Tax 

In Brief from International Taxation – June

Austria is considering introducing the digital service tax as of 1 January 2020. Based on the CJEU the national courts are not eligible to determine if certain requirements of a state aid regime are compatible with the fundamental freedoms. Aruba, Barbados and Bermuda were removed from the list of non-cooperative jurisdictions. German Lower Tax Courts introduces new interpretation of anti-treaty shopping rules. The Dutch appellate court decided that there is no reason for TP adjustment to a hybrid loan. Poland introduced the rules for defining a beneficial owner.

Austria: Introduction of digital taxation

On 4 April 2019, the Austrian Federal Ministry of Finance (MOF) released a draft bill on the taxation of the digital economy. The digital service tax (DST) is expected to apply as from 1 January 2020. Companies providing covered services would be subject to the DST only if their worldwide revenues exceed EUR 750 million and their revenues from Austrian-source covered services exceed EUR 25 million. For multinational groups, these thresholds would apply to consolidated revenues. As a covered service will be classified online advertising services (e.g. the placement of advertisements on search engines and online banner advertisements). A covered service would be deemed to be provided in Austria if the advertisement is displayed on the device of a user with an Austrian IP address.

 CJEU: No national assessment of compatibility with TFEU

On 2 May 2019 the CJEU issued a decision concluding that national courts do not have jurisdiction to determine whether certain requirements associated with a state aid regime are compatible with the fundamental freedoms in the Treaty on the Functioning of the European Union (TFEU). The CJEU acknowledged that the assessment of the compatibility of domestic rules in the EU member states with state aid measures falls within the exclusive competence of the European Commission. The CJEU’s decision is clear in its effect: where the refund of dividend withholding tax to (domestic) public entities is considered state aid, national tax courts cannot grant a refund to foreign public entities based on application of the fundamental EU freedoms.

EU: update of list of non-cooperative jurisdictions

On 17 May 2019, the European Council announced updates to the EU list of non-cooperative jurisdictions for tax purposes. Aruba, Barbados and Bermuda each have made the required changes to their laws and/or political commitments to get them removed from the main list. Barbados has made commitments at a high political level to remedy EU concerns regarding the replacement of its harmful preferential regimes by a measure of similar effect, whilst Aruba and Bermuda now have implemented their commitments. As a result, only 12 jurisdictions remain on the list: American Samoa, Belize, Dominica, Fiji, Guam, Marshall Islands, Oman, Samoa, Trinidad & Tobago, United Arab Emirates, the US Virgin Islands, and Vanuatu. The Council has indicated that it will continue to regularly review and update the list in 2019, but has requested that updates are limited to a maximum of two per year as from 2020.

Germany: Court rejection of the MOF’s position on anti-treaty shopping rules

The Lower Tax Court of Cologne, in a 23 January 2019 decision (which recently has been made public, but has not yet been officially published by the court), rejected the German tax authorities’ (MOF’s) interpretation of a Court of Justice of the European Union (CJEU) decision on the domestic anti-treaty shopping rules. The MOF set forth its interpretation of the CJEU decision in a decree dated 4 April 2018, in which the MOF limited the application of the ruling to claims for a reduced dividend withholding tax rate that are based on the EU parent-subsidiary directive (PSD). However, the MOF’s decree is limited in its scope and, due to its unclear wording, created a high level of uncertainty for affected taxpayers relating to the MOF’s interpretation of the CJEU decisions. The decision of the Lower Tax Court of Cologne is noteworthy for several reasons. It sets out the court’s position on several different issues that are relevant for inbound investors and for withholding tax payments in general. It rejects views of the tax authorities that have been heavily criticised by tax commentators as not being in line with EU law and the CJEU decisions, and hopefully will pave the way for a federal tax court decision on these matters. Even though the tax authorities have not yet officially filed an appeal of the lower tax court’s decision, it is expected that they will do so and that the case will be decided by the federal tax court.

Netherland: rejection of TP adjustment to hybrid loan

A Dutch appellate court has held that deductions on a hybrid debt instrument were not prohibited by transfer pricing or financial instrument characterisation rules, but that the deductions could be denied as an abusive avoidance arrangement. The court concluded that the instruments should be respected as debt for Dutch tax purposes and that the 13 percent interest rate was not excessive under the transfer pricing rules. Despite persuading the court that no specific provisions on transfer pricing or debt-equity classification disallow the deductions, the court agreed with the government that the arrangement was an abusive tax avoidance transaction subject to the Dutch doctrine of “fraus legis”. The use of the convertible instruments had no purpose other than to create significant tax deductions that eroded the Dutch tax base, the decision says.

Poland: New definition of beneficial owner

The new definition of a beneficial owner (BO) in Poland’s corporate income tax and personal income tax acts, which became effective on 1 January 2019, has made the requirements to qualify as a BO more stringent, thus limiting the scope of beneficial ownership. The new definition may be applied even in cases where an applicable tax treaty does not contain a beneficial ownership clause. As a result, the scope of tax treaty withholding tax exemptions may be limited and qualification for treaty benefits for intercompany payments may be in question. According to the new definition in Polish tax law, a BO is an entity that meets the following criteria: it receives a payment for its own benefit, it can decide how to use the payment and it bears the economic risk of loss for all or part of the payment; it is neither an intermediary, nor a representative, trustee or other entity that is obligated to transfer the amount to another person, in whole or in part; and it carries out actual economic activities in its state of residence if the amounts it receives are related to these economic activities.

The article is part of dReport – June 2019, Tax news; Grants and investment Incentives.

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