Issue 73 - 11th May 2007
Sentiment
Reading is an essential element of any tax advisors “homework” – keeping up to date with the latest trends and developments in international tax is important so that we stay in tune with what is happening around the world. Hopefully you, our readers, find the ITN informative and a useful addition to your weekly reading. Just recently I have been ploughing through a fascinating book on the way in which a modern professional advisory firm should function and be managed. One key element is of course how to charge clients for tax advice. The theory posited by the authors is that billing time is an archaic concept which has little relation to the value of the services actually provided. Whether this is true I don't know, but it certainly has some merit. By way of analogy Mercedes or BMW don't price a car simply by reference to the number of hours it takes to make, but by reference to a number of elements, two of which are quality and the value the customer believes the product to be worth. Whether fees are calculated on an hourly basis or value basis, the most important issue is ensuring that we are providing value for money when advising clients.
The other book I have been reading is about the 44 days Brian Clough spent at Leeds United in the early '70s. Cloughie, who went on to manage the best team in the world (Nottingham Forest FC, who, at the time of writing have been beaten by Yeovil in the play-offs!), had a unique approach to management which I may emulate if all else fails!
Happy reading!
Tax tip of the day
Despite the recent increase in interest rates, there appears to be no slow-down in UK property development activity. Rental yields may be compressing but the upside in developing property is certainly still attractive. The UK tax system is unusual in that non-resident property investors can realize capital gains free of UK taxation. Non-resident developers are, however, in principle liable to UK tax since they are, by the very nature of their activities, carrying on a trade. Despite this, we do have EU structures which allow UK development profits to be realized free of UK tax. The financing of such deals is also a critical component and here again we have sophisticated structures which can be used to blunt anti-abuse and limitation of benefits provisions. If you would like to discuss how IFS can help, please call us.
European Union / France
3% tax on immovable property held by non-resident companies incompatible with EC freedoms
Where French immovable property is held by a non-resident company, a 3% “Special Tax” is charged annually (on the commercial value of the property). This tax is not applicable to French resident companies holding French real estate. The tax may be mitigated where the company owning the French real estate is resident in a jurisdiction which has concluded a double tax agreement with France which includes a non-discrimination clause. The French Supreme Civil Court referred Case C-451/05 to the ECJ which involved a Luxembourg 1929 Holding company owning French real estate. The 1929 Holding company is not able to benefit from the French/Luxembourg treaty, and in any event the treaty does not have a non-discrimination clause. The Supreme Civil Court referred, in broad terms, the following questions:
- Is the fact that the exemption from the 3% tax is based on an ‘administrative provision' compatible with the freedom of movement of capital?
- If yes, would the Mutual Assistance Directive be construed as effective enough at preventing tax avoidance and does the 3% tax constitute a wealth tax?
- Under the principle of freedom of establishment, is it possible to extend treaty-based non-discrimination between two Member States, to a company in another Member State that does not have the relevant provision in a treaty?
The AG considered first questions 2 and 3. In regard to question 2, the AG held that the 3% tax fell within the Mutual Assistance Directive as it is supplementary to the French wealth tax which is included in the directive. The AG further held that the Directive overrides the France/Luxembourg treaty, and that the treaty is only applicable where it does not override the Directive. As such the 1929 Holding company is covered by the Directive. The AG dismissed the third question, and went on to consider at length question 1.
In answering the first question, the AG suggested that the limitation in Article 58(3) of the EC treaty, which allows discrimination between resident and non-resident companies under domestic law, must be interpreted narrowly. The AG suggested that the 3% tax would not be discriminatory if it could be justified by “overriding reasons of general interest”. Such overriding reasons may include the prevention of tax evasion where the measure, in this case the exemption from the 3% tax, specifically excludes “wholly artificial arrangements” which are undertaken with the sole intention of avoiding tax, from the tax benefit.
France levies the 3% tax to counter tax avoidance where the identity of the ultimate beneficial owner of the property is not disclosed. The AG opined that the French 3% tax levied in order to counter tax evasion was not proportionate to its aims, citing that the French authorities could have employed less restrictive measures in countering tax avoidance. The AG concluded that the 3% tax is incompatible with the freedom of capital movement, because it disproportionately discriminates between resident and non-resident companies holding French real estate.
France
Finance Bill 2008
With a new French President elected, a number of new tax measures have been released which are proposed to be included in the Finance Bill 2008. These include:
- Currently the effective rate of tax in France, including income tax, wealth tax, and local taxes may not exceed 60%, it is proposed that the maximum effective rate should not exceed 50%.
- The French Government, by amending the current IHT provisions, estimate that 90% of all French tax payers will fall outside the scope of inheritance tax.
- A tax incentive to encourage investment into SMEs is proposed to be introduced, which would allow up to €50,000 invested to be deductible from the net wealth tax liability of investor.
- It is proposed that an individual will be able to deduct their mortgage interest in respect to their principal residence.
- The French Government propose to abolish the annual wealth tax.
Iceland
Under Icelandic domestic law 10% tax is withheld on dividends paid by an Icelandic company. However, dividends paid to non-resident companies are subject to a further surcharge of 15% whereas resident companies are not subject to this surcharge. Iceland is not part of the EU, however it is in the EEA and has responded to the Denkavit case (see ITN 63 for details) by abolishing this discriminatory surcharge. The new rules provide dividends distributed from Iceland to companies within the EEA are not taxable and as such is brought in line with the tax treatment of domestic companies.
The Netherlands
Dutch Investment Fund – Vrijgestelde beleggingsinstelling
In recent ITNs we have reported on new fund regimes in various jurisdictions, most recently in Luxembourg in the last edition. This week it is the turn of the Netherlands to propose a new tax exempt open-ended investment fund, a so-called vrijgestelde beleggingsinstelling (“VBI”). A VBI should either hold a license or qualify from an exemption from the supervision of investment institutions under the Dutch Act of Financial Supervision.
Under the proposals the VBI would be established as either a Dutch limited company (“NV”), a mutual fund, or a comparable foreign entity. Certain risk diversification measures apply and investments are limited to marketable shares and bonds, instruments commonly traded on the money markets, commodity derivatives, forward contracts, swaps, and options of the aforementioned instruments. Under the VBI regime it is not possible to invest directly in real estate; however, provided the risk diversification requirements are met, it may be possible to invest in shares of a company owning real estate, although it is not a requirement for the shares to be listed on a stock exchange.
The VBI regime will provide a full exemption from Dutch corporate income tax as well as an exemption from withholding tax on dividend distributions. The VBI will not, however, be considered resident in the Netherlands for double tax treaty purposes. As such it will not be possible to reclaim foreign withholding tax on dividends or interest under relevant double tax agreements.
Unlike the FBI regime there are no shareholder requirements, financing limits or distribution obligations. With the envisaged changes the Netherlands aim to become more attractive for the establishment of investment funds. However, with the very flexible and tax efficient SIF recently introduced in Luxembourg (see ITN 72) questions remain whether the VBI will succeed. In the next edition we will review the fund options in Malta, a jurisdiction that is going from strength to strength.
The Netherlands
Share buy-back schemes challenged
Under Article 4c of the Dutch Dividend Withholding Tax Act, Dutch listed companies may buy back their own shares and receive dividends free of withholding tax where certain conditions are satisfied. However, companies which do not meet the requirements of Article 4c could make use of schemes whereby they buy back their own shares through a bank. Through this arrangement the bank would levy withholding tax but claim for a refund under Article 4c. The Dutch tax authorities are challenging such schemes arguing that the bank must be assessed as to whether it actually took any real risk, or whether the bank was merely a ‘middle man'. An analogy can be drawn with the Indofood Case (see ITN 63 for full details) where it was held that a nominee or conduit company could not be regarded as the beneficial owner of interest (or other types of income, such as dividends and royalties). Arguably, the bank in this case is not the beneficial owner of the withholding tax credits claimed, as the bank is merely a conduit for obtaining the tax credit.
