intra-group loan was not taxed. According to the Council, it is assumed that the indebtedness has not arisen “exclusively, or virtually exclusively in order to provide the group with a significant tax advantage” where the external borrowing exceeds the internal borrowing. The Council further held that it cannot be considered contrary to sound business considerations to have one group company borrow funds externally and then on lend the funds internally where the first company can obtain better International Tax Round-up May 2019 9 loans terms than other group companies. Other circumstances such as the internal loan being on market terms and being used to finance external acquisitions indicate that the indebtedness is not merely tax-driven. In conclusion, the Council held that, even though the indebtedness entailed a significant tax benefit for the group, it was not considered to be exclusively, or virtually exclusively in place for that reason. The case tried was thus not considered to constitute the type of abuse that the rules intend to prevent. < back to top > United Kingdom Exemption from UK CFC rules found to be State Aid in part The EU Commission has concluded that the finance company exemption (“FCE”) from the UK controlled foreign company (“CFC”) rules constitutes illegal state aid in part. The UK is now required to recover the illegal aid by collecting the additional amounts of tax which would have otherwise been payable from relevant multi-nationals. More specifically, the Commission has found that: the FCE does constitute illegal state aid to the extent that it exempts nontrading finance profits deriving from UK activities (i.e. attributable to UK significant people functions or “SPFs”) from the CFC charge; but the FCE does not constitute illegal state aid to the extent that it exempts nontrading finance profits deriving from capital investment from the UK from the CFC charge, so long as there are no UK SPFs involved. The Commission released a press release summarising its findings in early April 2019 and has now released its full decision. Multi-nationals that benefited from the FCE will need to consider next steps. Whilst the Commission’s decision is carefully reasoned and deals with (and dismisses) many of the potential areas of appeal, the decision’s classification of the FCE as “partially selective” under the state aid rules, as well as its assessment of the implications of the EU fundamental freedoms, give rise to potential grounds for challenge. Whether it is worth a particular taxpayer challenging the decision will depend on how much tax is at stake - which will be determined by the extent to which the non-trading finance profits received by their CFCs are referable to UK SPFs. Assessing this will be challenging, but the process may already be underway in some multi-national groups due to the changes to the FCE which took effect from 1 January 2019. If the state aid ruling is not challenged, negotiation with HMRC (and potentially litigation) as to how it applies in a given case will be key. Read more International Tax Round-up May 2019 10 CJEU reference in United Biscuits litigation concerning whether pension fund management services are insurance transactions The UK Court of Appeal has made a reference to the CJEU in the United Biscuits litigation, which has now been published in the Official Journal (see C235/19 United Biscuits (Pensions Trustees) and United Biscuits Pension Investments). The question referred is: “Are supplies of such pension fund management services (PFM Services) as are provided to the Trustees by (a) Insurers and/or (b) Non-Insurers "insurance transactions" within the meaning of Article 135(1)(a) of the EU VAT Directive (2006/112) (formerly Article 13B(a) of the Sixth VAT Directive (77/388))?” The Court of Appeal reasoning which led to this reference does not yet seem to be available. For details of the High Court decision, see UK Tax News Issue 36 (2017). This development will be of interest to the many investment fund management service providers who are following this case. < back to top > International Tax Round-up May 2019 11 This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. © Linklaters LLP. All Rights reserved 2019 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. 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International Tax Round-up - May 2019
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