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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.
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.
Research and development (R&D) tax relief is a solution available in the Polish tax system that aims to stimulate innovation and reward taxpayers investing in R&D activities.
In this article, we will explain what R&D tax relief is, who can use it, on what terms, and what the possible benefits are.
The fundamental condition for including R&D tax relief is conducting research and development activity, which refers to a set of actions undertaken to increase the state of knowledge and the development of a particular domain.
According to the statutory definition, it shall be creative, involve research or development work, be systematically undertaken, and be undertaken to increase resources of knowledge and use them to apply in a new way.
R&D tax relief is available for entrepreneurs who conduct R&D activity and settle their taxes according to tax scale, flat tax, or corporate income tax.
The size of the company is not important, as both micro-companies and huge corporations can benefit from it.
Eligible costs are expenditures incurred as part of R&D activities carried out for the purpose of research development. These include, but are not limited to:
The R&D tax relief allows for deducting a sum that cannot exceed 100% or 150% of eligible costs, depending on the taxpayer’s status.
The amount of the eligible costs cannot exceed a certain percentage, which varies depending on the taxpayer’s status.
To qualify for R&D tax relief, a taxpayer must meet several conditions, including
Yes, R&D tax relief may be settled up to five years back by submitting a correction of CIT/PIT declarations.
The procedure for settling R&D tax relief for past years consists of several steps, including collecting technical documentation and submitting a special application for ascertainment of overpayment to the Tax Office.
In summary, R&D tax relief is a beneficial and safe solution for all entrepreneurs who develop new products, processes, or services, regardless of the size of their business and industry.
It is one of the most attractive forms of business support for entrepreneurs, and it allows for deducting a certain percentage of eligible costs.
If you have any queries about this article on R&D tax relief in Poland, or Polish 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.
The UAE’s Ministry of Finance has recently issued Ministerial Decision No. 73 of 2023, which aims to provide small business relief for corporate tax purposes.
The relief is designed to support start-ups and small or micro businesses by reducing their corporate tax burden and compliance costs.
Small Business Relief provides that a taxpayer may elect to be treated as not having derived any taxable income for a tax period if their revenue in the relevant tax period and previous tax periods is below AED 3 million.
Quite simply, where SMEs have revenue below the AED 3 million threshold then they may be exempted from tax.
Once a taxable person exceeds the AED 3 million revenue threshold in any tax period, the relief will no longer be available.
AED 3 million is around USD 817k and GBP 657k.
The revenue threshold will apply to tax periods starting on or after June 1, 2023, and will continue to apply to subsequent tax periods ending before or on December 31, 2026.
The revenue is to be determined based on the applicable accounting standards accepted in the UAE.
However, Small Business Relief will not be available to Qualifying Free Zone Persons or members of Multinational Enterprises Groups (MNE Groups) as defined in Cabinet Decision No. 44 of 2020 on Organising Reports Submitted by Multinational Companies.
Key information is yet to be revealed regarding important aspects of the tax position of Free Zone companies.
MNE Groups are groups of companies with operations in more than one country and have consolidated group revenues of more than AED 3.15 billion (circa USD 857m or GBP 690m)
In tax periods where businesses do not elect to apply for Small Business Relief, they can carry forward any incurred tax losses and any disallowed net interest expenditure from such tax periods for use in future tax periods in which the relief is not elected.
The Ministerial Decision also addresses the issue of artificial separation of businesses.
If the Federal Tax Authority (FTA) establishes that taxable persons have artificially separated their business or business activity and the total revenue of the entire business or business activity exceeds Dh3 million in any tax period, while such persons have elected to apply for Small Business Relief, this would be considered an arrangement to obtain a corporate tax advantage under Clause (1) of Article 50 regarding the general anti-abuse rules of the Corporate Tax Law.
In summary, the UAE’s Ministry of Finance has introduced Small Business Relief to support start-ups and small or micro businesses by easing their corporate tax burden and compliance costs.
Eligible businesses with revenues below AED 3 million can benefit from this relief.
However, the relief will not be available to qualifying free zone persons or members of multinational enterprises groups.
Additionally, the decision emphasises that artificial separation of businesses for the purpose of obtaining a corporate tax advantage will be considered an abuse of the relief scheme.
All in all, this measure will maintain the UAE as a jurisdiction of choice for many SMEs.
If you have any queries about the UAE small business relief 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 global wave of the two-pillar solution to address base erosion and profit shifting (which all the cool kids are calling BEPS 2.0) has reached Singapore.
Singapore will implement Pillar 2 of BEPS 2.0 in 2025, which will require multinational enterprises (MNEs) with local operations to top up their effective tax rate (ETR) in Singapore to 15%.
Many MNEs with Singapore operations currently benefit from tax incentives and enjoy an ETR lower than the upcoming 15%.
It is unclear whether existing incentives and exemptions will continue to apply, and whether Singapore’s territorial basis of taxation will change.
As the full effects of BEPS 2.0 are expected to be felt in 2025 or later, Singapore has chosen a cautious approach to delay implementation until then, giving itself time and a chance to learn from the experiences of other countries before determining the best way forward.
The implementation of Pillar 2 is crucial for Singapore, as it is an opportunity to increase revenue and fortify its fiscal position.
Under Pillar 1, Singapore is expected to lose revenue when profits are reallocated to the countries where markets are located. With a small domestic market, Singapore has to give up taxing rights to bigger markets and receives very little in return.
However, Pillar 2 presents a chance for Singapore to generate more corporate tax revenue, assuming that existing economic activities are retained.
The key to Singapore’s continued success is staying competitive in attracting and retaining investments.
The use of tax incentives may become obsolete or significantly compromised once the effects of BEPS 2.0 are felt.
Singapore has signaled that it will seek to reinvest and strengthen non-tax factors to remain competitive.
Whatever additional corporate tax revenue can be generated from BEPS 2.0 will be reinvested to maintain and enhance its competitiveness. Together with the intended implementation of Pillar 2, Singapore will also review and update its broader suite of industry development schemes.
The lack of details and the delayed implementation of Pillar 2 suggest that policymakers are looking for more information to guide their decisions. If there are additional delays internationally, it is likely that Singapore will adjust its implementation timeline.
Singapore has assured companies that it will continue to engage them and give them sufficient notice ahead of any changes to its tax rules or schemes.
MNEs that may be affected should actively participate in public consultation exercises before the implementation of Pillar 2 in 2025.
Those who currently benefit from an existing tax incentive should consider reaching out early to the relevant authorities if they are concerned about the implications of the new rules.
If you have any queries relating to the Singapore two pillar solution, or Singaporean 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.
On February 24, 2023, the Wisconsin Tax Appeals Commission made a decision regarding Skechers’ licensing transaction with its subsidiary, Skechers USA Inc. II (SKII).
The Commission upheld the Department’s assessment that the transaction lacked a valid business purpose and economic substance.
Skechers entered into a license agreement with SKII upon the formation of the subsidiary, which resulted in significant royalty deductions claimed on Skechers’ Wisconsin tax returns. However, the Department disallowed the expense and assessed the intercompany transactions between Skechers and SKII as sham transactions.
The Commission agreed with the Department’s assessment, stating that Skechers failed to prove that the transactions had a valid business purpose other than tax avoidance. While there may have been some non-tax benefits related to intellectual property, Skechers did not consider these before forming SKII. The Commission also found that there was no economic substance to the royalty payments, as Skechers could not provide any evidence of a change in business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.
In upholding the Department’s assessments, the Commission determined that Skechers failed to provide persuasive evidence or testimony that the licensing transaction with SKII had a valid business purpose and economic substance.
This decision highlights the importance of ensuring that intercompany transactions have a valid business purpose beyond tax avoidance and demonstrate economic substance. Failure to do so may result in the disallowance of claimed expenses and potential tax assessments.
The UK’s Digital Services Tax (DST), which imposes a 2% tax on the revenues of search engines, social media platforms and online marketplaces, is set to be withdrawn as part of the Organisation for Economic Co-operation and Development’s (OECD) two-pillar plan to reform international corporate taxation.
The plan, announced on 1 July 2021, will see the UK commit to a 15% minimum level of global tax on large businesses under Pillar Two, in exchange for being able to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in the UK under Pillar One.
The DST was introduced in 2020 as a temporary measure to address the challenges posed by the digital economy to international corporate taxation. The tax has been effective in raising £358m from large digital businesses in the 2020/21 tax year, 30% more than originally forecast.
However, the DST has faced significant international opposition, with the US arguing that digital services taxes unfairly target American firms and are discriminatory.
The compromise agreed with the US covers the interim period between January 2022 and either 31 December 2023 or the date Pillar One is implemented, whichever is earlier.
Under this compromise, the UK is able to keep its existing DSTs in place until the implementation of Pillar One, but US corporations subject to DSTs may receive tax credits against future tax liabilities.
As a compromise, the US has agreed to terminate proposed trade action and refrain from imposing any future trade actions against the UK.
The OECD’s two-pillar plan aims to reform international corporate taxation and make it fit for the digital age.
Pillar One will enable countries to tax a portion of the profits of the world’s largest businesses that are attributable to consumption in their jurisdictions, including the profits of the world’s largest digital businesses.
Pillar Two will introduce a global minimum tax rate of 15% on large businesses to prevent them from shifting profits to low-tax jurisdictions.
The UK has committed to ending its DST by the deadline of 31 December 2023 in order to adopt the OECD’s Pillar One model rules from 2024.
The UK government anticipates that it will introduce a domestic minimum tax in the UK to complement Pillar Two, likely to come into effect from 1 April 2024 at the earliest.
The withdrawal of the DST will have implications for digital companies operating in the UK. Businesses that have not yet been found liable for DST but consider that they may be in scope should revisit their DST exposure analysis.
The UK government’s commitment to introducing a domestic minimum tax may also have an impact on the tax liabilities of digital companies operating in the UK.
If you have any queries relating to UK Withdraws Digital Services Tax or tax matters in the UK more generally, then please do not hesitate to get in touch with a UK specalist Native!
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.