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The business landscape is set to change significantly with the recent adaptation of public Country-by-Country Reporting obligations in the European Union, a development that underscores a global shift towards greater tax transparency.
Stemming from the European Commission’s proposal back in April 2016, this requirement mandates Multinational Enterprises (MNEs) to disclose annual reports on profits and taxes paid across all operational countries.
Finalised after years of deliberation, this regulation aims to shed light on MNEs’ tax strategies and their contribution to societal welfare.
The Decree incorporates these requirements into Dutch law, targeting entities exceeding €750 million in consolidated revenue for two consecutive years.
This applies to various forms of Dutch entities, including branches and subsidiaries of non-EU headquartered MNEs, introducing a new layer of fiscal responsibility.
However, the Decree’s broad scope raises questions about its applicability to entities solely operating within the Netherlands or those with minimal revenue from traditional business activities.
MNEs must now disclose detailed financial information, ranging from the number of employees to profit before income tax and the amount of income tax paid.
This requirement extends to reporting for each EU member state, including additional disclosures for countries deemed non-cooperative tax jurisdictions.
Interestingly, the Decree allows for the temporary omission of information that could harm the commercial stance of the entities involved, albeit with strict conditions.
Entities must file their reports within 12 months post-financial year, ensuring public accessibility in an EU official language and via a prescribed electronic format.
This proactive approach is aimed at promoting transparency and encouraging fair tax practices across borders.
The integration of this EU directive into Dutch law signals a significant shift towards transparency, yet it leaves room for interpretation, especially concerning the calculation of net turnover and the classification of subsidiaries.
Moreover, the absence of a specific conversion rate for MNEs operating in non-Euro currencies adds another layer of complexity to compliance.
As the EU strides towards greater tax transparency, Dutch businesses find themselves navigating a sea of new reporting obligations.
While the directive aligns with global trends, its implementation raises practical concerns, from the definition of applicable entities to the intricacies of financial reporting.
Businesses must tread carefully, ensuring their reporting strategies are compliant yet strategic, safeguarding their commercial interests while aligning with the broader goal of societal welfare through fair taxation.
For more insights into how these changes may affect your business or for any inquiries on Dutch or EU tax matters, feel free to get in touch.
The Court of Justice of the European Union (CJEU) Advocate General, Athanasios Rantos, has delivered an opinion suggesting that Spain’s regional variation of the Special Tax on Hydrocarbons (STH), effective between 2013 and 2018, contradicts the EU Energy Taxation Directive.
This position could significantly influence the forthcoming CJEU judgment, potentially impacting how energy products are taxed across regions within Member States.
The STH, an excise duty levied on mineral oil products’ transfer to purchasers, is aimed at taxing the ownership transfer from tax warehouse holders to buyers.
This duty, while ensuring tax collection from the purchaser by the warehouse holder, prohibits the latter from transferring the tax burden to customers, albeit allowing its consideration in product pricing.
Governed by the Law 38/1992 on excise duties, the STH’s harmonization with EU law, specifically with Directive 2003/96/EC, is crucial for its legality.
The introduction of an “Autonomous Community Tranche” allowing regions to apply supplementary tax brackets sparked legal debate, leading to varying tax levels across Spain based on purchase locations.
Questions arose regarding the tranche’s alignment with Directive 2003/96, especially Article 5, which discusses tax bracket uniformity within Member States.
Legal challenges ensued, prompting a referral to the CJEU for clarity on whether such regional tax brackets comply with EU directives.
Advocate General Rantos argued that Member States cannot implement regional excise duty variations without Council authorization, which Spain did not obtain.
Emphasizing the internal market’s integrity and the free movement of goods, Rantos highlighted that differentiated tax tranches could fragment the market, opposing Directive 2003/96’s objectives.
Furthermore, he noted that the Autonomous Community Tranche lacks a specific purpose, thereby not satisfying Directive 2008/118 conditions.
The principle of equal treatment, according to Rantos, further invalidates the regional tax differences within Spain.
Should the CJEU’s final decision align with the Advocate General’s opinion, it could echo the 2014 ruling against Spain’s “Céntimo Sanitario,” leading to the regional tax’s annulment.
This outcome would necessitate a mechanism for affected taxpayers to claim refunds, considering the tax’s non-transferable nature and the need to demonstrate that the tax burden wasn’t passed on.
The CJEU’s forthcoming judgment and its retrospective effect could significantly influence Spain’s taxation landscape, potentially mandating refunds to taxpayers who bore the STH without lawful basis.
As the legal community and taxpayers await the CJEU’s definitive ruling, the Advocate General’s stance marks a critical step towards resolving the dispute over Spain’s regional hydrocarbon taxation.
If you have any queries about this article, or Spanish taxes in general, then please get in touch.
In December 2022, the Court of Justice of the European Union (CJEU) made a significant ruling (C-378/21 P GmbH) that VAT incorrectly displayed on an invoice does not inherently result in a tax liability, provided that tax revenue is not at risk.
This interpretation of Art. 203 of the VAT Directive has been echoed in Germany for the first time by the Cologne Tax Court in a judgement dated May 27, 2023 (8 K 2452/21), applying it to Section 14c para. 1 of the German VAT Act.
This decision marks a shift in addressing VAT liabilities and showcases the evolving landscape of tax law in the European Union and its member states.
The Cologne Tax Court’s decision expands the scope of Section 14c para. 1 of the German VAT Act beyond its traditional application.
Historically, this section was interpreted to possibly implicate a broader range of entities, including those not eligible for input VAT deduction, in tax liabilities.
However, the court’s recent judgement clarifies that if an invoicing party acts in good faith, Section 14c (1) of the German VAT Act does not apply, aligning with the CJEU’s stance on safeguarding tax revenue without unduly penalizing companies.
This judicial interpretation is significant for companies, indicating that invoices need not be corrected in the absence of a tax risk, a principle now supported by both EU and German court decisions.
However, companies must demonstrate the absence of tax risk, particularly challenging when the services involve VAT-exempt entities, such as public authorities and courts, as highlighted in the Advocate General Kokott’s Opinion.
The CJEU ruling and the subsequent Cologne Tax Court decision stem from a case involving a provider of indoor playground services in Austria, where VAT was incorrectly applied at a standard rate for services that qualified for a reduced tax rate.
The correction of these mistakes raised questions about tax liabilities when the tax revenue was not jeopardized, primarily because the end consumers were not entitled to input VAT deductions.
In Germany, the Cologne Tax Court’s judgement directly addresses how Section 14c of the German VAT Act should be interpreted in light of EU directives, emphasizing the need for tax law to protect companies acting in good faith without risking tax revenue.
This decision not only reflects a harmonization of EU and German tax law but also offers a clearer path for companies navigating VAT compliance and potential liabilities.
While the Cologne Tax Court’s decision marks a significant development in the interpretation of VAT law in Germany, it is important to note that an appeal against this judgement is pending before the Federal Tax Court (case no. V R 16/23).
The appeal will not challenge the interpretation of Section 14c of the German VAT Act per se but will focus on the applicability of tax exemptions under specific conditions, indicating the ongoing evolution of tax law interpretation in response to EU directives.
The recent decisions by the CJEU and the Cologne Tax Court highlight the dynamic nature of tax law in the European Union, emphasizing the importance of aligning national laws with EU directives.
If you have any queries about this article or any other general German tax matters then please get in touch.
On December 27, 2023, the Implementation Act for the Minimum Tax Directive (Minimum Tax Act for short) was promulgated.
The Bundestag had previously passed the law on November 10, 2023 and the Bundesrat subsequently gave its approval on December 15, 2023.
The new Minimum Taxation Act serves to implement the EU Minimum Taxation Directive, which the EU member states were obliged to implement by the end of 2023.
The core of the transposition law – which in its full name is the “Law on the implementation of the Directive to ensure global minimum taxation for multinational enterprise groups and large domestic groups in the Union” – is the regulation of effective minimum taxation at a global level.
It is intended to counteract threats to competition and aggressive tax planning.
To this end, the international community (G20 countries in cooperation with the OECD) has taken certain measures to combat profit reduction and profit shifting.
The new minimum tax law applies to all financial years beginning after December 31, 2023, with the exception of the secondary supplementary tax regulation.
The secondary supplementary tax regulation only applies to financial years beginning after December 30, 2024.
The Minimum Taxation Act is part of the so-called two-pillar solution and is aimed in particular at implementing the second pillar (“Pillar Two”).
The first of these two pillars (“Pillar One”) of the international agreements on which this is based provides for new tax nexus points and regulations for the distribution of profits between several countries.
Particularly due to advancing digitalization, companies would otherwise often operate in other countries without having a physical presence in that country.
As a result, profits could be taxed in a place where they were not generated. In this respect, the first pillar affects the question of the “where” of taxation. The first pillar is currently still the subject of political debate.
The second pillar concerns regulations for the introduction of effective minimum taxation at a global level and therefore the question of how high taxation should be. Corresponding regulations are intended to counteract aggressive tax planning and harmful competition.
Irrespective of how an individual state structures tax liability and the extent to which tax concessions are to be granted, for example, a general minimum threshold for taxation should apply. This should make tax planning less risky. In order to close gaps in taxation, certain options for subsequent taxation should apply.
The second pillar and the associated provisions of the Minimum Tax Act are intended to remedy this. The new Minimum Tax Act obliges larger companies to pay tax on profits in certain cases. Any negative difference to the specified minimum tax rate must be retaxed in the home country.
The adjustment of income tax and foreign tax must be accompanied by the introduction of the Minimum Tax Act.
The new minimum taxation law binds large nationally or internationally active companies or groups of companies with a turnover of at least EUR 750 million in at least two of the last four financial years. The legal form of the company or group of companies is irrelevant.
There is an exception to this in accordance with Section 83 of the Minimum Taxation Act if the company’s international activities are subordinate. This is the case if the company has business units in no more than 6 tax jurisdictions and the total assets of these business units do not exceed EUR 50 million. In this case, these are not taxable business units.
The provisions of the new minimum tax law pose major challenges for the companies concerned with regard to the necessary procurement and evaluation of the extensive data. The prescribed calculation system can only be complied with if these large volumes of data are comprehensively evaluated. Companies often lack this data, have not collected it in the past or it is not or not fully stored in the relevant IT systems.
However, the new minimum tax law provides for certain simplifications and transitional regulations for the first three years. Specifically, this relates to the simplified materiality test, the simplified effective tax rate test and the substance test.
There are also other simplifications without time limits, such as in Section 80 of the Minimum Tax Act for immaterial business units upon application.
The minimum tax applicable under the new implementation law is made up of three factors:
The primary and secondary supplementary tax amounts relate to the difference in the event of under-taxation of a business unit.
The parent companies of the corporate group are generally subject to the primary supplementary tax regulation.
The secondary supplementary tax regulation serves as a subsidiary catch-all provision for cases that are not already covered by the primary supplementary tax amount.
The national supplementary tax amount is the increase amount determined in the Federal Republic of Germany for the respective business unit.
The tax increase amount is calculated on the basis of a minimum tax rate of 15 percent.
Overall, the minimum tax is a separate tax that applies in addition to the income and corporation tax that is due anyway, irrespective of income and legal form.
Germany’s enactment of the Minimum Tax Act marks a significant step towards aligning with the EU’s directive for global minimum taxation, aiming to curb aggressive tax planning and ensure fair competition.
Effective from the fiscal year beginning after December 31, 2023, this legislation targets large multinational and domestic corporations, setting a minimum tax rate of 15% to prevent profit shifting and reduce tax evasion.
With its comprehensive approach and inclusion of transitional simplifications, the law represents an important shift in international tax policy, reinforcing Germany’s commitment to the OECD and G20’s two-pillar solution for global tax reform.
if you have any queries about this article on the New Minimum tax law in Germany, or German tax matters in general, then please get in touch.
On 14 December 14, 2023, the Court of Justice of the European Union (CJEU) delivered an eagerly awaited judgment in favor of Amazon and Luxembourg, upholding the May 2021 decision of the General Court.
This judgment dismissed the European Commission’s appeal, confirming that Amazon did not receive unlawful state aid from Luxembourg.
The CJEU’s judgment is definitive and marks a significant moment in the ongoing discussions around state aid and tax rulings within the EU.
The case centered around the arm’s length nature of a royalty paid by a Luxembourg operating company (LuxOpCo) to a Luxembourg partnership (LuxSCS).
The payment was for the use of intangibles like technology, marketing-related intangibles, and customer data.
In 2003, the Luxembourg tax authorities had confirmed the arm’s length nature of these deductible royalty payments, based on a transfer pricing analysis using the transactional net margin method (TNMM).
The European Commission had challenged this arrangement, arguing that LuxOpCo’s tax base was unduly reduced, effectively constituting state aid.
However, the General Court identified factual and legal errors in the Commission’s analysis and annulled its decision, a position now affirmed by the CJEU.
The CJEU agreed with the General Court’s conclusion but based its decision on different grounds.
Echoing its approach in the Fiat judgment of November 2022, the CJEU held that the OECD transfer pricing guidelines could not be part of the “reference framework” for assessing normal taxation in Luxembourg.
This is because Luxembourg law did not explicitly refer to these guidelines.
Thus, the European Commission’s decision was fundamentally flawed.
The CJEU concluded that even though the General Court had used an incorrect reference framework, its ultimate decision to annul the Commission’s decision was correct.
The CJEU, therefore, chose to rule directly and confirm the annulment of the European Commission’s decision.
This judgment aligns with previous rulings in the Fiat and ENGIE cases, underscoring that the European Commission cannot enforce non-binding OECD transfer pricing guidelines over national legal frameworks.
However, these guidelines may still be relevant if they are explicitly referenced in national laws.
The judgment also has implications for the pending appeal in the Apple case, which similarly involves intragroup profit allocation and the definition of the correct reference framework.
Additionally, it influences other ongoing formal investigations, although details on these cases remain non-public.
The CJEU’s decision marks a crucial development in the landscape of EU state aid law, particularly concerning the application of transfer pricing rules and the boundaries of the European Commission’s powers.
It highlights the importance of national legal frameworks in determining the arm’s length principle and sets a precedent for future cases involving similar issues.
If you have any queries about this article on the Amazon and Luxembourg state aid case, or Luxembourg tax matters in general, then please get in touch.
On 16 October 2023, the Council of Ministers preliminarily approved a legislative decree proposing significant reforms to international taxation in Italy.
This decree is currently undergoing review by relevant parliamentary committees before it officially becomes law.
An interesting proposal is a relief for the so-called ‘reshoring’ of economic activities.
Let’s look at this in some more detail.
Expected to come into force after final approval of the legislative decree (anticipated by December 31, 2023), the ‘reshoring’ provisions aim to rejuvenate Italy’s economic landscape.
However, their actual enactment hinges on authorization from the European Commission.
Article 6 of the draft legislative decree outlines a specialized tax incentive designed to incentivize the transfer of ‘economic activities’ to Italy.
Unlike similar measures in other nations, Italy’s decree extends beyond specific sectors, aiming to encompass ‘economic activities’ regardless of industry.
Under the proposed measure, income derived from business activities transferred from non-EU or non-EEA countries to Italy will enjoy a 50% exemption from income tax and IRAP (Regional Production Tax) for a designated period:
The relief spans the tax period during the transfer and the following five tax periods. However, ‘economic activities’ already conducted in Italy within the preceding 24 months are excluded from eligibility. Interpretive Challenges and Scope The decree poses several questions for stakeholders, primarily concerning its application scope.
The term ‘economic activities’ casts a wide net, referencing income from business activities conducted in non-EU/EEA countries and relocated to Italy.
This suggests potential application scenarios, including the relocation of non-EU/EEA companies’ registered offices to Italy.
Though the draft decree doesn’t explicitly mention the combined application of ‘reshoring’ relief and tax basis adjustment provisions, such as Article 166-bis of the Consolidated Income Tax Law (TUIR), experts opine that these could complement each other.
This combination might lead to higher depreciation or lower capital gains, further reducing the taxable base.
Determining the application of ‘reshoring’ relief, along with compliance with other provisions like ‘Pillar 2’ and ‘Qualifying Domestic Minimum Top-Up Taxes,’ poses intricate challenges.
The definition of ‘economic activity’ under European Union law highlights the complexity of identifying eligible activities.
Moreover, entities already established in Italy undergoing functional changes might potentially qualify for ‘reshoring’ benefits.
This includes transformations within the value chain, such as a distributor evolving into a manufacturing entity.
To benefit from the incentive, taxpayers must maintain meticulous accounting records to verify income determination and eligible production values.
The legislation stipulates forfeiture conditions, triggering the recovery of unpaid taxes in case of activity transfer out of Italy within specific periods following ‘reshoring.’
Italy’s proposed tax incentive for ‘reshoring’ economic activities presents opportunities and complexities for businesses.
The legislation’s interpretation and application nuances warrant thorough understanding, and compliance measures are crucial to harness the benefits while navigating the regulatory landscape effectively.
If you have any queries around Italy and reshoring of economic activities, or Italian 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.
In a significant development for the British Virgin Islands (BVI), the European Union (EU) has officially removed the BVI from its list of non-cooperative jurisdictions for tax purposes.
This is important news for the BVI, a prominent offshore financial centre, and reflects its commitment to adhere to international standards, particularly those set by the OECD Global Forum regarding the exchange of information on request.
The EU press release regarding this development stated that the British Virgin Islands had been removed from the list due to amendments made in its framework concerning the exchange of information on request, specifically criterion 1.2.
The EU further noted that the BVI would be reassessed in line with the OECD standard. While this reassessment is pending, the jurisdiction has been placed in Annex II.
The EU’s list of non-cooperative jurisdictions for tax purposes was established in December 2017 as part of the EU’s external taxation strategy.
Its primary goal is to support worldwide efforts in promoting good tax governance.
The EU Council has established a set of criteria by which jurisdictions are evaluated.
These criteria encompass areas like tax transparency, fair taxation, and the implementation of international standards aimed at preventing tax base erosion and profit shifting.
The code of conduct group’s chair engages in political and procedural dialogues with relevant international organizations and jurisdictions as needed.
The BVI’s journey towards removal from the EU’s list of non-cooperative jurisdictions began when, on 9 November 2022, the OECD Global Forum published its second-round Peer Review Report on the BVI.
This report revealed that the BVI’s rating had been downgraded from ‘largely compliant’ to ‘partially compliant.’ Importantly, a rating below ‘largely compliant’ automatically led to a jurisdiction being placed on the European Union’s list of non-cooperative jurisdictions for tax purposes.
The ‘partially compliant’ rating assigned to the BVI encompassed the period from 1 March 2016, to 30 June 2020, considering exchange of information requests received during this timeframe.
It also factored in a ‘block period’ from 17 September 2017, to 31 December 2018, which was due to the disruptive impact of Hurricane Irma. Furthermore, the report assessed the legal and regulatory framework in place as of 9 September 2022.
Crucially, this rating did not account for the legislative changes introduced in 2022, which included the BVI Business Companies Amendment Act 2022 and the BVI Business Amendment Regulations 2022, both of which came into effect on 1 January 2023.
The removal of the British Virgin Islands from the EU’s list of non-cooperative jurisdictions for tax purposes is a significant milestone for the BVI and its reputation as a financial center.
It reflects the dedication of the BVI government and stakeholders in aligning with international standards and demonstrating a commitment to transparency and cooperation.
This development not only bolsters the BVI’s status but also highlights the importance of maintaining adherence to global tax governance standards in an increasingly interconnected world.
If you have any queries about BVI removed from blacklist, BVI matters in general, or any tax matters, then please get in touch.
In the ever-evolving landscape of global taxation, the European Union (EU) has taken a significant stride in enforcing tax transparency on digital platforms.
The recent extension of EU tax transparency rules to digital platforms has introduced new obligations on platform operators, shaking up the way information is collected, verified, and reported for sellers engaging in what are termed as “Relevant Activities.”
While initially an EU initiative, these rules have far-reaching implications for platform operators beyond the EU, especially those established in non-EU countries like the United States.
In this article, we delve into the intricacies of these rules, their impact, and what platform operators need to know.
On January 1, 2023, the EU’s regulations implementing the OECD’s Model Reporting Rules for Digital Platforms, known as DAC7, officially came into effect.
With a deadline of December 31, 2022, EU Member States were mandated to incorporate DAC7 into their national legislation.
The overarching aim of these regulations is to ensure tax compliance among participants in the digital economy and level the playing field between online and traditional businesses.
While the UK’s regulations implementing these rules are still in draft form, they are slated to take effect from January 1, 2024, with the first reports expected in 2025.
The UK’s implementation of these rules will be closely aligned with EU regulations to streamline reporting obligations and reduce duplication.
The crux of DAC7 lies in its broad-ranging requirements for platform operators. In essence, platform operators falling under the scope of these rules must:
DAC7’s focus centers on platform operators.
The term “platform operator” encompasses entities that provide software connecting sellers with users to perform Relevant Activities.
Compliance requirements kick in for platform operators that are either residents of a Member State for tax purposes or fulfill specific conditions like being incorporated under Member State laws, having their management based in a Member State, or having a permanent establishment in a Member State without a jurisdictional information exchange agreement.
Central to DAC7 are the “Relevant Activities,” encompassing activities like renting immovable property, personal services facilitated through the platform, sale of tangible goods, and rental of transport modes.
Platform operators in scope of DAC7 are required to conduct due diligence to collect seller information.
However, exceptions are provided for sellers falling under certain thresholds. Notably, sellers with fewer than 30 sales or a consideration of less than 2,000 euros, governmental entities, listed entities, and certain lessors of immovable property fall outside the due diligence scope.
The collected information includes a range of details such as names, addresses, tax IDs, VAT registration numbers, and more. Verification of this data’s accuracy is paramount, and operators are encouraged to utilize electronic interfaces provided by Member States or the EU for authentication purposes.
For sellers identified through due diligence, platform operators must collect and report a host of transaction-related information. This includes financial account numbers, consideration amounts, activity volumes, fees, commissions, and taxes withheld.
DAC7 outlines measures platform operators must take against non-cooperative sellers. If sellers fail to provide requested information after two reminders, operators can close their accounts or withhold payments until compliance is achieved.
Compliance timelines are well-defined: due diligence and verification by December 31 of the reporting year and information reporting by January 31 of the subsequent year.
Fines for non-compliance should be “effective, proportionate, and dissuasive,” although exact penalties vary by Member State.
The extension of EU tax transparency rules transcends geographical boundaries, impacting non-EU platform operators with ties to the EU.
For instance, US-based operators accommodating EU-based sellers or property rentals in the EU now need to adapt their operations to comply with DAC7.
In a digitally connected world, tax transparency is evolving rapidly. As platform operators, it’s crucial to remain informed about regulations like DAC7 that impact your business operations.
From information collection and verification to reporting and compliance, understanding the nuances is essential for a smooth transition.
As the tax landscape continues to reshape, being proactive in embracing change and adapting to new norms will set the stage for sustainable growth and compliance in an ever-evolving global marketplace.
If you have any queries about this article on the EU tax rules for digital platforms or any other international tax matters, 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 notable step towards combating overseas economic crime and tax offences, representatives from the Financial Intelligence Units of Gibraltar, Guernsey, Isle of Man, and Jersey met at London’s Gibraltar House.
The meeting marked the continued commitment of the Quad Island Form to strengthen its framework and enhance collaboration with other authorities responsible for tackling financial crime.
During the three-day event, participants engaged in productive discussions involving the Economic Crime and Confiscation Unit from Jersey and the Isle of Man Proactive International Money Laundering Investigation Team. The primary focus was on sharing best practices in preparation for upcoming Moneyval assessments.
An important outcome of the meeting was the establishment of a dedicated subgroup that integrates tax authorities from all four jurisdictions. This initiative aims to foster greater cooperation between tax authorities and FIUs, enabling them to combat serious tax-related crimes and sophisticated fraud schemes that result in substantial illicit gains.
The participants discussed other matters, including:
The formation of this sub-group represents an encouraging step, showcasing the commitment of each jurisdiction to equip themselves with comprehensive financial intelligence and mechanisms to target criminals and illicit proceeds.
It also serves as a collaborative platform for sharing knowledge and experiences, allowing the four jurisdictions to work collectively towards their objectives.
Recognising the significance of international cooperation in combating money laundering, financial terrorism, and proliferation, the Forum emphasises the importance of collaboration, providing a vital avenue for identifying and addressing criminal activities effectively. The Forum members share common values, face similar challenges, and closely collaborate on issues of mutual importance.
Lynette Chaudhary, Director of Sovereign Tax Services, welcomes the Forum’s continued commitment to strengthening its framework and expanding collaboration. Emphasising the collaborative approach would facilitate closer working and knowledge sharing within the quad, and aid in the fight against financial crime.
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.