Issue 76 - 24th October 2007
International Tax Newswire 76
Sentiment
I am sitting in Guernsey airport writing this sentiment, having spent the last few hours debating whether the zero rate of corporate tax to be introduced in Guernsey will have an impact on the validity of the Guernsey / UK double tax treaty. The same argument is applicable to Jersey and the Isle of Man and is an interesting one. For a company to benefit from a double tax treaty it must be resident for tax purposes in a given jurisdiction. If a Guernsey company, for example, is subject to tax, albeit at a rate of zero, is it tax resident for the purposes of the treaty? That’s what has been vexing me today and I think there are valid arguments to say that a treaty won’t apply in such circumstances, or at least will provoke a renegotiation of the relevant UK treaties.
In the UK, the new Chancellor has announced the Pre Budget Report, which has caused the odd stir. We have included the highlights (or lowlights) in our Notes re 2007 Pre-Budget Report and would welcome your comments – the conclusion we have come to is that there is not a shred of evidence in this latest PBR that the Government want to make the UK an attractive place to foreign companies or individuals. I don’t think I was the only tax advisor to be shocked by the changes to the domicile system; only a few days before the announcement I had been asked whether I thought the Conservative’s proposal of a £25,000 levy for “non-doms” was a runner. My response was this:
“Hmm, if the law changes in the way they have proposed I will run down Clarges Street naked. I simply do not believe this will happen – ever!”
How foolish! I’ve never been a gambling man and just my luck I get caught with my pants down! I am contemplating the time and date for this momentous occasion – more news to come.
It seems to me that the changes to the domicile rules have been brought about by the popular press and are motivated by political point scoring rather than for the good of the country. A recent article in the London Evening Standard was a work of pure fiction. It ranted and raved about the non-dom loop-hole (not so much a loop-hole but a specific provision of UK tax law) and the fact that foreign footballers plying their trade in the Premiership can take their salaries without tax! What a load of [foot]balls. Oh to be a journalist with the freedom to write what you want!
Happy reading!
Tax Tips of the Day
1. Review UK property development structures before January 1, 2008; consider alternatives to the “traditional” arrangements
2. Get ready to review and amend your non-dom structures
3. Never, ever, ever say you will run naked down a central London street (especially one in Mayfair!)
Germany
Tax incentives for venture capital in Germany
To promote venture capital investment in Germany, the Federal Ministry of Finance released a new draft Bill to enter into force on 1 January 2008. The Bill heralds an improvement in the legal and tax environment for venture capital in Germany by introducing a special regime for funds that meet certain conditions.
Provided the conditions set out below are met, funds formed to invest in start-up private companies within the European Economic Area will be treated as tax transparent in Germany, will not constitute a taxable presence in Germany for non-German investors, and will not suffer German trade tax. The preconditions are as follows:
• the venture capital holding company must be in the form of a partnership with a minimum equity of EUR 1 million and have adequately qualified managers;
• at least 70% of the invested capital must be invested in qualifying companies;
• individual participations may not be lower than EUR 50,000;
• the maximum holding period must not exceed 15 years; and
• the target companies must not have been in existence for more than 10 years at the time the participations are bought and their equity may not exceed EUR 20 million.
Although these proposed changes are clearly beneficial for those funds that fall within their scope, Germany still needs to prove that it is internationally competitive in respect of the establishment of all funds. Significantly, the draft Bill also proposes that carried interest paid by all private equity funds formed from 2008 will only benefit from a 40% tax exemption, meaning that the effective tax burden for carry will rise for new funds.
Germany
Foreign models: employees, entertainers or clothes horses?
A recent case concerned the income earned by foreign models from the shooting of commercials in Germany.
In the facts of the case, the claimant, a producer of commercials, hired foreign models on a large scale through agencies. The shoots took one to three days each, and each model was hired only for one commercial.
The producer did not withhold wage tax on the remuneration paid to the models; however, the tax administration considered the sums paid to the models to be employment income and subject to wage withholding tax holding the producer liable.
The Court decided that the foreign models rendered independent personal services not subject to wage withholding tax. The Court based its decision on the fact that the models performed their services for the producer only for a very short period and therefore should not be regarded as employees.
This case is interesting because the question of whether the models could be considered entertainers did not arise. Most models would not and could not be considered entertainers but there are circumstances where this may not be the case. Our Swiss company, Opus Sports & Entertainment AG (and its sister company in Cyprus) has over the years employed a number of models providing them a very tax efficient vehicle through which to operate. For more information on how we may be able to help in similar circumstances please contact Stuart Stobie.
Italy
Application of CFC regime to company resident in “black list” country regardless of effective tax rate
On 21 September 2007, the Italian tax authorities issued Ruling No. 262 regarding the applicability of the CFC regime to companies resident in a country which is on the “black list”, irrespective of the effective tax rate applicable.
The Italian tax authorities stated that the CFC regime can be avoided if the resident person proves, through an advance ruling, that
- the foreign entity predominantly carries on an industrial or commercial activity in the state or territory in which it is located; or
- the participation in the foreign entity does not achieve the localization of income in tax haven countries or territories.
In the facts of the case, the taxpayer tried to prove that the level of taxation in Malaysia is high enough (i.e. at least 27%) not to consider this country as black listed. However, the taxpayer did not prove that one of the above conditions were met. It was considered that this approach is not acceptable because the black listed countries are determined by law (and currently include Malaysia) and it is not up to the discretion of the individual taxpayer to assess that a country is not a tax haven. It was stated that the only way to argue that the CFC rules do not apply is to prove that one of the two conditions are met.
France
Reduced tax rates for disposals of shares in real estate companies scrapped
On 26 September 2007, the Council of Ministers adopted the Finance Bill for 2008. Amongst the measures introduced is a cut-back in the beneficial treatment for real estate companies.
Previously, capital gains on the disposal of shares in a "deemed real estate company" (i.e. companies whose assets consist directly and/or indirectly of more than 50% of immovable property) were subject to a reduced tax rate of 15% if the shares were held for two years. From 26 September 2007, capital gains on the disposal of such shares are subject to the standard tax rate of 33 1/3%, as currently applicable to direct sales by a company of immovable property.
The new 33 1/3% tax rate applies on disposals of shares in a “deemed real estate company” by corporate taxpayers subject to corporate income tax whatever the location of residence of the seller.
We understand that the tax treaty with Denmark may be favourable to override this increased charge. For further information, please contact any member of the IFS Team.
France
ECJ decision in case disputing the 3% special tax levied on immovable property held by a non-resident company
We reported earlier this year that the Attorney General opined on the 3% Special Tax levied on immovable property held by a non-resident company in the case C-451/05, (see ITN 73 for full details). The AG held that the 3% tax levied to counter tax avoidance where the identity of the ultimate beneficial owner of the property is not disclosed, is not proportionate to its aims, citing that the French tax 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 is disproportionately discriminates between resident and non-resident companies holding French real estate.
On 11 October 2007, the ECJ reached a decision on the case in question, although contrary to the AG's opinion. The ECJ did not find the 3% tax to be discriminatory, as the AG had opined, but rather held that it constituted a free movement of capital, finding that the proportionality test was not met. The ECJ found that the legislation grants an exemption from the 3% tax to companies established in a Member State which has concluded a tax treaty containing a "non-discrimination" clause. A company established in a Member State, without a relevant double tax treaty in place, would not be able to take advantage of the exemption from charge. The ECJ finally concluded France could have taken less punitive steps to counter tax evasion and as such the legislation failed the proportionality test and was therefore incompatible with the free movement of capital.
Hungary
Proposed tax law changes for 2008
The Hungarian government has proposed amendments to the controlled foreign company (CFC) rules, the participation exemption and the transfer pricing rules. The proposal is expected to be submitted to the Parliament in the near future, and is likely to be passed by mid-November.
The proposed changes are:
i) A new simplified definition of a CFC so that a foreign company would qualify as a CFC if its effective tax rate is less than 10.66% in the state of its seat, permanent establishment or residence unless the seat, permanent establishment or residence of the company is in an EU or OECD Member State or a country that has a tax treaty with Hungary in force. Unlike the existing definition, there is no relief based on real economic substance.
ii) A relaxation of the requirements to qualify for the participation exemption for corporate gains on the sale of shares. Currently, at least 30% of the share capital of the qualifying subsidiary must be held for at least two years at the time of sale. The proposal is for the holding period to be reduced to one year. If the bill is passed by the Parliament as proposed, the new reduced holding period would apply to both domestic and foreign shareholdings.
iii) An extension of the transfer pricing rules to the payment of in-kind dividends to or by related parties.
These proposals help to further present Hungary as a sophisticated fiscal jurisdiction on the international stage, able to compete with its EU counterparts.
United Kingdom
Pre-Budget Report announced
On 9 October 2007, the Chancellor announced the Pre-Budget Report, which has been the subject of much jeering from political opponents and outcry from the business community.
For details on the proposals, see our Notes re 2007 Pre-Budget Report.
