Issue 78 - 20 December 2007
Sentiment
Welcome to the last edition of the ITN for 2007. It has been quite some year: we have settled nicely into our new offices (although the proximity to The Fox Club has resulted in some late nights and significant headaches); we have seen old friends move to new pastures (Hema in particular) and been joined by new members of the team (Lara, Hayley and Lynette) who have fitted in perfectly. All in all it has been a great year and we hope to continue our development in 2008 with the appointment of two new senior members of the tax advisory team. More to follow in the New Year. Our client cases have been as varied as I can remember, and we are very grateful to our clients and professional colleagues who keep referring business to us. Keep it coming!
I would like to thank all our readers for continuing to read our little newsletter and contributing with comments and discussion points. Without the input we regularly receive (including assistance with locating wing mirrors, and accusations that I am ageist (see last ITN) it would not be half as much fun to write my regular sentiment.
Finally, instead of sending Christmas cards this year, we have decided to donate our Christmas card budget to Teenage Cancer Trust (TCT). Further information about TCT can be found by clicking on the following link: http://www.teenagecancertrust.org.
Happy Christmas, and happy reading!
Tax tip of the day
When businesses expand internationally, tax as a cost of doing business is a vital consideration when choosing which jurisdiction to base operational activities. Certainly, in Europe there is tax competition between member states not only with regards to tax rates and other incentives but also in respect of the ability for the prospective taxpayer to discuss and negotiate the tax position with the tax administration in advance. Not surprisingly, it is usually the smaller member states that are keen to attract foreign investment and are therefore willing to provide certainty about the tax implications of planned investment and trading activities.
Particularly when the stakes are high (for example, significant investments or major reorganisations which may involve relocation of staff), businesses require certainty of the tax implications prior to embarking on such activities. Not all countries adopt a flexible ruling practice and in the case of the bigger member states, such as the UK, France and Germany, the attitude to discussing tax positions in advance is even hostile. On the other hand, countries such as the Netherlands, Luxembourg and Switzerland are well known for their open approach in negotiating with taxpayers and providing certainty in advance. Other jurisdictions, such as Malta and Spain may be less known for their ruling practice but in our experience they certainly are “open for business".
Austria should also be mentioned as a country with a flexible ruling practice. It also has a very interesting participation exemption regime which makes it attractive for group holding companies, and is quite unusual in that active zero tax subsidiaries can distribute dividends to Austria withouth Austrian taxation. With the help of our Austrian colleagues we have recently negotiated beneficial tax rulings with the Austrian tax authorities in respect of a corporate reorganisation and the tax treatment of an investment in an oil and gas project.
If you would like to discuss tax rulings in general or using Austria as a potential location for your international business interests, please contact Binne Vries on +44(0) 207 016 5480 or send him an email to BinneV@interfis.com
European Union
Columbus Container Services BVBA & Co v Finanzamt Bielefeld-Innenstadt
The ruling of 6 December 2007 in the case of Columbus Container Services BVBA & Co v Finanzamt Bielefeld-Innenstadt has caused a stir amongst those championing harmonization within the EU. Some have even said that it has set EU law back some 20 years!
The case concerned German resident partners in a Belgian limited partnership, ‘Columbus’. German law treats a limited partnership as a transparent entity for tax purposes and so the profits are attributable to the partners. However, under Belgian law, the partnership itself is liable to corporation tax. Under article 7 of the Belgium/Germany double tax treaty (“the treaty”), profits of a German undertaking carrying out its activities through a permanent establishment (PE) in Belgium (e.g. a limited partnership) are taxed in Belgium to the extent to which they are attributable to that PE. Since under Belgian law a limited partnership is liable to corporation tax, the treaty treats the distribution of profits as dividends. Under article 23 of the treaty, income of a person resident in Germany which is derived from Belgium and is taxable in Belgium is exempt from tax in Germany.
Contrary to the provisions of article 23 of the treaty, German domestic law defaults to a credit system where the foreign entity would be treated as a Controlled Foreign Company (CFC) for German purposes (which the limited partnership did in this case).
Cloumbus claimed that this domestic law is incompatible with EU principles of Freedom of Establishemnt. According to Columbus, by replacing the exemption method provided for in the treaty with the credit method provided for by domestic law it was less attractive for the German resident partners from a tax point of view and dissuaded them from investing in a member state other than Germany.
The ECJ held that the domestic principles took precedent over the treaty provisions in this case, and that the EU principles must be interpreted so as not to preclude such domestic legislation. This ruling is very much in favour of Member States’ autonomy, and it signals a significant move away from taxpayer friendly decisions. Undoubtedly a trend has been set and it will be very interesting to see how far this develops in the coming year.
India/Singapore
Radha Rani Holdings (P) Ltd v. Assistant Director of Income Tax (16 SOT 495)
In this case the question before the Indian tax tribunal was whether a Singaporean company, owned 99% by an Indian resident individual, could be deemed to be resident in India. It should be noted that the remaining 1% was owned by an individual resident in Singapore.
The Court looked at all the facts such as the Company being part of a group which had its headquarters in India; that all the financing of the Company came from an Indian source and applied these to s.6 of the Indian Income Tax Act 1961 and to Article 4 of the India/Singapore double tax treaty.
Under Indian domestic law a company will be regarded as resident in India for tax purposes if it was incorporated in India or if it is managed and controlled from India. The Indian tax authorities argued that the Company’s management and control was in India taking into account the following:
Reviewing minutes of board meetings and comparing them with the details of the passports of the directors (which actually showed they were present in Singapore at the time of the meeting);
- The fact that there were no employees in Singapore and holding that the Singapore office was merely a ‘brass plate’;
- The activities of the Company related mainly to Indian investments, such as Indian investment funds;
- The fact that the Company was owned as to 99% by an individual resident in India;
- The fact that the Company had an Indian subsidiary; and
- The fact that the bank account was operated by the Indian resident individual.
However, and somewhat surprisingly, the Court distinguished the term “control and management,” found in Indian domestic law, to mean not simply the day-to-day running of the company, but to mean central control and management. The Court further clarified that “central control and management” should be determined by the situs of the board of directors, and not meaning where the board of directors reside but where the board meetings were carried out. The Court found that all the board meetings were held in Singapore and as such concluded that the Company was not resident in India for tax purposes. This case can be likened to Wood v Holden (see ITN 63) and contrasted with the Italian anti-abuse laws which we discussed in ITN 64.
We have said it before and we will say it again: substance, substance, substance!
Italy/Switzerland
CFC Regime
The Italian tax authorities have issued a ruling (No.288) regarding the applicability of the Italian controlled foreign companies (CFC) legislation following the decision in a recent tax case. The details of the case are as follows:
An Italian company (ItaliaCo) owned almost 70% of a Swiss company (SwissCo1), which in turn owned 100% of another Swiss company (SwissCo2). SwissCo2 was a trading company and paid tax on its trading income. SwissCo2 distributed its income to SwissCo1 where it was subject to Cantonal and Municipal taxes. ItaliaCo was simply a holding company. The reason for the interposition of SwissCo1 appeared to be to obtain an exemption in Italy on dividends remitted there.
Italy has a blacklist of countries which automatically trigger certain anti-avoidance provisions, such as the CFC legislation. Switzerland is only on the black list to the exten that no tax is paid there. In the case at hand, the paxpayer had elected for SwissCo1 to pay tax in Switzerland. The question arising being whether the CFC regime was applicable given that SwissCo1 was not on the black list, by virtue of the face that it paid Cantonal and Municipal taxes. The Court considered that the CFC legislation did apply, because the fact that SwissCo1 did not fall within a favourable (no tax) regime was simply because the taxpayer had chosen so and therefore found that SwissCo1 was resident in a blacklisted country. The Court supported their decision by citing Ruling No.358, where it was similarly held that "even if the tax payer modifies his tax position it is irrelevant for CFC the foreign company in question is subject to an effective tax rate of higher than 27%.
Turkey
Transfer pricing
On 6 December 2007, the decree on transfer pricing was adopted. The decree, which applies to both resident and non-resident individuals and corporations, clarifies the arm's length principle, transfer pricing methods, advance pricing agreements and transfer pricing documentation. The decree shall be retroactively applied from 1 January 2007.
This is the first time that transfer pricing regulations have been introduced in Turkey and brings Turkey in line with other sophisticated tax jurisdictions. For more information on the new rules, please contact a member of the IFS Tax Team.
Switzerland
Guidelines on taxation of trusts
After many years of discussion, guidelines on the taxation of trusts have finally been published in Switzerland.
The guidelines start with an analysis of the legal aspects of a trust. Though a trust bears similarities with a Foundation it ought to be distinguished from a Foundation since it is not a legal entity. Under Swiss law a trust will be considered a transparent entity and consequently the trust itself will not be subject to Swiss taxation. The trust assets and any income derived therefrom are either taxable at the level of the settlor, or at the level of the beneficiaries.
The guidelines determine that if neither the settlor nor any of the beneficiaries are Swiss resident, and if the trust assets do not include any Swiss real property, the trust arrangement is not subject to Swiss income taxes. If the settlor is a resident of Switzerland, the tax analysis depends on whether the trust is revocable or not. If the trust is revocable the settlor remains the sole owner of the trust assets because of the transparency principle and will be taxed accordingly. At the level of the settlor this has the following tax consequences:
- The establishment of the trust has no gift or estate tax consequences;
- Capital gains are generally tax exempt in Switzerland;
- Distributions to the beneficiaries are taxed as donations (in most cantons donations from parents to their children are not subject to tax so this may have a negligible effect);
- Upon a settlor’s death a revocable trust becomes irrevocable.
In light of the above, the settlement of an irrevocable discretionary trust is considered a donation and if the settlor is Swiss resident, the establishment of the trust is, in principle, subject to cantonal gift and inheritance laws. However, as the beneficiaries will only have contingent rights as to the trust assets it is very difficult to argue that they have received a donation. The settlor will therefore continue to be taxed as the owner of the trust assets for both income tax and net wealth tax, even though the trust is irrevocable. What the tax consequences will be when the settlor passes away is unfortunately not explained in the Guidelines. Distributions of periodical income are taxable income for Swiss resident beneficiaries. Distributions of trust property are, however, not subject to tax, provided that the settlor’s original contribution was taxed as a donation. In the case of an irrevocable discretionary trust, capital gains attributable to Swiss resident beneficiaries are exceptionally - and contrary to the general tax law principles - taxed as regular income.
If the foreign Trust has a Swiss resident trustee or a Swiss resident protector, only the fees generated by the trustee or protector will be subject to Swiss income tax.
United Kingdom
Consultation paper on residence and domicile
As reported in ITN 75, the Pre-Budget Report proposed measures affecting UK resident but non-domiciled individuals. Currently such individuals are taxed on a remittance basis, which means non-UK source income and gains remain free from UK tax to the extent that they are not brought into the UK. With regard to UK inheritance tax rules, a non-domiciled individual is ‘deemed domiciled’ in the UK if he has spent the last 17 out of 20 tax years in the UK. The PBR proposed to extend the deemed domicile provisions for income and capital gains tax purposes. A consultation paper, “Paying a Fairer Share” was published this month putting slightly more meat on the bones of the PBR, the following being key points to note:
- An individual relying on the remittance basis of taxation, who has been resident in the UK for 7 out of the last 10 years, will have to pay £30,000 p.a. in order to retain the remittance basis (unless their foreign unremitted income is less than £1,000). Where the remittance basis is not claimed for the tax year, the individual will be taxed on an accrual basis.
- Benefits such as personal allowances, the capital gains tax exemption, married couples allowance and blind person’s allowance will not be available to those electing to be taxed under the remittance basis. It strikes us that this is potentially very dangerous for the Government and it will only be a matter of time before it is seriously challenged.
- It is proposed that from April 2008, days of arrival and departure will be counted as a day spent in the UK for the 91 day and 183 day tests.
The PBR stated that ‘other anomalies’ would be corrected, and the consultation paper identified the following loopholes be closed:
- “Source ceasing” – Where the source of foreign savings or investment income and gains ceases in one tax year, such income or gains may be remitted in the following year tax free.
- “Cash only” – A UK resident but non-domiciled individual may bring an asset into the UK which he has acquired with foreign source income or gains. Whilst this appears to be a remittance, it is not, however, taxable until the asset is sold and actual cash is realised.
- “Mixed funds” – It is proposed that clear rules are introduced on how to tax money that is brought into the UK from mixed funds, i.e. where there is a mixture of pure capital, income and capital gains, employment income and so on. We already advise our clients that such funds should be kept separately, HMRC are always likely to treat a remittance from a mixed fund as the income part and thus taxable in the UK!
- “Anti-avoidance” – rules targeted at structures that alienate income and gains through offshore trusts and other such vehicles or related parties.
HMRC would specifically like comments on the following points:
- Rather than introducing the 7 out of 10 year rule, the £30,000 fee should apply to all non-domiciled individuals taking advantage of the remittance basis regardless of the length of time spent in the UK; or
- Where an individual has been resident for 10 out of 12 tax years a higher charge will be applied to retain the remittance basis of taxation, of £50,000; and
- Imposing the deemed domicile rules for inheritance tax in respect of income and capital.
As we have mentioned previously, such changes would appear to make the UK a less attractive place for foreign individuals who bring with them expertise in a number of business sectors. The deadline for any comments on the consultation paper is 28 February 2008.
United Kingdom
Barrett v HMRC SpC 639
Recently, there have been a string of cases on the subject of how to determine whether an individual has effectively left the UK for the purposes of relinquishing UK tax residence (Gaines-Cooper, Shepherd).
In the recent case of Barrett v HMRC SpC 639, Mr Barrett left the UK to work internationally, but continued to have his centre of business and personal interests in the UK. HMRC successfully argued that because there had been no distinct break in Mr Barrett’s pattern of life, he should continue to be treated as UK resident for tax purposes.
Mr Barrett’s assertion that he was non-UK resident largely failed on a lack of documentary evidence, as he was not able to supply airline tickets, cash machine withdrawal slips etc. to support his claim.
The moral of the story is to make a distinct break with the UK if non-residence status is sought, and that whilst day counting is vital, the intention to become non-resident can only be backed up by facts.
