In Brief from International Taxation [March 2020]

CJEU concluded that the Belgian TOB is compatible of the measure with the freedom to provide services under TFEU. The EU published an updated of EU list of non-cooperative jurisdictions. The Netherlands published the FQA concerning to the decree on supervision of holding companies and group service companies. The Russian First Court of Appeal published an interpretation of beneficial owner concept under Cyprus treaty. The OECD released final guidance on the transfer pricing aspects of financial transactions.

CJEU rules Belgian TOB is not contrary to EU law

The Court of Justice of the European Union (CJEU) issued its decision on 30 January 2020 in a case (C-725/18) referred by the Belgian Constitutional Court in 2018, concluding that 2017 amendments to Belgium’s stock exchange tax (TOB) are not contrary to EU law. Belgium has imposed the TOB since 2007 on transactions (e.g., purchases and sales of shares, employee stock options, other financial instruments, etc.) taking place in Belgium that involve Belgian or foreign funds. Since 1 January 2017, the scope of the TOB was extended to include transactions executed by Belgian residents though professional financial intermediaries established outside Belgium. In such cases, the Belgian resident issuing the instruction to carry out the transaction is liable to pay the TOB (and file the required TOB returns), since Belgium cannot enforce obligations arising under Belgian tax law against foreign intermediaries. The taxpayer in the case at hand argued that the amendments to the legislation discourage Belgian issuers from using foreign intermediaries because doing so entails increased risk, is more expensive, and creates additional administrative obligations. The CJEU examined the compatibility of the measure with the freedom to provide services under article 56 of the Treaty on the Functioning of the EU (TFEU) and found that the situations of a Belgian resident using a Belgian intermediary and a Belgian resident using a foreign intermediary are comparable.

EU expands list of non-cooperative jurisdictions

On 18 February 2020, the Council of the European Union published an amendment of EU list of non-cooperative jurisdictions for tax purposes, including adding four more jurisdictions (Cayman Islands, Palau, Panama, and Seychelles) to the ”black list” (Annex I). These jurisdictions failed to implement the tax reforms to which they had committed by the agreed deadline. There are now 12 jurisdictions on the black list that already included American Samoa, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the US Virgin Islands, and Vanuatu. Annex II (“grey list”) contains those jurisdictions with pending commitments, these are Anguilla, Australia, Bosnia and Herzegovina, Botswana, Eswatini, Jordan, Maldives, Mongolia, Morocco, Namibia, Saint Lucia, Thailand, and Turkey. The Council noted that annexes I and II are to be updated no more than twice a year, and expects the next update to be in October 2020.

Netherlands: Q&A on pre-consultations for rulings with international character

On 25 February 2020, the tax authorities published a document with questions and answers concerning the July 2019 decree, i.e. the decree on supervision of (intermediary) holding companies and group service companies. The most important details are for example:

  • When filing a corporate income tax return, companies can tick a box requesting a decision from the Tax Administration on a certain tax aspect for the tax year concerned. If the decision is only requested for 1 tax year, this situation is not within the scope of the Decree.
  • Settlement agreements for the application of the participation exemption are not within the scope of the Decree because the team responsible for international advance tax rulings is not competent to take decisions with respect to such agreement.
  • No pre-consultation concerning an international advance tax ruling can be requested if the main or one of the main aims of a construction is to reduce Dutch or foreign tax. This rule applies to corporate income tax, dividend withholding tax and any other tax.
  • A ruling can be requested with respect to international aspects of corporate income tax, dividend withholding tax, tax treaties and other regulations for the avoidance of double taxation.
  • No ruling can be requested for transactions with low-tax countries applying a tax rate of less than 9% or countries included in the EU black list. This rule also applies if the Netherlands has concluded a tax treaty with such a country.
  • An advance ruling is only granted if sufficient nexus with the Netherlands exists. Holding companies can only obtain an advance tax ruling if real economic activities are carried on in the Netherlands. Activities of an auxiliary or administrative nature are not sufficient.

Russian ruling on interpretation of beneficial owner concept under Cyprus treaty

On 9 December 2019, the First Court of Appeal’s decision in case no. А11-6159/2018 regarding the interpretation of the beneficial owner concept in the case of a Russian company (RusCo) paying dividends to a company resident in Cyprus (CyprusCo) was published. In the  considered case RusCo paid dividends to CyprusCo between 2012 and 2014. Under article 10(2)(a) of the Cyprus – Russia Income and Capital Tax Treaty (1998), a withholding tax of 5% on dividends was applied by RusCo. Further to a tax audit, the tax authorities denied the application of the reduced withholding tax of 5% and reassessed the tax liability by applying the domestic dividend tax at a rate of 15%. The tax authorities were of the opinion that CyprusCo only performed technical functions of an intermediary company for the benefit of other companies and therefore could not be treated as the beneficial owner of these dividends. The First Court of Appeal agreed with the tax authorities and decided that CyprusCo was not the beneficial owner since, the shares in RusCo were the only assets held by CyprusCo; the dividends received from RusCo were the only sources of income for CyprusCo; CyprusCo only had a formal right to receive the dividends; and the dividends were subsequently paid to related companies resident in British Virgin Islands (BVI) in the form of dividends and interest.

OECD final guidance on transfers pricing aspects of financial transactions

On 11 February 2020 the OECD released final guidance on the transfer pricing aspects of financial transactions. The report includes guidance that reflects an approach of accurate delineation of the actual transaction to determine the capital structure (the mix and types of debt and equity) used to fund an entity within a multinational enterprise (MNE) group. The report indicates that an approach of accurate delineation, which may include a multifactor analysis, can be used before pricing a loan to determine whether the purported loan is regarded correctly or should be re-characterized as equity for tax purposes. The report lists a number of factors that may be used to distinguish intercompany debt from other forms of funding such as equity, these are for example: the presence or absence of a fixed repayment date, the obligation to pay interest, the source of interest payments etc.  The report also states that accurate delineation of financial transactions should begin with the thorough identification of economically relevant characteristics of the transaction, consistent with the application to other transactions. The new chapter of the OECD Guidelines sets out guidance for businesses and tax authorities on how to determine whether financial transactions between associated enterprises are consistent with the arm’s length principle. The guidance also covers what is considered a risk free and risk-adjusted rate of return, including various approaches that are aligned with established practice, and potential methodologies that may be appropriate. There remains, as anticipated, the option for countries to apply domestic rules in respect of when a loan should be considered to be equity for tax purposes, and the guidance is not prescriptive on how this should be approached. This will continue to be an area for potential double taxation if countries take different views, without recourse to resolution under double tax treaties.

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