The Recovery Package in the context of tax changes
Following the Government announcement on the Recovery Package, the related amendment to the tax regulations was published. Below we summarise a selection of the most important changes in this area.
A number of states have recently introduced new rules for substance requirements based on which the nexus taxation is derived, among them are Curaçao, the British Virgin Islands, Jersey and Guernsey. The CJEU AG gives its opinion on cases relating to cross-period loss relief, Belgian notional interest deduction and freedom of establishment. The guidance on tax treatment of virtual currency is newly available in the United States. Belgium is preparing for Brexit. The advance tax ruling issued in Luxembourg before 1 January 2015 will be valid only to the end of 2019. A new version of the list of non-cooperative jurisdictions was published by the European Union.
US guidance on tax treatment of virtual currency
On 9 October 2019, the US Internal Revenue Service (IRS) issued a ruling and FAQs providing guidance for taxpayers holding virtual currency as a capital asset. The IRS guidance addresses many areas associated with virtual currency transactions, including tax accounting, valuation, reporting, charitable contributions and the tax implications of “hard forks” and airdrops. In Notice 2014-21, the IRS stated that virtual currency is treated as property for federal income tax purposes and provided examples that illustrate how general income tax principles would apply to transactions using virtual currency. The recently issued FAQs provide several additional examples that continue to emphasize that longstanding federal income tax principles applicable to property will apply to virtual currency in the same manner, notably with respect to: determining gain or loss on sale of virtual currency, determining gain or losses on exchanges of virtual currency (e.g. for services or other property), determining basis on the purchase of virtual currency, as well as the treatment of the receipt of virtual currency as remuneration for services or wages.
Belgian draft bill on transitional regimes for Brexit
On 18 October 2019, the Belgian Council of Ministers adopted a draft bill on various transitional regimes with respect to Brexit. The transitional regimes include for example maintenance of benefits related to supplementary pension, long-term saving and pension saving contracts concluded in or before December 2019; withholding tax exemptions for remuneration paid to researchers completing R&D projects with universities; exemption for capital gains realized before 31 December by private investment companies established in the United Kingdom and the tonnage tax regime.
CJEU AG in cross-period loss relief case
On 17 October 2019, an Advocate General of the Court of Justice of the European Union (CJEU) delivered her opinion in Case C-405 /18, which concerns the interpretation of freedom of establishment under Article 49 TFEU, read in conjunction with Article 54 TFEU. The question that arises in the case is whether the freedom of establishment permits a taxpayer, when relocating a company’s place of management, to claim in the host State a tax loss incurred in previous years in another Member State. The case is set in the context of an action brought by a Czech company which is claiming a loss before the Czech tax authorities. The company sustained that loss previously in the Netherlands. It was no longer able to take the loss into account there due to the transfer of its place of effective management to the Czech Republic,and thus in the absence of economic activity in the Netherlands. The AG concluded that the simple transfer of the place of a company’s management from one Member State to another Member State falls within the scope of freedom of establishment under Article 49 TFEU. The exclusion of cross-period loss relief in the case of a cross-border transfer of the place of management does constitute a restriction of freedom of establishment. However, it is justified by the preservation of the balanced allocation of the power to impose taxes between Member States.
CJEU upholds Belgian notional interest deduction
On 17 October 2019, the Court of Justice of the European Union (CJEU) issued a decision upholding the Belgian allowance for corporate equity (notional interest deduction, NID). The CJEU concluded that the measure does not lead to disadvantageous treatment of Belgian companies with foreign permanent establishments (PEs), even though different calculation methods apply to calculate the NID for such companies and companies that operate purely domestically. In the case at hand, the Belgian Court of First Instance in Antwerp requested a preliminary ruling from the CJEU on the method of calculating the NID, which is different for Belgian companies with a PE in another EU member state and Belgian companies that operate purely domestically. Where the profits of a foreign PE are exempt in Belgium under a relevant tax treaty, the net value of the PE’s assets is initially taken into account when calculating the NID granted to the Belgian company. The NID is subsequently reduced by the lesser of (i) the part of the deduction for risk capital that relates to the PE and (ii) the positive result generated by the PE. In contrast, this deduction does not apply where a company operates solely in Belgium. The referring court asked whether this difference in treatment violates the freedom of establishment principle in article 49 of the Treaty on the Functioning of the European Union.
CJEU AG opinion on freedom of establishment
The Advocate-General (AG) concluded that articles 49 and 52 of the Treaty on the Functioning of the EU must be interpreted as precluding legislation of a member state which excludes from the exemption from withholding taxes, in a general way on the basis of a territorial criterion, dividends paid by subsidiary companies incorporated in the given member state to their parent companies incorporated in Gibraltar.
EU updates list of non-cooperative jurisdictions
On 10 October 2019, the European Council announced that it had removed the Marshall Islands and the United Arab Emirates from annex I of the EU list of non-cooperative tax jurisdictions (black list); and Albania, Costa Rica, Mauritius, Serbia and Switzerland from annex II (grey list). As a result, nine jurisdictions remain on the list of non-cooperative jurisdictions: American Samoa, Belize, Fiji, Guam, Oman, Samoa, Trinidad and Tobago, the US Virgin Islands and Vanuatu. The Council reiterated that it would 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. The actual list of non-cooperative jurisdictions is available here.
Definition of substance requirements
Number of states have recently introduced new rules for substance requirements based on which the nexus taxation is derived. Among these states is Curaçao where the Ministry of Finance issued a decree providing guidance on the term “substance” within the meaning of article 1C, sub 2 of the Corporate Income Tax Code on 12 September 2019. The decree is effective as per 13 September 2013. Substance requirements are derived for example from the place of seat of management or the residency of board members. Amended rules for the recognition of economic substance were also introduced by the British Virgin Islands (BVI) on 9 October 2019. The substance rules introduced by BVI refers to BVI companies and limited partnerships with legal personality (LPs) that are engaged in “relevant activities,” unless they are considered non-resident for the purposes of the Economic Substance Act. Due to political commitments given to the EU Code of Conduct Group in December 2018, also Guernsey and Jersey have recently introduced a mandatory disclosure regimes (MDR) with respect to economic substance information. The MDR introduced in Jersey on 23 September 2019 would require Jersey “intermediaries” to report to the Jersey tax authorities if they become aware of Common Reporting Standard avoidance arrangements or passive offshore vehicles that are held through opaque structures. The implemented MDR in Jersey follows the OECD version of MDR, rather than the EU version of MDR (known as DAC 6), where there is a much broader list of reportable arrangements. The new legislation shall be enacted by 31 December 2019. The newly MDR proposed by Guernsey shall be also introduced into law by 31 December 2019. The proposed MDR rules would require Guernsey promoters of tax avoidance arrangements and service providers to disclose information on the arrangement or structure to the Guernsey Revenue Service.
Limited validity of tax rulings issued before 1 January 2015 in Luxembourg
Luxembourg’s 2020 draft budget law presented by the Finance Minister to the Chamber of Deputies on 14 October 2019 includes a new provision regarding the validity period of advance tax decisions issued by the tax authorities before 1 January 2015. Currently, advance tax decision requests receiving a favourable response from the tax authorities after 1 January 2015 are valid for five years, subject to certain conditions. Decisions issued before 1 January 2015 are generally valid indefinitely provided the decision complies with the legislation in force. The 2020 draft budget law would introduce a new provision under which these decisions would be applicable only until the end of fiscal year 2019. Taxpayers affected by the proposed change that wish to receive an advance decision covering tax years after 2019 would have to file a new application.
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