The new rules for withholding tax on cross-border payments exceeding PLN 2 million shall be applicable in Poland from 1 July 2020. Norway is considering the introduction of a withholding tax on interest and royalties paid to non-resident related parties with effect from 1 January 2021. The CJEU approved the compatibility of the Hungarian turnover tax with the Treaty on the Functioning of the European Union. The Luxemburg Tax Authorities issued a guidance on recently introduced CFC rules. The Luxembourg Council of Ministers has imposed a ban on deductibility of interest and royalty payments to companies established in non-cooperative jurisdictions. The Arbitration Court of the Moscow District authorised the application of thin capitalisation rules on domestic loans. The UK issued updated draft legislation to a new 2% digital service tax applicable since 1 April 2020.
Under the new legislation rules, which are supposed to be fully effective as from 1 July 2020, a domestic entity that makes cross-border payments in excess of PLN 2 million to a foreign entity during a single tax year is required to withhold tax at the time of payment at the standard domestic rate (i.e., 20%, except for dividends, which are taxed at 19%) on the amount exceeding PLN 2 million (Corporate Income Tax (CIT) Act article 26(2e)). A Polish payer company may apply a reduced rate or withholding tax exemption under an applicable tax treaty or an EU directive but only if (i) the company’s management board provides a signed statement to the tax authorities confirming, under penalty of perjury, that the recipient of the payment qualifies for the tax relief; or (ii) a withholding tax clearance opinion is obtained from the tax authorities. The amendments will apply retroactively as from 1 January 2020.
On 27 February 2020, the Norwegian Ministry of Finance (MOF) issued a consultation paper regarding the possible introduction of a withholding tax on interest and royalties paid to non-resident related parties with effect from 1 January 2021. Norway currently does not impose withholding tax on interest or royalties under its domestic law, and most of Norway’s existing tax treaties allocate exclusive taxing rights to such income to the other contracting state. According to the consultation document, interest paid to a related party that is a tax resident in a low tax jurisdiction (i.e., a jurisdiction where the effective taxation is less than two-thirds of the tax that would have been due if the related party was a Norwegian tax resident) would be subject to a 15% withholding tax. Royalties (i.e., payments for the use or right to use intangible assets) paid to a non-resident related party also would be subject to a 15% withholding tax, but irrespective of whether the recipient is a resident in a low tax jurisdiction. The payer would be responsible for withholding the tax in connection with each payment and would be required to submit a declaration within seven days from the date the payment was made. The MOF has requested comments on the proposal by 27 May 2020. A detailed legislative proposal will likely be presented in October 2020 as part of Norway’s fiscal budget for 2021.
On 3 March 2020, the Court of Justice of the European Union (CJEU) issued a decision in the Tesco case (C-323/18), ruling that the Hungarian special turnover tax in the store retail trade sector (“special tax”) does not violate the freedom of establishment under the Treaty on the Functioning of the European Union. The state aid questions referred to the CJEU were determined to be inadmissible. Under the Hungarian special tax, companies were taxed progressively on their turnover between 2010 and 2012. The first bracket—turnover up to HUF 500 million (around EUR 1.5 million)—was taxed at 0%. The rate increased for three other brackets, and the top bracket on turnover exceeding HUF 100 billion (around EUR 300 million) was taxed at a rate of 2.5%. No distinguishing criterion was applied to treat cross-border situations less favourably than domestic situations. However, according to Tesco, standalone Hungarian companies predominantly benefitted from the 0% tax rate, while the highest bracket was almost entirely applied to Hungarian resident group companies with non-Hungarian parent companies. The CJEU, however, decided that any illegality under EU law of the exemption from the special tax for which some taxable persons qualify is not capable of affecting the legality of that tax itself. The court then considered Tesco’s argument that the progressive tax rate structure was incompatible with the freedom of establishment because Hungarian-owned companies usually benefitted from a 0% or 0.1% tax rate, while the companies that suffered the highest tax rate generally were part of multinational groups. The CJEU noted that progressive taxation may be based on turnover, since, on the one hand, the amount of turnover constitutes a neutral criterion of differentiation and, on the other, turnover constitutes a relevant indicator of a taxable person’s ability to pay. The fact that the greater part of the special tax was borne by companies owned by individuals or legal persons from other EU member states could not, by itself, warrant classification of the tax as discriminatory.
On 4 March 2020, the Tax Authorities issued a circular providing guidance on the recently implemented controlled foreign company (CFC) rules. Under the CFC rules, the income of low-taxed controlled foreign subsidiaries (or branches) is to be taxed at the level of the relevant resident corporate shareholder (or head office) when certain conditions are met, as if the income had been directly realised by the shareholder (or head office). The circular intends to complement the existing Luxembourg transfer pricing rules and introduces the obligation for Luxembourg taxpayers to prepare on an annual basis a transfer pricing documentation containing a functional analysis covering any relationships with foreign entities or permanent establishments that based on the CFC rules are deemed to be considered as CFC. Such documentation should be made available upon request to the Luxembourg tax authorities. The circular also determines that the net income inclusion is limited to the revenue generated by the assets and risks located in the CFC, but controlled by the significant people located at the Luxembourg taxpayer. The net income inclusion shall be determined on the basis of the transfer pricing rules.
On 25 March 2020, the Council of Ministers adopted a bill to implement the guidelines of the Council of the EU agreed on 5 December 2019 to introduce a specific provision disallowing the deduction of interests or royalties paid or owed to a related enterprise established in a country or territory included in the EU list of non-cooperative countries and territories for tax purposes. The bill aims to combat certain operations, including financial, which are carried out with related companies established in such country or territory.
On 25 February 2020, the Arbitration Court of the Moscow District held that the rules apply to a loan granted by a Russian company to a related Russian company. During a tax audit, the tax authorities denied the deductibility of interest expenses for a loan granted by a Russian company to another related Russian company. The tax authorities considered that thin capitalisation rules apply to the interest expenses relating to the loan due to the fact that both Russian companies were controlled by the same parent company, a tax resident of Cyprus. The Arbitration Court supported the position of the tax authorities, pointing out that thin capitalisation rules under article 269(2) of the Tax Code apply not only in the case of direct participation of the foreign company (creditor) in the capital of the Russian company (borrower), but also in the case of indirect participation of a foreign company in the capital of the Russian companies that concluded the loan agreement.
UK legislation update on digital service tax
On 19 March 2020, the UK issued updated draft legislation and further HM Revenue & Customs guidance in respect of the new 2% tax on revenues of large businesses that provide a social media service, search engine, or online marketplace to UK-based users. The UK digital services tax (UK DST) will apply as from 1 April 2020. The tax will apply to groups undertaking one or more relevant digital service activities (i.e. the provision of a search engine, social media service, or online marketplace) for third party users. The guidance states that sales of e-commerce retailers/online sales generally are not intended to be in scope, and that the intention is to only cover cases where the business acts as an intermediary and matches buyers and sellers. An online service will not be in scope where there is only one user selling a particular thing on the platform. Services which facilitate business-to-consumer, business-to-business, or consumer-to-consumer transactions are all in scope. It is irrelevant whether transactions are concluded on the marketplace itself or outside of the platform. The extent to which platforms are passive or actively regulate content/carry on value-adding services (e.g., delivery) also is not a relevant factor. The charge to UK DST will apply to a group where two threshold conditions are met:
- More than GBP 500 million of global revenues arise to the group in connection with any in-scope digital services activities; and
- More than GBP 25 million of revenues arise to the group from in-scope business activities linked to the participation of UK users (“UK digital service revenues”).
The charge to UK DST is calculated as 2% of the total UK digital services revenues arising to group members after deduction of an annual allowance of GBP 25 million. The UK DST liability is allocated to each (UK and non-UK resident) group member in proportion to their share of the group’s UK digital service revenues. A cross-border relief claim can be made to reduce UK digital services revenues of an online marketplace by 50% in respect of revenues that also are subject to a similar DST in another country. HMRC intends to update the guidance with a list of similar foreign taxes.
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