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The wheels of international tax reform continue to turn as Canada takes significant strides to implement the OECD’s Pillar Two global minimum tax (GMT) recommendations.
On August 4, 2023, the Department of Finance unveiled draft legislation outlining the implementation of two pivotal elements of Pillar Two: the income inclusion rule (IIR) and a qualified domestic minimum top-up tax (QDMTT).
The aim is to align Canada’s tax landscape with the evolving international consensus on curbing tax base erosion and profit shifting.
Let’s have a look at the key aspects of this draft legislation, along with insights into the broader implications it holds.
The draft legislation holds particular importance for multinational enterprises (MNEs) as it focuses on two crucial aspects of the GMT framework:
These provisions are designed to ensure that MNEs pay a minimum level of tax on their global income, irrespective of their jurisdiction of operation
The IIR, closely aligned with the OECD’s model rules and the accompanying commentary, obliges a qualifying MNE group to include a top-up amount in its income.
This amount is determined by evaluating the group’s effective tax rate against the stipulated minimum rate of 15%.
Notably, the draft legislation incorporates mechanisms for calculating this top-up amount, encompassing factors such as excess profits, substance-based income exclusions, and adjusted covered taxes.
The goal is to prevent instances where MNEs might be subject to lower tax rates in certain jurisdictions.
The QDMTT, on the other hand, allows jurisdictions to implement a domestic top-up tax to align with the principles of Pillar Two.
This is aimed at domestic entities within the scope of Pillar Two, counterbalancing the global minimum tax liability.
The intricacies of the QDMTT provision, including computations and adjustments, are outlined in the draft legislation to ensure an encompassing and fair application.
To effectively implement the Global Minimum Tax Act (GMTA), the draft legislation covers a spectrum of administrative facets.
These include provisions for assessments, appeals, enforcement, audit, collection, penalties, and other vital components to ensure the smooth functioning of the new tax regime.
As part of compliance measures, the legislation introduces the requirement of filing a GloBE information return (GIR) within 15 months of the fiscal year’s end, with potential penalties for non-compliance.
It’s important to note that the legislation doesn’t shy away from significant penalties for non-compliance.
Failure to file the required GIR within the stipulated timeframe could result in penalties of up to $1 million. Moreover, penalties may also be imposed as a percentage of taxes owed under the GMTA for not filing Part II or Part IV returns, adding a layer of urgency to adhere to these provisions.
One of the central themes that emerge from the draft legislation is the intricate interplay between the GMTA and Canada’s existing tax framework.
While the legislation attempts to bridge these two domains, certain aspects remain to be ironed out.
Notably, the interaction between the GMTA and provisions within the Income Tax Act (ITA) raises questions about the allocation of losses or tax attributions under the ITA to offset taxes owing under the GMTA.
Additionally, the draft legislation is deliberately silent on the specifics of this interaction, particularly concerning issues like Canadian foreign affiliate and foreign accrual property regimes.
As businesses and professionals delve into the consultation process, these areas of ambiguity are likely to be focal points of discussion, aiming to ensure a harmonious alignment between the new regime and the existing tax landscape.
The consultation process for the draft legislation is underway, with the Department of Finance welcoming feedback until September 29, 2023.
During this period, stakeholders, including businesses, tax professionals, and policymakers, have the opportunity to contribute insights and perspectives to shape the final legislation.
The complex and evolving nature of international taxation underscores the importance of robust consultation, as the new rules have far-reaching implications for cross-border businesses.
Canada’s proactive approach to aligning its tax laws with the global consensus on minimum taxation is a significant stride.
As the draft legislation undergoes scrutiny and refinement, it’s essential to recognize its implications not only for multinational enterprises but also for the broader tax landscape.
The interplay between the GMTA and the existing tax regime will be closely watched, highlighting the intricate path of international tax reform and the commitment of nations to creating a fair and balanced tax environment.
If you have any queries about this article on Canada and Global Minimum Tax, or Canadian tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article..
A recent decision by the lower administrative court in Luxembourg (case n° 45759) has brought to light the importance of providing valid economic justifications and proper documentation when using “alphabet shares” in corporate transactions.
The case involved the tax treatment of a Luxembourg company’s redemption of alphabet shares, leading to a crucial ruling that may impact similar situations in the future.
The case revolved around a company that migrated its registered office from Cyprus to Luxembourg.
Following the migration, the Luxembourg company (LuxCo) held an investment in a Dutch company (DutchCo).
In a series of transactions, LuxCo converted its ordinary shares into twenty classes of shares, all having the same economic rights as the initial ordinary shares.
Later, LuxCo redeemed and canceled two classes of shares using distributable reserves, considering the transaction as a partial liquidation eligible for a 15% withholding tax exemption.
However, the Luxembourg tax authorities recharacterized the transaction as a dividend distribution and applied the 15% withholding tax, citing abuse of law.
The lower administrative court highlighted that the legal form of a transaction is not decisive for tax purposes. Instead, the economic substance and true intention behind the transaction are crucial factors in determining its tax treatment.
The court confirmed that the redemption of shares could be considered as a partial liquidation under tax treatment.
However, in this case, the court focused on the economic analysis of the transaction to ascertain whether LuxCo used an inappropriate path.
The short timeframe between the share conversion, receipt of dividends, and redemption raised suspicions, leading the court to conclude that the shareholders did not intend to exit from LuxCo. As a result, the transaction was deemed a dividend distribution subject to the 15% withholding tax.
Regarding the absence of non-tax reasons justifying the chosen path, LuxCo’s arguments were considered insufficient by the court.
Merely stating economic reasons without concrete proof was inadequate to shift the burden of proof.
Consequently, the court found that the condition of abuse of law due to the lack of valid economic reasons was met.
This case highlights important considerations for businesses using alphabet shares in their transactions.
While redemption and cancellation of alphabet shares may qualify as a partial liquidation under tax rules, it can be recharacterized as a dividend distribution if economic reasons are not adequately documented.
To avoid potential tax challenges, taxpayers must ensure they have concrete evidence justifying the use of alphabet shares and adequately record such reasons in board minutes or related documentation.
As such, companies in Luxembourg must take care when employing alphabet shares in their transactions and must be prepared to provide well-documented economic justifications to avoid potential tax implications.
If you have any queries about this article on alphabet shares, or Luxembourg tax in general, then please do get in touch
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
In a landmark ruling on 19th July, the Italian Supreme Court shook up the taxation landscape by declaring that non-resident companies without an Italian permanent establishment (PE) can now benefit from the Italian 95% participation exemption (PEX) regime.
This ruling opens up new possibilities for foreign investors looking to divest their stakes in Italian resident companies. The Court’s decision was based on the grounds of safeguarding fundamental freedoms enshrined in the Treaty on the Functioning of the European Union (EU).
Let’s delve deeper into the implications of this judgment and its potential impact on cross-border investments.
The PEX regime in Italy provides a significant tax advantage to qualifying investors. Under this regime, a company can be exempted from paying taxes on 95% of the capital gains realized upon selling its participation in an Italian resident company.
This effectively results in an effective tax rate of only 1.2% on the capital gain (calculated using the 24% corporate income tax rate applied to 5% of the capital gain).
Before this judgment, only Italian companies and non-resident companies with an Italian permanent establishment were eligible to benefit from the PEX regime.
However, the Supreme Court’s ruling has expanded the scope of eligibility, allowing non-resident companies without an Italian PE to also take advantage of the PEX regime if they fulfill the necessary requirements.
The Supreme Court justified its decision by invoking the fundamental freedoms enshrined in the EU treaty. The ruling ensures that non-resident companies are not subject to discrimination, which is essential for the free movement of capital across EU member states.
The case in question involved a French parent company holding a substantial participation (25% or more) in an Italian subsidiary. Although Art. 8, let. b) of the Italy-France Double Tax Convention permits Italy to tax such capital gains, the Court upheld the application of the PEX regime for the French parent company as it fulfilled all the requirements set by Italian tax law.
The Court reasoned that the limited tax credit provided under the Double Tax Convention was insufficient to eliminate the discriminatory effect.
Foreign investors, particularly French parent companies, can now leverage this ruling to apply the PEX regime on capital gains arising from substantial participations in Italian companies.
While the possibility of an audit by the Italian Tax Authorities remains, the robust legal foundation for the application of the PEX regime and the support from CJEU case law on discrimination and restrictions strengthen the position of foreign investors.
In response to this judgment, the Italian legislature is expected to take action soon by adopting provisions that explicitly extend the PEX regime’s applicability to capital gains realized by non-resident companies without an Italian PE.
This move is in line with past experiences concerning dividends distributed by Italian subsidiaries to EU resident parent companies.
Furthermore, there’s a possibility that the PEX regime could be extended to EU resident parent companies and parent companies resident in States of the European Economic Area (EEA) that have adequate tax information exchange agreements with Italy.
While the Supreme Court’s judgment refers to EU fundamental freedoms, recent CJEU jurisprudence suggests that rules like the PEX regime should be tested against the provisions on the free movement of capital.
Leveraging on this interpretation, it could be argued that the PEX regime should also be extended to non-EU parent companies holding participations in Italian companies.
For example, countries like China, South Korea, Israel, and the United States might benefit from such an extension, depending on the specifics of their tax treaties with Italy.
The Italian Supreme Court’s judgment on the application of the PEX regime to non-resident companies marks a significant development in cross-border taxation.
Foreign investors now have an opportunity to optimize their tax position when divesting their interests in Italian companies.
As the legislative response unfolds and potential extensions of the PEX regime come into play, businesses must stay informed to capitalize on these new tax opportunities.
The ruling is undoubtedly a step towards fostering a more favorable investment environment and encouraging economic growth in Italy.
If you have any queries relating to this article or Italian tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
In December 2022, Hungary’s government introduced a windfall tax on drug producers.
It was based on net revenues generated in 2022 and 2023 in attempt to ‘cure’ its ailing state budget.
The rate increased progressively from 8% on net revenues exceeding 150 billion forints ($398 million).
Companies have to pay the new tax for both 2022 and 2023 next year.
However, the government has somewhat rowed back to provide support to some of the businesses within its scope.
Published in the Hungarian Gazette on 17 July 2023, the detailed legislation provides for taxpayers to reduce windfall tax and increased clawback payment obligations.
These measures come as welcome news for the Pharma industry, offering potential relief based on investments in tangible assets and research and development costs.
The tax relief provides a potential lifeline for eligible taxpayers in the pharmaceutical sector. It offers the opportunity to reduce their clawback payment obligation in the 2023 and 2024 tax years.
Deductible items include the cost of investments in Hungary for tangible assets, direct costs of fundamental research, applied research, and experimental development in the healthcare sector.
Furthermore, marketing authorization holders or distributors, in case of an approved agreement, can apply the tax relief starting from 20 July 2023, and continue to benefit from it for both 2023 and 2024.
For corporate groups preparing consolidated financial statements, an affected company may also apply deductible items indicated in its financial statement for the tax year preceding the ongoing tax year.
This provision ensures that consolidation does not overshadow the tax relief, allowing for smoother application and fair distribution of benefits among the group entities.
The tax relief extends further, encompassing the costs of phase I to III clinical trials and clinical research commissioned in Hungary as deductible items.
Moreover, the location of direct R&D costs is no longer a barrier, as long as the clinical research is conducted in Hungary.
However, some restrictions may apply in specific cases.
The clawback payment obligation rules took effect from 18 July 2023.
Taxpayers can apply the relief for the first time for the clawback payment obligation due by 20 July 2023.
Any remaining unused tax relief may be applied to subsequent clawback payment obligations, while the relief is available until the clawback payment obligation due by March 20, 2025.
The same favorable rules apply to Hungarian pharmaceutical manufacturers regarding deductible items and tax relief caps.
Clinical research commissioned in Hungary involving the manufacturers may also be considered to reduce windfall tax.
However, unlike the clawback payment obligation, the windfall tax relief will only take effect on 1 January 2024.
Hungarian pharmaceutical manufacturers can apply the relief for the first time when determining their tax liability for the tax year 2024.
With the introduction of these measures, Hungary’s pharmaceutical industry should he shielded to some extent from the windfall taxes previously introduced.
These incentives should serve to encourage investments in tangible assets and research and development, while alleviating the financial burden on taxpayers.
If you have any queries relating to the Hungary windfall tax relief or tax matters in Hungary more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
In a significant move, the Swiss electorate and cantons have voted in favor of implementing the Organisation for Economic Co-operation and Development (OECD) global minimum tax of 15% for large multinational enterprises operating in Switzerland.
This constitutional amendment was supported by an overwhelming majority, with 78.45% of voters and all cantons endorsing the proposal.
The implementation of the OECD minimum tax aims to safeguard Switzerland’s tax receipts and maintain its position as a stable business location.
The global minimum tax initiative has been developed by the OECD and the Group of 20 countries to establish a uniform minimum tax rate worldwide.
Under this framework, multinational companies with a global annual turnover exceeding €750 million will be subject to a minimum tax rate of 15% in each country they operate in.
Numerous countries, particularly in the European Union, plan to introduce the OECD minimum tax on 1 January 2024.
In Switzerland, 21 out of the 26 cantons currently have tax rates below the required 15%. Failure to meet the minimum tax rate would result in the imposition of a supplementary tax to make up the shortfall.
By implementing the minimum tax, Switzerland ensures that its tax receipts remain within the country rather than being shifted to other jurisdictions.
It’s important to note that the OECD minimum tax will only affect large multinational groups with an annual turnover of at least €750 million.
Small and medium-sized enterprises will not be affected by this amendment.
In Switzerland, approximately 200 internationally active groups headquartered in the country and 2,000 Swiss subsidiaries of foreign groups will be subject to the minimum tax.
As a result, around 99% of companies in Switzerland will continue to be taxed under the existing regulations.
The constitutional amendment to introduce the OECD minimum tax is in Switzerland’s best interest.
Without such a provision, jurisdictions in which Swiss multinational groups operate would be entitled to impose a subsequent tax to compensate for the difference in tax burdens, thereby impacting Switzerland’s tax revenues. Implementing the minimum tax rate ensures tax stability for Switzerland and provides legal certainty for companies affected by the new international tax rules.
However, it is worth considering the potential impact on tax competition within Switzerland.
High-tax cantons may become more attractive compared to those with lower taxes, as the introduction of the minimum tax limits the extent to which lower tax rates can be used to offset geographical disadvantages.
Switzerland’s embrace of the OECD global minimum tax represents a proactive step to secure tax revenues and maintain its status as an internationally stable business location.
By implementing the minimum tax, Switzerland ensures that tax receipts remain within the country and avoids the risk of revenue shifting to other jurisdictions.
While this decision may have implications for tax competition within Switzerland, the overall objective is to create a robust and equitable international tax framework.
The introduction of the OECD minimum tax paves the way for a more uniform global tax system, providing a level playing field for multinational enterprises across different countries.
If you have any queries about this article, or Swiss tax matters in general, then please get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Company restructuring offers numerous advantages and supports a business in achieving its changing commercial, financial, and legal goals. Periodically reassessing and adjusting the corporate structure becomes necessary for businesses.
In the current economic landscape, where rising costs and interest rates impact profitability, it is crucial for companies to consider restructuring as a means to address these challenges.
The business structure encompasses the legal and organisational framework that governs a company’s operations and management. It has a significant impact on various aspects, including decision-making authority, profit allocation, and share distribution. As a result, it is a powerful tool for business owners to shape their organisation.
To maximise its effectiveness, restructuring should be seamlessly integrated into the fundamental workflows of your business. It is prudent to evaluate your business structure whenever there are significant changes in your market, business plan, or performance—both current and planned.
While many companies undergo restructuring during challenging times, it can also be advantageous for those aiming to boost profits and minimise tax obligations at any stage of their business lifecycle. Moreover, restructuring is often necessary in specific circumstances such as preparing for a sale or acquisition or protecting assets.
There are various reasons and scenarios that may prompt a business to consider restructuring.
For expert advice on restructuring and insights into the tax advantages it can offer, reach out to our team of corporate tax advisors at Tax Natives.
The choice of business restructuring depends on the unique circumstances and objectives of each company. While each type presents its own challenges, they also offer distinct advantages. Here are the four primary types of business restructuring.
When a business expands, the goals of its various sectors may no longer align, or disagreements among shareholders may arise. Additionally, there may be a need to separate a large property from the group. In such cases, operating the companies independently could be a better solution.
This can be achieved by creating subsidiaries to divide the different sectors within the business. This approach can also be advantageous when a company intends to sell a portion of its business.
Expanding businesses may find that related companies operating independently could achieve greater efficiency by working together. Streamlining and consolidating the group structure can lower operational costs by reducing the need for separate entities and administrative roles. This allows key staff to concentrate on their core business activities and enhances day-to-day operations.
By implementing this approach, the company can possess shares or assets in subsidiaries, granting the holding company the ability to manage and oversee the operations of these subsidiary entities.
Share reorganisation involves various actions such as capital reductions, changes in rights, or the acquisition of existing shares. It is commonly pursued to secure fresh investments, address shareholder conflicts, or facilitate smooth succession planning.
Businesses may seek to restructure for a variety of reasons:
When acquiring or merging with a new company, restructuring the corporate structure may be required to integrate the new business effectively.
Accurate tracking and analysis of business performance are crucial for making informed decisions. While accounting software provides departmental reporting, having separate entities for each product or department offers a more detailed view of their individual performance. This allows for better investment planning, comprehensive statement reviews, and targeted decision-making based on performance data to seize opportunities and manage risks effectively.
Creating a subsidiary or separate company can mitigate financial risks associated with potential loss-making departments.
When it comes to property assets, such as company premises or investments, holding them in a separate entity provides protection. By separating trade and property ownership, the value of the property is shielded from potential liabilities arising from the business’s operations, reducing risks and safeguarding the assets.
Succession planning in family businesses is crucial for a smooth transfer of ownership across generations. It involves careful timing and consideration of various factors, including the transfer of share rights, to ensure a seamless transition.
A key focus is on achieving the most tax-efficient method of transferring ownership, taking into account the complexities and personal nature of the task.
Shareholder disputes and deadlocks can hinder business progress and impact profitability and morale.
In such situations, restructuring options like demerger or share redistribution, including buyouts, can effectively resolve disagreements and restore harmony within the company. This proactive approach helps address conflicts and pave the way for a more productive and collaborative business environment.
Transferring assets can be motivated by various factors, and if there is an existing group structure, it can typically be done in a tax-efficient way. By strategically managing asset transfers within a group, businesses can optimise their tax planning and ensure a smooth and advantageous transfer process.
Consolidating companies can lower compliance and administration costs, as it streamlines tasks like preparing accounts and tax returns. Additionally, downsizing during a restructuring opens up opportunities for cost-effective outsourcing of functions like payroll and financial management.
Furthermore, restructuring can prioritise the integration of new technologies to enhance business efficiency and generate financial savings. Embracing innovative technologies is crucial for business growth and can yield substantial benefits.
Restructuring can enhance a business’s appeal to potential investors. Limited companies often encounter limited external investment prospects, but a straightforward restructuring can unlock a multitude of new opportunities for external investment.
Providing employees with shares in the company is a strategic approach to restructuring that offers numerous advantages. Implementing an employee share scheme promotes loyalty, enhances retention rates, and strengthens the overall business.
A well-designed business structure offers flexibility for growth and investment. By creating separate entities for new ventures, you can focus on specific areas and make targeted decisions. Additionally, when it comes to selling your business, having a structured setup allows you to carve out specific parts for sale instead of selling the entire company.
Business restructuring offers the opportunity for tax-efficient benefits. By reorganising the corporate structure, you can create a more tax-efficient setup, reducing your tax liability in the long run. It is crucial to seek professional advice to ensure that the restructuring maximises applicable tax reliefs.
Without careful consideration, restructuring can result in increased tax burdens, including stamp duty, SDLT, VAT, corporation tax, and potential loss of tax reliefs.
Are you looking to enhance the financial efficiency and flexibility of your business?
Consider the advantages of company restructuring. By reorganising your corporate structure, you can unlock tax benefits, streamline operations, and position your business for growth.
At Tax Natives, we specialise in helping businesses navigate the complexities of company restructuring while optimising their tax obligations in the UK. Our team of experts understands the intricacies of tax planning and can guide you through the process, ensuring you capitalise on available tax reliefs and minimise potential tax burdens.
With our professional advice and tailored solutions, you can strategically restructure your business to reduce tax liabilities, increase operational efficiency, and seize new growth opportunities. Don’t let tax complexities hinder your business success.
Contact Tax Natives today and explore the advantages of company restructuring tailored to your unique needs.
The Spanish General Directorate of Taxes (GDT) has recently issued a binding ruling.
The ruling clarifies the exemption from Corporate Income Tax for the transfer of shares in entities that have obtained the necessary permits for commencing their activities – even if they have not yet materialised their operations.
This decision marks a change in the approach taken by the GDT. Of course, it will also have significant implications for businesses involved in such transactions.
The ruling by the GDT centers around a consulting entity (A) that held a 100% stake in another entity (S) engaged in online gaming licenses.
Although entity (S) had not commenced its economic activity, it had acquired all the required administrative licenses, incurring substantial expenses in the process.
The value of these licenses exceeded 50% of entity (S)’s asset value. Entity (A) intended to transfer its entire shareholding in entity (S) to an unrelated entity.
The GDT was asked to confirm whether the tax exemption under Article 21.3 of the Corporate Income Tax Law applied to the positive income generated from this transfer.
The GDT concluded that as long as entity (S) had organized itself, either independently or using its own or third-party resources, for the purpose of engaging in the production or distribution of goods or services, entity (A) could avail the exemption under Article 21 of the Corporate Income Tax Law.
This ruling reference is CV 0863/23.
This ruling signifies a departure from a previous binding ruling, CV 2265/21, issued by the GDT in 2021.
In that ruling, the GDT had held that the transfer of 100% shares in an entity that owned land undergoing permit processing for the installation of a solar plant was not exempt from Corporate Income Tax, as the economic activity had not materially commenced.
However, it is worth mentioning that the tax authorities of Navarra had already deviated from this approach, deciding in a similar case that the exemption should indeed apply.
The recent ruling by the GDT is a positive development for businesses seeking clarity on the Corporate Income Tax exemption. It brings reassurance and aligns with the correct interpretation of the law.
Nevertheless, it is crucial to evaluate each case individually, considering the specific circumstances and ensuring proper declaration of all economic activities performed up until the point of the share transfer.
The Spanish General Directorate of Taxes has taken a significant step in clarifying the application of the Corporate Income Tax exemption in these circumstances.
Theruling marks a departure from a previous stance and provides much-needed clarity for businesses engaging in such transactions.
As always, careful consideration of each case’s particulars is essential to ensure compliance with tax regulations.
If you have any queries about corporate income tax on transfer of shares or Spanish tax matters in general, then please do get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
So, on 1 June 2023, the UAE began its new life with a brand, spanking new corporate income tax.
However, right up until the last minute, we were still left waiting for the final pieces in the legislative jigsaw.
These have now been revealed.
The Ministry shared the details of this new tax framework during a press conference held in Abu Dhabi. This included:
(1) Cabinet Decision No. 55 of 2023 on Determining Qualifying Income; and
(2) Ministerial Decision No. 139 of 2023 on Qualifying Activities and Excluded Activities.
One of the key highlights of the new tax regime is the introduction of the Free Zone Corporate Tax, which applies to “Free Zone Persons.”
This term refers to juridical entities that are incorporated or registered within a Free Zone.
However, it’s important to note that this tax regime is only applicable within the designated areas of the Free Zones.
Businesses can contact their respective Free Zone Authority to confirm whether the Free Zone qualifies for zero percent tax.
Under the Freezone Corporate Tax regime, only income derived from activities exclusively conducted within the Free Zone will be subject to taxation.
This concept is reflected in the definition of “Qualifying Income,” which includes income generated from transactions with other Free Zone Persons, as well as domestic and foreign sourced income resulting from the performance of any “Qualifying Activities” listed in the related Ministerial Decision.
The Qualifying Activities encompass various sectors, such as manufacturing of goods or materials, processing of goods or materials, holding of shares and other securities, ship ownership and operation, reinsurance services, fund management services subject to UAE regulatory oversight, and wealth and investment management services also subject to UAE regulatory oversight.
Other qualifying activities include headquarter services to related parties, treasury and financing services to related parties, financing and leasing of aircraft, logistics services, distribution within or from a designated zone meeting specific conditions, and any activities ancillary to the aforementioned sectors.
However, income derived from certain specific “Excluded Activities” will not be considered as “Qualifying Income” regardless of whether it originates from a Free Zone Person or is part of a Qualifying Activity.
Excluded Activities encompass income derived from transactions with natural persons, income derived from certain regulated financial services activities, income derived from intangible assets, and income derived from immovable property, excluding transactions with Free Zone Persons involving commercial immovable property located within a Free Zone.
To ensure compliance with the tax regime, there are de minimis requirements in place.
If a Free Zone Person earns income from Excluded Activities or any other income that does not qualify as Qualifying Income, they will be disqualified from the tax regime unless the non-qualifying revenue remains below the lower of either 5 percent of their total revenue or AED 5 million.
It’s worth noting that revenue attributed to a Free Zone Person’s domestic or foreign permanent establishment, as well as revenue from immovable property within a Free Zone that does not qualify for the tax regime, will not be considered for the de minimis threshold. Instead, the associated taxable income will be subject to the regular UAE Corporate Tax rate of 9 percent.
In cases where the de minimis requirements are not met, or if a Free Zone Person no longer satisfies other qualifying conditions, they will lose the benefits of the Free Zone Corporate Tax regime for a minimum period of five years.
During this period, they will be treated as an ordinary Taxable Person and subjected to Corporate Tax at a rate of 9 percent on their Taxable Income exceeding AED 375,000.
The implementation of the UAE Corporate Tax regime and the introduction of the Freezone Corporate Tax mark significant developments in the country’s tax landscape.
These changes aim to ensure clarity and fair taxation practices while providing opportunities for businesses to thrive within the Free Zones.
If you have any queries about Qualifying income and free zones or UAE tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
The Finance Act 2021 brought significant changes to the tax liability of non-resident companies renting out property in Ireland.
This article examines the impact of these changes on non-resident corporate landlords, provides guidance on the new tax regime, and discusses the steps non-Irish resident corporate landlords must take under the new legislation.
Prior to the changes, non-resident corporate landlords were not subject to Irish corporation tax on Irish source rental income. An exception being where connected to a branch, agency, or permanent establishment in Ireland.
Instead, they paid Irish income tax at a 20% rate on taxable rental income.
To collect taxes from non-resident landlords, tenants had to deduct withholding tax (20%) on rent payments, with an exception for landlords who appointed an Irish collection agent.
In this case, the agent took responsibility for filing and paying relevant Irish taxes on the letting.
Starting in January 2022, non-resident corporate landlords now face a 25% Irish corporation tax rate on rental income, a 5% increase from before.
Additionally, new tax filing requirements were introduced for landlords and Irish collection agents.
Collection agents must register for corporation tax under a separate tax reference number for each landlord, file the corporation tax return, and pay any due taxes.
Tenants must still deduct withholding tax on rent payments to non-resident landlords, unless an Irish collection agent is appointed.
Although the treatment of expenses for landlords remains generally the same, some differences may arise under the corporate tax regime.
For example, interest deductions may now be restricted by deemed distribution rules or the new EU Anti-Tax Avoidance Directive interest limitation rule.
Transitional rules will also apply, allowing for the carry forward of unused losses or excess capital allowances and ensuring that no benefit or loss occurs from the rate change from 20% to 25% concerning balancing allowances and charges after 1 January 2022.
The effective capital gains tax (CGT) rate for non-resident landlords selling (or otherwise disposing of) Irish property remains at 33%.
However, landlords now face corporation tax instead of CGT on property disposals, which are included in the corporation tax pay and file regime.
The tax rules on development land disposals remain unchanged, subject to the CGT pay and file requirements.
The corporation tax regime applies to profits or income earned from 1 January 2022.
Thus, regardless of a landlord’s financial year-end date, a new accounting period is deemed to begin on 1 January 2022. This means that landlords without a 31 December 2022 year-end date will likely have two corporation tax returns to file for income earned in 2022.
Corporation tax returns must be filed by the 23rd of the ninth month after the end of the relevant accounting period. For example, for accounting periods ending on 31 December 2022, the filing due date is 23 September 2023.
The corporation tax liability must be paid in preliminary tax instalments during the accounting period, with a final instalment due on or before the corporation tax return filing date.
The year 2022 will mark the first tax year in which non-resident corporate landlords are subject to the corporation tax regime.
Landlords will need to seek timely advice regarding their tax liability and their filing obligations to ensure compliance with the new system of tax.
If you have any queries about the new Non-Resident Corporate Landlords in Ireland regime, or Irish tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
A recent court judgment has held that non resident hedge funds should be treated like residents in Spain if they meet certain requirements.
Under the Non-resident Income Tax Law, hedge funds resident in Spain are taxed at a lower rate of 1%, while those resident in other countries are taxed at a higher rate of 19%, unless there is a relevant double tax treaty.
The Supreme Court ruled that this different treatment is discriminatory and goes against the free movement of capital regulated in article 63 of the Treaty on the Functioning of the European Union.
The court held that non-resident hedge funds should be treated like residents if they can prove that they are open-ended entities, that they have relevant authorization, and that they are managed by an authorized management company pursuant to the terms of Directive 2011/61/EU.
The nonresident hedge fund has the burden to prove these requirements, but a certain flexibility should be allowed due to the lack of specific regulations in Spain in this regard. If the Spanish authorities have reservations about the documentation provided by the fund, they must initiate an exchange of information procedure with its State of residence.
The Court also concluded that the restriction on the free movement of capital could only be considered neutralized by the provisions of a double tax treaty if the treaty permits the hedge fund (not its members) to deduct the total amount of Spanish tax withheld in excess. However, given the way hedge funds operate and are taxed, that neutralization is impossible in practice.
This judgment is significant as it removes discrimination against nonresident hedge funds and brings Spain in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union.
The decision clarifies the requirements that nonresident hedge funds must meet to be treated like residents and offers some flexibility in terms of providing documentation. It also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
In conclusion, the recent Supreme Court judgment in Spain has removed discrimination against nonresident hedge funds and clarified the requirements for them to be treated like residents.
This decision is in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union and offers some flexibility in terms of providing documentation.
However, the decision also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
If you have any queries about issues around Spain non-resident hedge funds, or Spanish tax matters in general, then please do get in touch.
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