In Brief from International Taxation [February 2020]

Leaders from the USA and France agree on a compromise in collecting digital services tax by France. The Australian tax authority focuses on the taxation of cross-border transactions with intangible assets. The Korean Supreme Court confirmed that any overseas public collective investment vehicle (public fund) could be recognised as a resident under a relevant tax treaty and a beneficial owner of Korean source income earned. CJEU ruled that the Dutch requirement for refund of dividend WHT to non-resident fiscal investment institution might breach EU law. This information and other news can be found in the following article.

USA and France declare a truce with respect to digital services tax (DST)

The World Economic Forum meeting in Davos held in the week of 20 January 2020 provided an opportunity for negotiations and some movement in issues related to unilateral digital services taxes (DSTs) and the OECD’s broader project to revise international tax rules. French and US leaders arrived in Davos hoping to defuse a conflict that began in 2019 when France imposed a 3% DST on large – and mostly US-based – technology companies and the USA in turn threatened by harsh tariffs on French products. France implemented its tax in the fall of 2019, with a retroactive effect from 1 January 2019, and it collected first-year payments from the impacted companies in November. The next payment was due to be collected in April 2020. As a result of negotiations of the leaders of both states, France will suspend its collection of the DST until the end of 2020, and the USA will hold off imposing the proposed tariffs. The US leaders will continue supporting the multilateral OECD process, which in their opinion offers the greatest potential for long-term success in resolving complex tax issues arising from digitalisation.

Australia: Cross-border intangible asset transactions under the ATO’s control

On 22 January 2020, the Australian Taxation Office (ATO) released its Taxpayer Alert (TA 2020/1), outlining concerns regarding the “mischaracterisation” of activities/payments in connection with intangible assets, and migration of intangible assets. TA 2020/1 describes arrangements where Australian entities are not appropriately remunerated for the functions performed, assets used, and risks assumed in connection with intangible assets. Of particular concern are issues relating to the migration of Australian intangible assets to international related parties on non-arm’s length terms or in a manner intended to avoid tax in Australia. In broad terms, the ATO identifies two arrangements: A) Arrangements involving the bifurcation of intangible assets and mischaracterisation of Australian development, enhancement, maintenance, protection, and exploitation (DEMPE) activities; and B) Arrangements involving the non-recognition of Australian DEMPE activities. Taxpayers who participate in, or contemplate, arrangements under which they undertake activities in Australia using offshore intangibles should consider whether those arrangements are of the types described in TA 2020/1 or have some of the features identified. Taxpayers that the ATO considers as higher risk will be subject to increased scrutiny. The ATO is encouraging affected taxpayers to engage with the ATO to discuss their situation.

Korean Supreme Court rules on tax treaty benefit entitlements for Luxembourg SICAVs

In the past, SICAVs (i.e. an open-ended collective investment scheme) enjoyed the treaty benefits on interest and dividend income arising from Korean bond and equity stock investments. However, in May 2011, the Korean Ministry of Strategy and Finance issued an authoritative tax ruling providing that SICAVs were no longer entitled to the benefit under article 28 of the treaty. This ultimately resulted in an increase in taxes for a number of Korean sub-custodian banks (the withholding obligors under the law) to be paid to the Korean tax authority. The issue before the Court was whether SICAVs were entitled to the treaty benefits on interest and dividend income arising from Korean source bond and equity stock investments. The Korean Supreme Court ruled that SICAVs were considered collective investment vehicles and not holding companies as stipulated in article 28 of the treaty. They are also Luxembourg tax residents and beneficial owners of the Korean source income earned and as such, they are entitled to the reduced withholding tax rate under the treaty. With this most recent significant ruling, the Supreme Court confirmed that any overseas public collective investment vehicle (public fund) could be recognised as a resident under a relevant tax treaty and a beneficial owner of Korean source income earned.

CJEU: the Dutch requirements for refund of dividend WHT to non-resident FIIs may breach EU law

On 30 January 2020, the Court of Justice of the European Union (CJEU) issued its decision in a case (C-156/17) referred by the Netherlands Supreme Court on whether a non-resident fiscal investment institution (FII) should be entitled to a refund of withholding tax on dividend distributions from Dutch resident companies. Dutch law recognises several ways to neutralise the imposition of dividend withholding tax, with the applicable method depending on the recipient of the dividend. Under Dutch domestic law, a direct or indirect refund of dividend withholding tax is available if a collective investment vehicle: is located in the Netherlands (condition revoked as of 1 August 2007); or qualifies as an agent for dividend withholding tax purposes (condition applicable as of 1 January 2008); and fulfils other specified criteria to qualify as an FII. This gave rise to the question of when a non-resident FII would be comparable to a resident FII and thus entitled to the dividend withholding tax refund. The case at hand was selected as a test case to be heard by the Supreme Court, and was in turn referred by the court to the CJEU for a preliminary ruling. In its decision, the CJEU reconfirmed that EU member states may specify the conditions under which taxpayers are entitled to a dividend withholding tax refund. This includes establishing rules that allocate the burden of proof relating to entitlement to taxpayers and the tax authorities. The rules, however, may not be such that while they apply in principle to all taxpayers, in practice, non-resident taxpayers generally are unable to meet the criteria.

Netherlands Supreme Court defines “mutual funds” for WHT purposes

On 24 January 2020, the Dutch Supreme Court responded to a preliminary ruling request from an appellate court presenting questions regarding whether a German single-beneficiary Spezial-Sondervermögen (i.e. a type of specialised investment fund) is subject to dividend withholding tax in the Netherlands. The Supreme Court concluded that although the fund might temporarily have a single beneficiary, the determination as to whether investments are made on behalf of two or more beneficiaries should be assessed based on the memorandum and articles of association of the fund, as well as on the intention of the founders and the factual situation of the beneficiaries. The Supreme Court therefore concluded that a special purpose fund simply earmarked funds for a specific purpose and had no owners (such as shareholders or security holders).The Supreme Court determined that the fund itself could not file a refund request if it was deemed to have no legal personality pursuant to Dutch law. In such cases, refund requests must be made by the beneficiaries of the fund.

Netherlands: Anti-abuse rule to non-resident substantial shareholders

On 10 January 2020, the Dutch Supreme Court (Hoge Raad der Nederlanden, the Court) published its decision in X BV v. the tax administration (Case No. 18/00219) concerning the application of the provision that foreign dividend payments derived from a substantial shareholding were taxable in the Netherlands in case of wholly artificial arrangements aimed at avoiding tax. The Court first dealt with the question whether the substantial shareholding could be regarded as a business asset of the taxpayer. If this was indeed the case, the anti-avoidance provision concerned would not apply. The Court also rejected the taxpayer’s arguments that (i) the shareholding was not held with the main purpose (or one of the main purposes) to avoid the imposition of income tax or dividend withholding tax at the level of the director/substantial shareholder; and (ii) the imposition of dividend withholding tax was incompatible with the Parent-Subsidiary Directive (90/435)) or the freedom of establishment of article 49 of the Treaty on the Functioning of the EU (TFEU). With respect to the burden of proof, the Court considered the fact that the tax inspector had to provide proof (or indications) that a construction was artificial and mainly aimed at tax avoidance. Subsequently, the taxpayer had an opportunity to show that the construction was based on economic motives. Finally, the Court observed that a wholly artificial construction existed where, in a group structure with an underlying shareholder established outside the European Union, a company established in the European Union was interposed between the shareholder and a Dutch group company to avoid the imposition of Dutch income tax or dividend withholding tax. This is the case if the interposed company, or the establishment thereof in an EU Member State, has no real significance. Based on the evaluation of the facts available, the Court agreed with the decision of the Hague Court of Appeal that the construction was wholly artificial. Consequently, the Court decided in favour of the Tax Administration, and held that the dividends were subject to withholding tax in the Netherlands. As the Court of Appeal considered the transfer of the actual management of the taxpayer to Luxembourg to be a decisive aspect of the arrangement, the Court finally held that the 2.5% withholding tax for qualifying shareholders under the Luxembourg – Netherlands Income and Capital Tax Treaty (1968) (as amended through 2009) applied.

Russia: The dividends treatment under the tax treaty with France

Russia’s Ministry of Finance has issued a guidance letter explaining the application of the France-Russia tax treaty to dividend distributions. The guidance letter was issued in response to an inquiry regarding the corporate tax implications when a Russian legal entity paid dividends to its French parent company under the parent-subsidiary regime established by the French Tax Code. The parent-subsidiary regime allows qualifying parent companies to be either 95 percent or 99 percent exempt (depending on the existence of a French tax grouping) from corporate tax on dividends received from qualifying subsidiaries if the relevant securities are held for a minimum of two years and represent 5 percent or more of the share capital of the issuing entity. The MOF noted that under article 10 dividends paid by a company resident in a contracting state to a resident of the other contracting state might be taxed in the state of residence of the company paying the dividends according to the laws of that contracting state. However, if the beneficial owner of the dividends is a resident of the other contracting state, the tax cannot exceed 5 to 15 percent under specific conditions. The MOF confirmed that the provisions of article 10 of the treaty applied to the French parent-subsidiary regime. It ruled that if a French company applied that regime, the income of its subsidiaries might be exempt from corporate income tax at the level of the parent company. The MOF noted that a French company that was the beneficial owner of Russian-source dividend income and requested the application of the reduced 5 percent withholding tax rate for that income under the France-Russia tax treaty had to provide evidence confirming its compliance with the eligibility conditions stipulated by the French Tax Code.

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