In Brief from International Taxation [January 2020]

The mandatory registration of the beneficial owner was introduced in Iceland since 1 December 2019. The Luxemburg tax authorities published a guideline for the renewal of expiring advance tax decisions. United States proposed the final version of base erosion and anti-abuse tax regulations. Danish court made a negative decision on deductibility of royalties paid to a Swiss parent company, since the transfer prices set were not at arm’s length. EU member states failed to agree on the compromise proposal for public CbC reporting. Hungary has introduced an exit tax from 1 January 2020. The draft bill for seven and a half percent digital service tax was issued in Turkey.

Mandatory registration of beneficial owner in Iceland

On 4 December 2019, a bill which amends the recently passed legislation regarding the obligation to register beneficial owners of legal entities was presented to parliament. The amendments were considered necessary following the issues Iceland has had with the Financial Action Task Force (FATF) and after having been added to their grey list. The grey list is a list of countries which have failed to take sufficient measures to combat money laundering and the financing of terrorism. The obligation to register beneficial owners of legal entities that are already registered in the Icelandic Trade Register will be moved up to 1 March 2020 (currently 1 June 2020). The obligation to register beneficial owners of new legal entities has been in place since 30 August 2019, but the law provides for a deferral for legal entities already registered before this date with the Icelandic Trade Register. Since 1 December 2019, legal entities have been able to register their beneficial owners digitally through the website of the tax authorities.

Luxemburg: guidance on renewal procedure for advance tax decisions

On 3 December 2019, the Luxembourg tax authorities published on their website a newsletter detailing the formalities and procedural steps that taxpayers should follow if they wish to renew an expiring advance tax decision (ATA). The guidance may be particularly relevant to taxpayers whose ATAs were issued by the Luxembourg tax authorities before 1 January 2015 because such ATAs may already be null and void or become so on 1 January 2020. Luxembourg’s 2020 draft budget law, presented to the Chamber of Deputies in October 2019 and now under consideration by the legislature, includes a measure that would render invalid ATAs issued before 1 January 2015 to taxpayers using a fiscal year that has already closed for 2019 (e.g. an entity with a 31 March 2019 fiscal year end). Pre-2015 ATAs would become invalid as from 1 January 2020 for taxpayers using the calendar year. Since ATA requests granted by the Luxembourg tax authorities after 1 January 2015, in principle, are valid for five years, the proposed measure would align the treatment of pre- and post-2015 ATAs. Taxpayers affected by this provision that wish to obtain an ATA covering tax years after 2019 would have to file a new ATA request.

US base erosion and anti-abuse tax regulations

On 2 December 2019, the US Treasury and Internal Revenue Service released final and proposed base erosion and anti-abuse tax (BEAT) regulations. The BEAT, which applies in addition to a taxpayer’s regular tax liability, is designed to prevent the reduction of tax liability by certain large corporate taxpayers through certain payments made to foreign related parties and certain tax credits. The provision primarily affects corporate taxpayers with annual gross receipts averaging more than USD 500 million over a three-year period that make deductible payments to foreign related parties. The regulations provide detailed guidance regarding which taxpayers will be subject to the BEAT, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount (BEMTA), and the required base erosion and anti-abuse tax resulting from that calculation. The final regulations also affect any reporting corporations required to furnish information relating to certain related party transactions and information relating to a trade or business conducted within the US by a foreign corporation.

Danish court decision on deductibility of royalties paid to Swiss parent company.

On 4 July 2019, the Danish Eastern High Court (Østre Landsret) (the Court) gave its decision in the case of SKM2019.537.ØLR (published on 28 October 2019), which dealt with the arm’s length principle of paid royalties for various trademarks and trade names, extensive know-how, international network intangibles and new business concept trademark between 2006 and 2009 paid by a Danish subsidiary (DK Sub) to its ultimate parent company with head office in Switzerland (CH Parent). The amount of royalties was calculated based on the comparable uncontrolled price (CUP) method and set to 2% for Office and Industrial Business Lines and 4.0% for Professional Business Lines of the net sales. The Danish tax authorities disagreed with the transfer pricing (TP) analysis and took the view that the transfer prices set were not at arm’s length. The Court held that royalties paid by DK Sub for the use of CH Parent’s trademark and know-how were not a deductible operating expense. The Court considered that the burden of proof was not met as the TP documentation did not adequately explain that the marketing intangible assisted DK Sub in earning its income. The Court saw indications in the TP documentation that the royalty was imposed by CH Parent without much regard to the circumstances of DK Sub. The Court referred to the fact that price was the most important competitive parameter in the Danish market, but that DK Sub operated at a loss for a long period. In addition, the Court found that the marketing expenses of DK Sub indicated that the use of CH Parent’s trademark was of little benefit to DK Sub. An unrelated party would therefore not have paid or continued to pay for the right to use such trademark. The Court presumed that CH Parent had its own purposes of being represented in the Danish market.

EU: disagreement on proposal for public CbC reporting

At a meeting of the EU Competitiveness Council on 28 November 2019, a compromise proposal put forward by the Finnish presidency on a public country-by-country (CbC) reporting directive, amending accounting directive 2013/34/EU as regards the disclosure of income tax information, failed to gather sufficient support. The directive first was proposed by the European Commission in April 2016 and a revised version subsequently was approved by the European parliament in July 2017. Under the proposal, multinationals would be required to publish, for each country in which they are established, their assets and taxable income in that country, the amount of tax paid, the number of employees, etc.

Although there was broad support in the Council for enhanced transparency in the business activities of multinational companies in the various member states, there was not sufficient support for the presidency’s proposal, in particular, as regards the proposed legal basis. In a joint statement, Cyprus, the Czech Republic, Estonia, Hungary, Ireland, Latvia, Luxembourg, Malta, Slovenia and Sweden announced their support of the conclusions of the Council legal service, broadly that the proposal must be approved by the Economic and Financial Affairs Council and that the Competitiveness Council is not the appropriate forum for adopting a general approach on the proposal.

Introduction of exit tax in Hungary

In accordance with the implementing obligations of the EU Anti Tax Avoidance Directives, Hungary has introduced an exit tax from 1 January 2020. Exit tax is designed to prevent taxpayers from avoiding tax by transferring residence, assets or activities out of the country without tax being imposed on unrealized capital gains upon such transfer. Under exit taxation, Hungary is entitled to tax capital gains which are generated in its territory, but are unrealized at the time of transfer. The exit tax is levied provided a taxpayer transfers its tax residence to another country, with the exception of the assets which remain effectively connected with a permanent establishment (PE) located in Hungary; a taxpayer transfers assets from its Hungarian head office to its PE in another country, and Hungary loses the right to tax the transferred assets due to the transfer; a taxpayer transfers assets from its Hungarian PE to its head office or another PE in another country, provided that Hungary no longer has the right to tax the transferred assets due to the transfer; and a taxpayer transfers the business carried on by its Hungarian PE to another country if Hungary no longer has the right to tax the transferred assets due to the transfer. A 9% general rate of corporate income tax is levied on the difference between the market value of the transferred assets and activities as at the time of their exit and their net book value. In line with EU norms, the Hungarian implementing regulation allows taxpayers to opt for deferring the exit tax by paying five equal instalments over 5 years if the transfer is made to another EU Member State, or to a third country that is a party to the Agreement on the European Economic Area.

Seven and a half percent digital service tax in Turkey

On 21 November 2019, the parliament adopted Law No. 7193 amending certain tax laws and introducing a digital service tax (DST). The DST is imposed on revenue derived from the specific services rendered in Turkey, which are all types of online advertising, the sale of audio, video or any digital content in the digital environment; any services performed in the digital environment that enable such content to be heard, watched and/or played in the digital environment; and audio, video or any digital content recorded or used in electronic device; the provision and management of services in the digital environment that allow users to interact with each other (including services that are performed to allow or facilitate the sales of goods or services among users); and intermediary services performed in the digital environment relating to the aforementioned services. The spectrum regarding taxable persons for DST also covers resident and non-resident individuals, corporations and permanent establishments, and representatives of non-residents. Persons providing digital services with an annual worldwide revenue of less than EUR 750 million (the equivalent in TRY is being considered) during the previous fiscal year and with a total amount of taxable revenue from digital services obtained in Turkey of less than TRY 20 million are exempt from DST. There is also list of services which shall be exempted from the DTS like financial services or services provided by R&D centres or design centres. The DST rate is 7.5% and the DST is calculated based on the gross revenue derived from digital services provided, no deductions of expenses, costs or taxes are allowed for the purposes of calculating the DST base. Moreover, the DST is not stated separately in the invoices or similar documents produced by digital service providers. The DSTL will enter into force on the first day of the third month following the date on which the law is published in the Official Gazette.

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