Tax 

In Brief from International Taxation [October 2021]

Germany will allow partnerships to tax income as corporations through corporate tax. The Finnish Supreme Administrative Court has issued a ruling regulating the rules restricting the tax deductibility of interest expenses. The European Union has included Hong Kong in the list of non-cooperative tax jurisdictions in Annex II, together with a commitment to adjust the tax exemption regime for foreign income. This and more can be found in current news from the field of international taxation.

Germany: Taxation of companies in the new regime

From 1 January 2022, in the Federal Republic of Germany, partnerships (e.g. Offene Handelsgesellschaft – akin to general partnerships (v. o. s.) in the Czech Republic, Kommanditgesellschaft – akin to limited partnership (k. s.) in the Czech Republic), which have so far been taxed in a so-called transparent manner at the level of their partners, will be allowed to be taxed as a corporations through corporate tax. The precondition for the exercise of this option is an application filed no later than one month before the end of the tax period.

Germany: Are you about to register a patent or trademark?

You may be surprised to learn that Germany has applied a special rule for the taxation of intellectual property since 1925. Under national law, non-resident companies are obliged to pay income tax on intellectual property, which is the subject of an entry in the German public register of intellectual property. Mere entry in the register is thus considered to be an indicator of taxable presence in Germany. All rights and patents registered in the German national register on the basis of an application to the European Patent Office are thus subject to this scheme. In November 2020, the German Ministry of Finance proposed an amendment to this regime so that the taxable presence of a non-resident could not be inferred from mere registration in a public list of rights and patents in Germany. However, the bill has not advanced in the legislative process and the current regime remains applicable. According to the German tax authorities, income associated with the transfer of an intellectual property right is subject to German withholding tax in a proportion corresponding to the turnover covered by the transfer of rights (unless the factual and formal conditions for a possible exemption are met).

When registering a trademark or right with the European Patent Office, we recommend checking whether the aforementioned regime may also apply to you.

Finland: Interest deduction limitation rules

On 10 September 2021, the Finnish Supreme Administrative Court issued an important ruling (SAC:2021:123) on the application of interest deduction limitation rules. According to the decision, the payments based on interest swap contracts (including fixed interest rates, payments due to negative reference interest rates, and premiums) should be considered as interest expenses when applying the interest deduction limitation rules and calculating the amount of net interest expenses. The decision actually expands the scope of the Finnish interest deduction limitation rule, as the payments based on interest derivative contracts have usually been considered outside the scope of the limitation rules.

European Union: Hong Kong’s commitment for implementation of good tax principles

On 5 October 2021, the Council of the European Union approved updates to the EU list of noncooperative tax jurisdictions and the inclusion of Hong Kong in annex II, which is the “state-of-play” document with respect to commitments taken by cooperative jurisdictions to implement good tax governance principles. Hong Kong has committed to amending its foreign-source income exemption regime, which is considered by the European Union as harmful, until 31 December 2022. According to the European Union, the currently applicable foreign-source income exemption regime creates double nontaxation; specifically, nontaxation of passive income in the form of interest or royalties where the income recipient has no substantial economic activity.

European Union: Step forward on the adoption of CbC reporting directive

On 28 September 2021, the Council of the EU adopted its position at the first reading of the EU public country-by country reporting directive. The mostly positive position (Cyprus and Sweden are understood to have voted against the position, and the Czech Republic, Ireland, Luxembourg, and Malta to have abstained) of the Council means a step towards the final adoption of the directive. The CbC reporting directive is intended to enhance the corporate transparency of large multinational companies by requiring certain multinational undertakings with annual global consolidated revenue exceeding EUR 750 million to disclose publicly, in a specific report and on a country-by-country basis, corporate income tax information relating to their operations in each of the 27 member states, as well as information on certain third countries on the EU list of noncooperative jurisdictions. This is expected to be the case by mid-2023, following the transposition of the directive into the national laws of EU member states. The next step before the directive can enter into force is the formal approval of the provisional agreement from June 2021 by the European Parliament, which is expected to be scheduled for one of the Parliament’s two plenary sessions in November. Then the directive will enter into force on the 20th day following its publication in the EU Official Journal.

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