In Brief from International Taxation [September 2020]

Since 1 September 2020 The Czech republic has implemented MLI rules to Tax Treaties with Australia and Canada. The European Commission published the Study on EU-28 2018 VAT Gap, the largest VAT Gap was observed in Romania. Latvia and Romania have prolongation for the VAT registration threshold for small businesses. The deduction of Interest Paid to Non-Cooperative Jurisdictions will be limited in Sweden from 2021. Tax Relief for Polish Residents Working Abroad will be probably abolished. The leaseback agreements have guidelines for correct Tax Treatment in Slovenia.

Czech Republic Publishes Details of Amendments to Australia/Canada-Czech Republic Treaty

On 8 September 2020, the Ministry of Finance of the Czech Republic published a document, containing details of the amendments made to the Canada – Czech Republic Income Tax Treaty (2001) by the Multilateral Convetion (“MLI”). The Czech Republic and Canada deposited their instruments of ratification of the MLI on, respectively, 13 May 2020 and 29 August 2019. The MLI therefore entered into force for the Czech Republic on 1 September 2020 and for Canada on 1 December 2019. On 14 September 2020, the Ministry of Finance of the Czech Republic also published a document containing details of the amendments made to the Czech Republic – Australia Income Tax Treaty (1995) by the MLI. Australia deposited their instruments of ratification of the MLI on, respectively, 13 May 2020 and 26 September 2018. The MLI therefore entered into force for the Czech Republic on 1 September 2020 and for Australia on 1 January 2019.

The amendments concern:

  • the text of the preamble of the treaty;
  • the text of paragraphs 1 and 3 of article 24 (Mutual Agreement Procedure) of the treaty; and
  • application of the Principal Purpose Test Rule.

European Commission Reports on EU-28 2018 VAT Gap of EUR 140 Billion

In its press release of 10 September 2020, the European Commission (EC) presented the latest figures on the VAT Gap for 2018. According to the EC’s study, the EU-28 VAT Gap amounted to EUR 140 billion in 2018 (slight decrease compared to the 2017 data). However, the EC already anticipates an increase in the VAT Gap in 2020 due to the COVID-19 pandemic.

The VAT Gap is defined as the difference between the amount of VAT revenue actually collected and the theoretical amount that is expected to be collected, given the observed information on the country’s economy and the actual VAT legislation. The study emphasises that the VAT Gap cannot be seen solely as an equivalent of VAT fraud. Besides VAT fraud and tax evasion and avoidance, the VAT gap can also be influenced by bankruptcies and tax arrears, as well as reporting problems in national accounts.

The smallest VAT Gap was observed in Sweden (1%), the largest in Romania (33.8%). The fact sheet on the figures is available here.

Council of the European Union Extends the Authorisation Given to Latvia and Romania

Latvia was granted authorisation to apply a VAT registration threshold of EUR 40,000 for small businesses by the Council Implementing Decision (EU) 2017/2408, the authorisation of which has now been prolonged until December 2024.

On 10 September 2020, the Council Implementing Decision (EU) 2020/1260, published in the Official Journal of the European Union, extended the authorisation for Romania to apply the higher VAT exemption threshold of EUR 88,500 for small businesses until 31 December 2024. Moreover, the Council of the European Union also prolonged the authorisation for Romania to limit the VAT deduction right for motorised vehicles to 50% until 31 December 2023. The reason for the derogation is that generally input VAT is deductible to the extent an asset is used for the taxable activity of the taxable person. However, the splitting of business and personal use for passenger cars can be difficult and may create a significant administrative burden for enterprises. Consequently, this derogation creates a legal assumption of 50% private use, enabling the VAT deduction right for the remaining 50% without having to collect supporting documentation (e.g. road logs).

Sweden: Government Proposes Prohibiting Deduction of Interest Paid to Non-Cooperative Jurisdictions from 2021

In a referral to the Legal Council (Lagrådsremiss), the government has proposed legislation to prohibit the deduction of interest paid to companies established in a jurisdiction contained in the EU’s list of non-cooperative jurisdictions for tax purposes. The proposal would take effect from 1 January 2021.

The prohibition would apply to interest relating to both internal (intra-group) and external (third party) debts owed to companies in such jurisdictions. Such interest is currently deductible (under conditions).

The proposal also seeks to amend Chapter 39 section 7 of the Income Tax Law (Inkomstskattelag), to ensure that Sweden’s Controlled Foreign Company (CFC) rules will also apply in relation to Trinidad & Tobago (which is also included on the EU’s list of non-cooperative jurisdictions). This change is needed because under Sweden’s domestic legislation, Trinidad & Tobago is currently still on a “white list” which (partially) prevents the application of the CFC rules.

After review by the Legal Council, the proposal will move forward to the parliament.

Polish Government Announces Plans to Abolish Tax Relief for Polish Residents Working Abroad

The Polish Council of Ministers announced plans to tighten the tax system concerning individual income tax and flat rate tax. The most important measure that has been announced is the abolition of a tax relief for Polish residents working abroad, thus exempting foreign income from tax in Poland.

The tax relief is currently available to Polish residents working abroad, who work in countries with which the tax treaties applicable between these countries and Poland apply the ordinary tax credit as a method of avoidance of double taxation. If not for the tax relief, those Polish residents would have to pay tax in Poland according to domestic provisions and tax rates, deducting the foreign paid tax from the tax due in Poland. However, domestic legislation (article 27g of the Individual Income Tax Law and article 13 of the Law on Flat Rate Tax), grants those Polish residents the tax relief that enables them to settle the tax in Poland in the same way as individuals subject to the exemption with the progression method, therefore exempting the foreign income from an additional tax in Poland.

The Council of Ministers expects to adopt the draft Law in the third quarter of 2020.

Slovenia: Clarification of Tax Treatment of Leaseback Agreements

Slovenian tax authorities have clarified whether sale and leaseback agreements can be considered to be a single financing service (in terms of giving credit to the taxpayer) and the corresponding tax treatment.

Specifically, the guidelines clarify that an immediate sale and leaseback of goods between the same parties constitute a single financial transaction to increase the taxpayer’s liquidity and not two separate legal transactions, if the following conditions are met:

  • the taxpayer (the seller) transfers the goods to another taxpayer (the lessor) for the purpose of obtaining assets as a loan, and the lessor later concludes a financial leasing contract with the seller for the same goods; and
  • the mentioned purpose is shown if the transfer of goods does not allow the lessor to dispose of it (as e.g. in the case of ownership of goods).

The guidelines expose the tax treatment under the VAT, real estate transfer tax and financial transaction tax when the leaseback agreement meets those conditions.

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