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In a landmark decision, the Conseil d’Etat, France’s highest tax court, has reined in attempts by the French tax administration to broaden the application of withholding tax on transactions involving French banks and foreign shareholders.
The ruling came after the French Banking Association (Fédération Bancaire Française, FBF) successfully contested the tax administration’s position, which sought to expand the beneficial ownership requirements under certain conditions.
The controversy centered around the French tax administration’s interpretation of Article 119 bis-2 of the French General Tax Code.
The administration issued guidance suggesting that withholding tax applies even if the recipient is based in France, as long as the income’s beneficial owner, or the entity with the right to freely dispose of the income, is domiciled or has a registered office outside France.
This interpretation, targeting specific banking activities like temporary share acquisitions and certain derivatives transactions, was seen as an overreach by the banking sector.
The FBF took legal action against this interpretation and two related rulings from 15 February 2023.
The association argued that the tax administration’s comments and the rulings were ultra vires, meaning they went beyond the administration’s legal authority.
On 8 December 2023, the Conseil d’Etat delivered its judgment, making two critical clarifications:
The court specified that Article 119 bis-2 should not be construed to impose a withholding tax on distributions to a rights holder based in France, even if the funds are eventually remitted to someone considered the beneficial owner based outside France.
The court affirmed that unless the anti-abuse of rights procedure under Article L. 64 of the Tax Procedure Code is implemented, the tax administration cannot disregard the involvement of a French resident intermediary between the payer and a non-resident beneficial owner.
This decision is pivotal for the French banking industry and foreign investors involved in the French market.
It clarifies the application of withholding tax and provides a more predictable framework for financial transactions involving foreign shareholders.
The court’s ruling emphasizes the need for the tax administration to adhere strictly to the legislative framework without overstepping its bounds.
It also underlines the importance of clearly defined rules in fostering a stable and transparent tax environment, crucial for international investment and financial operations.
The Conseil d’Etat’s ruling marks a significant turn in the ongoing discourse about the scope of withholding tax in France, particularly concerning transactions involving French banks and foreign entities.
It underscores the judiciary’s role in maintaining the balance between tax collection efforts and the need for a clear, predictable legal environment for domestic and international economic activities.
For further insights or queries on this development or broader French tax matters, feel free to reach out and engage in the discussion.
On December 6, HM Revenue & Customs (HMRC) announced critical updates to its International Manual, specifically focusing on the UK tax treatment of overseas entities.
This includes Delaware and other US limited liability companies (LLCs).
This revision, reflected in sections INTM180000 and INTM180050 follows the seminal case of Anson and aims to provide clarity in the complex world of international taxation.
HMRC’s distinction between “opaque” and “transparent” entities is pivotal.
Transparent entities subject UK resident members to immediate taxation on income or gains, whereas opaque entities are taxed directly with members taxed on distributions.
INTM180040: Elaborates on HMRC’s process in determining a foreign entity’s tax status.
INTM180050: Reflects on the Anson case, usually treating Delaware (and other US) LLCs as opaque.
INTM180060: Offers guidance on non-statutory clearances for specific entity cases.
These terms, while not legislative, are crucial in applying the law to the facts of a case, with the updated guidance emphasizing this application.
This concept plays a significant role in determining an entity’s status, focusing on the entity’s legal personality and its capacity to own assets and bear liabilities independently of its members.
Despite the Anson case favoring transparency for Delaware LLCs, HMRC continues to generally view US LLCs, especially from Delaware, as opaque, although it does consider individual case specifics.
HMRC’s stance is influenced by several aspects of Delaware law, particularly focusing on the LLC’s role in business operations, ownership of assets, responsibility for debts, and the distribution of profits.
Now labelled “How HMRC arrives at a general view of foreign entities,” this section provides a more detailed approach, replacing the old INTM180010.
This update is a significant development for tax professionals and entities operating across borders.
It underscores HMRC’s nuanced approach to international tax rules, particularly in light of evolving global tax landscapes and landmark legal rulings like Anson.
HMRC’s recent update reaffirms the complexities inherent in international taxation, especially concerning the UK tax status of non-UK entities and US LLCs.
If you have any comments or queries on this article on HMRC’s Updated Guidance on Overseas Entities and US LLCs or UK and US tax matters more generally, 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.
The Bermuda Government is consulting on the introduction of a corporate income tax, a significant policy shift driven by the OECD’s Pillar Two global minimum tax rules, known as the GloBE Rules.
This move aims to align Bermuda with international tax standards and mitigate the impact of top-up taxes under the GloBE framework.
The new tax regime in Bermuda is designed to ensure that taxes paid by Multinational Enterprise Groups (MNEs) in Bermuda are accounted for under the GloBE Rules.
The Bermuda Government is considering a corporate income tax rate between 9% and 15%, aiming to avoid exceeding an overall 15% effective tax rate for MNEs operating in Bermuda.
The tax would primarily affect Bermuda businesses that are part of MNEs with annual revenue exceeding €750M.
Certain sectors, such as not-for-profit groups, pension funds, and investment funds, would be exempt from this corporate tax.
Provisions for tax credits and qualified refundable tax credits, as defined in the GloBE Rules, will be included in the new tax regime.
Most Bermuda entities, especially those with annual revenues below €750M, will not be affected by the new tax.
The Bermuda Tax Reform Commission is exploring restructuring existing tax regimes to reduce living and business costs on the island.
The first consultation period runs from August 8 to September 8, 2023. Interested parties can submit comments through the government’s website or through legal contacts in Bermuda.
A more comprehensive second consultation is planned for later in the year to address specific aspects of the proposals, including scope, tax computations, and transitional matters.
The introduction of a corporate income tax in Bermuda marks a shift towards global tax compliance standards.
The new tax regime will affect how MNEs structure their operations and tax strategies, particularly those with significant activities in Bermuda.
Bermuda’s government must balance the new tax regime’s implications for the local economy with international tax obligations.
Bermuda’s potential introduction of a corporate income tax signifies a notable adaptation to the global tax landscape, particularly in response to the OECD’s GloBE Rules.
It also highlights the increasing international pressure on tax havens to comply with global minimum tax standards, and it underscores the need for MNEs to reassess their tax strategies in light of evolving international tax policies.
If you have any queries about this article on Bermuda Corporation Income Tax, or Bermuda tax matters in general, then please get in touch.
A significant development occurred on 19 December 2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.
This Convention, formally known as the Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! – marks a milestone as the first new U.S. tax treaty in over a decade.
Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.
Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.
This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.
The Treaty introduces significant reductions in withholding taxes across various domains:
For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.
It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.
Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.
The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.
Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.
Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.
The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:
The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.
Other tax provisions will be effective for tax years starting 1 January 2024.
Additionally, the provisions for information exchange are effective immediately.
The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.
For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.
If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.
On 15 November 2023, HM Revenue & Customs (HMRC) issued comprehensive guidance on the UK implementation of the OECD’s model reporting rules for digital platforms.
This initiative aligns with similar regulations already in effect in EU Member States.
The new rules are applicable from 1 January 2024, with reporting starting in January 2025.
The rules apply to UK digital platforms facilitating transactions between sellers and customers.
These platforms, defined broadly, are required to perform due diligence to identify sellers engaged in relevant activities.
Reporting obligations include annual submission of identification and transactional information of sellers to HMRC.
UK-based platforms under EU rules must be aware of earlier reporting obligations in the EU.
However, platforms complying with UK rules may not need to report in the EU, as there’s relief when equivalent information is accessible from non-EU countries.
The guidance clarifies what constitutes a ‘Platform’ and outlines the responsibilities of ‘Platform Operators,’ especially in scenarios with multiple entities involved in a single platform operation.
Notably, non-UK platforms with UK sellers or property are not deemed in-scope as UK Reporting Platform Operators.
However, platforms operated by partnerships or similar legal entities must consider their UK tax exposure.
The guidance details activities considered relevant under the rules, emphasizing that services must be ‘at the request of the user’ and capable of being personalized.
For reporting purposes, the ‘Seller’ is identified as the person registered on the Platform, which simplifies reporting obligations for Platform Operators.
Platform Operators are mandated to conduct due diligence on sellers, with the flexibility to delegate this task but retaining legal responsibility.
HMRC has established the Platform Reporting Service (PRS) for the electronic submission of reports, requiring registration and notification by Platform Operators.
Platform Operators must begin due diligence and related obligations from January 1, 2024.
The first reporting period covers January 1 to December 31, 2024, with reports due by January 31, 2025.
HMRC’s new guidance provides a clear roadmap for digital platforms to prepare for and comply with the upcoming reporting requirements.
It emphasises the importance of accurate data collection and reporting, aiming to streamline the process and ensure tax compliance across digital platforms.
For UK digital platforms, and those with UK sellers, understanding and integrating these guidelines into their operational frameworks is essential for smooth compliance starting in 2024.
If you have any queries about this article on HMRC guidance on digital platform reporting, or UK tax matters in general, then please get in touch.
Last year, the UK and Luxembourg signed a new double tax treaty, which officially came into force on 22 November 2023.
This development brings significant changes, particularly in how capital gains are treated.
For Luxembourg-based investors in UK real estate, the clock is ticking to adapt to these changes.
Previously, Luxembourg residents could sell stakes in UK property-rich entities without worrying about the UK’s tax net.
But, the updated treaty has flipped that particular script.
Now, if you’re a Luxembourg resident and you dispose of shares (or interests in partnerships or trusts) that derive more than half of their value from UK real estate, the UK will have a say in your tax bill.
This change primarily affects entities where at least 75% of their value comes from UK real estate, as UK tax laws have targeted such gains since 2019.
So, if your investment structure falls into this category, it’s time to pay attention.
Mark your calendars!
The treaty’s provisions will be implemented as follows:
This isn’t just a minor lick of paint.
The lack of ‘grandfathering’ for existing structures means that Luxembourg investors in UK real estate could face significant tax implications.
It’s a key time to review your investment structures and consider strategies to navigate these changes.
One trend is a shift to using Real Estate Investment Trust (REIT) status prior to 1 April 2024.
This move aims to capitaliae on the current rules for conversion and then leverage the REIT regime moving forward.
Change is often challenging, but it also brings opportunities for adaptation and growth.
If you’re a Luxembourg investor in UK real estate, now is the time to review your portfolio and strategies. As always, professional advice tailored to your specific circumstances is key in making the most of these changes.
If you have any queries about the New UK-Luxembourg Tax Treaty, or are a property investor in the UK and looking at options, 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.
The Portuguese Prime Minister announced an intention to terminate the “Non-Habitual Resident” taxation regime (‘NHR Regime’).
This has been an attractive and popular tax regime that provided tax benefits to non-residents moving to Portugal.
On 10 October 2023, the Draft State Budget Law proposed the end of the NHR Regime from 1 January 2024.
This means that individuals acquiring tax residency in Portugal or holding a Portuguese residence permit until 31 December 2023, can still apply for the NHR Program.
The final draft law is expected to be available by the end of November 2023.
The practical issues are perhaps, refreshingly simple.
Those individuals wishing to benefit from the NHR Regime must establish tax residency in Portugal before December 31st, 2023, and submit the NHR application promptly.
As such, there is a feel of an ‘Everything Must Go’ style fiscal sale in the offing.
Under the 2024 Draft State Budget Law, individuals relocating to Portugal between 1 January 2024, and 31 December 2026, who haven’t resided in Portugal in the previous 5 years, are eligible for a 50% deduction on taxable income, up to a maximum of €250,000 for 5 consecutive years.
Standard progressive tax rates apply to the remaining taxable income, and foreign-source income may be taxable in Portugal. Contractors and freelancers may have additional deductions during the first and second years.
In addition, a new taxation regime, available for 10 years, will apply to individuals who have not resided in Portugal for the past 5 years.
It’s limited to university professionals, scientific research, income from companies with contractual tax benefits for productive investment projects, and income from companies under the R&D tax incentives system (SIFIDE) paid to individuals with a PhD.
Under this regime, foreign-source income (except pensions) will be exempt, and a flat 20% tax rate will apply to employment and self-employment income. Those benefiting from the NHR or the 50% exclusion regime are not eligible.
The Portuguese Personal Income Tax Code offers an attractive regime for income generated through life insurance or pension funds.
Regular investment income is taxed at a flat rate of 28%, with portions of income from life insurance or pension funds being exempt under certain conditions.
Other efficient taxation arrangements can be considered on a case-by-case basis.
Please note that this information is subject to change based on the final draft law.
Of course, there are other jurisdictions around the world happy to accommodate mobile, wealthy, and tax savvy individuals.
Cyprus and Italy both offer attractive ‘non-dom’ regimes for individuals.
Jurisdictions like the UAE continue to offer welcoming low or nil personal tax rates.
If you have any queries about the Non-Habitual Residence (NHR) regime, Portuguese tax, or tax matters in general, then please get in touch.
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..