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On March 12, 2024, the Legislative Assembly of El Salvador passed an amendment to the Income Tax Law (LISR).
This law significantly impacts the taxation of income earned abroad.
Here’s a breakdown of the key changes and their potential effects:
The amendment adds a new provision (IV) to Article 3 of the LISR, specifying that income obtained abroad in any form, including capital movement, remuneration, or emoluments, is not taxable under the law.
Additionally, the amendment exempts income covered under this new provision from the requirement to apply proportionality in determining costs and expenses, as outlined in Article 28 of the LISR.
The reform repeals several existing provisions that currently tax income earned by individuals and entities domiciled in El Salvador from overseas deposits, securities, financial instruments, and derivative contracts.
Overseas profits and returns that were previously taxable will now be considered non-taxable income for taxpayers in El Salvador.
This change is expected to encourage increased capital investment within El Salvador, as investors will no longer face taxation on income generated abroad.
Specifically, the following types of income will be exempt from taxation:
The amendment to El Salvador’s Income Tax Law represents a significant shift in the taxation of income earned abroad by individuals and entities domiciled in the country.
By exempting such income from taxation, the government aims to attract more capital investment into El Salvador.
However, taxpayers should consult with legal and financial advisors to understand the full implications of these changes for their specific circumstances.
If you have any queries about this article on El Salvador’s Income Tax Law, or tax matters in South America more generally, then please get in touch
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Cyprus has long been recognized as a strategic location for businesses looking to optimize their intellectual property (IP) management.
In 2016, Cyprus further enhanced its appeal by aligning its IP Box Regime with EU regulations and the OECD’s Base Erosion and Profit Shifting (BEPS) Action 5 rules.
Recent amendments in 2020 to Section 9(1)(l) of the Income Tax Law have introduced significant tax advantages for intangible assets, reaffirming Cyprus as a prime destination for IP-centric companies.
The 2020 amendments came at a crucial time, offering tax exemptions on incomes derived from the disposal of intangible assets, effectively exempting them from capital gains tax since January 1, 2020.
This move aims to boost innovation by making it more financially viable for companies to invest in IP development.
Cyprus stands out in the EU for its competitive IP tax regime. As a member of the EU and a signatory to all major IP treaties, Cyprus ensures robust protection for IP owners.
The IP Box Regime in Cyprus offers one of the most advantageous programs in the EU, characterized by low effective tax rates, a broad range of qualifying IP assets, and generous deductions on gains from disposals.
The regime’s hallmark is the substantial tax exemption provided for IP income.
Specifically, 80% of worldwide qualifying profits generated from qualifying assets is deemed a tax-deductible expense, and the same percentage of profits from the disposal of IP is exempt from income tax.
This arrangement results in a maximum effective tax rate of just 2.5%.
Qualifying Assets (QAs) include patents, certain software and computer programs, and other legally protected intangible assets that meet specific criteria, such as utility models and orphan drug designations.
These assets must be the result of the business’s research and development (R&D) activities. Notably, marketing-related IP such as trademarks and brand names does not qualify.
The regime employs a nexus approach to determine the portion of income eligible for tax benefits, relating it to the company’s actual R&D expenditure.
The formula for Qualifying Profits (QP) considers the ratio of qualifying R&D expenditure and total expenditure on the QA, fostering a direct link between tax benefits and genuine innovation efforts.
Qualifying Expenditure includes all R&D costs directly associated with the development of a QA, such as salaries, direct costs, and certain outsourced expenses.
However, acquisition costs of intangible assets and expenditures not directly linked to a QA do not qualify.
Entities eligible for the Cyprus IP Regime’s benefits include Cyprus tax resident companies, tax resident Permanent Establishments (PEs) of non-resident entities, and foreign PEs subjected to Cyprus taxation, provided they meet certain criteria.
The Income Tax Law amendments also introduced capital allowances for all intangible assets, allowing for the spread of these costs over the asset’s useful life (up to 20 years).
This provision supports businesses in managing the financial impact of large IP investments over time.
Moreover, the regime permits taxpayers to opt out of claiming these allowances in a given tax year, offering flexibility in tax planning.
Upon the disposal of an IP asset, a taxpayer must provide a detailed balance statement to determine any taxable gains or deductible amounts.
With its favorable IP Box Regime and recent legislative enhancements, Cyprus continues to cement its status as an attractive location for IP-rich companies seeking tax efficiency within the European Union.
Companies operating in high-tech and innovative industries should consider Cyprus for their IP management and development activities, benefiting from substantial tax incentives and robust legal protections.
If you have any queries about this article on Cyprus and Intellectual Property, or tax matters in Cyprus more generally, then please get in touch.
On 5 April 2024, the Irish Government released a consultation on a potential new tax exemption for qualifying foreign dividends as part of the Finance Act 2024.
The proposed participation exemption could mean significant changes to the way foreign dividend income is taxed, impacting Irish corporation tax starting 1 January 2025.
Here’s the lowdown…
Currently, Ireland operates on a “tax and credit” system, which taxes foreign dividends but allows credits for taxes paid abroad.
The proposed participation exemption would remove Irish corporation tax on qualifying foreign dividend income, aligning Ireland with international best practices and making the country more competitive for business investment.
The consultation document outlines key features of the proposed regime, including eligibility criteria and other important details.
The exemption is intended to support Irish companies with foreign subsidiaries and make Ireland a more attractive location for international businesses and investment funds.
The consultation outlines a strawman proposal, which serves as a draft for feedback and discussion. Here’s a summary of its key points:
The proposed participation exemption is expected to benefit international businesses with Irish-based subsidiaries, similar to the introduction of a participation exemption for capital gains some 20 years ago.
With the OECD’s Global Minimum Tax rules now in effect in Ireland for large multinational groups, it’s crucial for these companies to manage their tax obligations efficiently.
The new regime could also increase the attractiveness of Ireland for private equity funds, providing more flexibility for investment structures.
The consultation period for the feedback statement runs until 8 May 2024, with a second feedback statement expected later in the year.
If you have any queries about this article on the the Irish Participation Exemption for Foreign Dividends, or tax matters in Ireland more generally, then please get in touch.
Thailand has recently taken a significant stride in international tax reform by joining the International Cooperation Framework on Base Erosion and Profit Shifting, a collective of over 140 economic zones initiated by the OECD/G20.
This participation aligns Thailand with a global movement aimed at addressing tax challenges presented by the digital economy through a comprehensive two-pillar solution.
The Thai Revenue Department has disclosed the guiding principles derived from this global framework, signaling a proactive approach to integrating these international tax standards.
As these proposals are in the draft stage, stakeholders have been invited to contribute their insights and feedback to refine the approach.
The Ministry of Finance is spearheading the implementation process, which involves critical actions such as:
Adhering to Pillar 2’s principles, Thailand aims to adjust its tax collection strategies to ensure fairness and efficiency in the digital age.
Funds raised from the new tax measures will be allocated to a special fund dedicated to enhancing the competitiveness of key sectors within Thailand’s economy.
Information on taxpayers benefiting from these changes will be systematically reported to the Office of the Board of Investment, ensuring oversight and alignment with investment strategies.
A key aspect of Thailand’s approach is the active solicitation of feedback from the business community, tax professionals, and other interested parties.
This open call for comments, facilitated through the Revenue Department’s and the central legal system’s websites, underscores the government’s commitment to transparency and inclusiveness in shaping its tax policy.
Thailand’s commitment to adopting the OECD/G20’s two-pillar solution is a testament to its dedication to international tax cooperation and its role in fostering a fair, sustainable global tax landscape.
As the country moves forward with these reforms, the engagement and input of stakeholders will be invaluable in ensuring that Thailand’s tax system remains competitive, equitable, and aligned with global standards.
If you have any queries about this article on Thailand Global Tax Reform, or Thai tax matters in general, then please get in touch.
On 21 March 2024, the Bahamas Financial Services Board (BFSB) and the Association of International Banks and Trust Companies (AIBT) have come forward with a significant plea to the government.
In a joint statement, these key industry stakeholders have voiced their concern over the proposed enactment of a minimum 15% global corporate tax, a move aligned with the OECD‘s Pillar Two framework aimed at modernizing international business taxation rules.
The Bahamas’ decision to introduce this tax comes as a strategy to adhere to the OECD’s base erosion and profit shifting (BEPS) initiative, targeting multinational enterprises (MNEs) with a group turnover exceeding EUR750 million annually.
The government’s plan includes unveiling draft legislation by the end of May 2024, with a legislative Bill anticipated to follow after further consultations.
However, the BFSB and AIBT have raised alarms over the proposed tax, arguing that it challenges the sovereignty of nations to manage their tax systems independently.
Their contention is that international tax regulations should pivot towards reinforcing economic substance rules and harmonizing transfer pricing standards to curb tax evasion and profit shifting.
An open letter has been dispatched to a UN committee currently penning a new international tax cooperation convention. This emerging UN convention garners support mainly from smaller jurisdictions and developing countries, advocating for more equitable tax cooperation frameworks.
The joint letter criticizes the OECD’s approach of instituting a uniform tax rate as a means to tackle avoidance and evasion by large MNEs, suggesting it would unfairly eliminate tax competition among nations.
The BFSB and AIBT propose a model where tax rules of a jurisdiction are applied based on the economic substance present, whether the tax rate is 0% or 15%.
Furthermore, the BFSB and AIBT recommend the introduction of a ‘holding’ period for countries willing to engage in the UN tax convention.
This grace period aims to streamline the adoption of new international tax standards and prevent the overlapping of efforts resulting from competing tax rules set by different international bodies.
As the Bahamas prepares to navigate through these proposed tax changes, the financial sector’s plea highlights a critical conversation about sovereignty, economic competitiveness, and fairness in the global tax landscape.
The coming months will be pivotal as the government contemplates these feedbacks and moves towards legislating this global tax initiative.
If you have any queries about this article, the Bahamas Financial Sector Appeals for Reevaluation of 15% Global Corporate Tax, or tax matters in the Bahamas more generally, then please get in touch
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.
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.
In a significant move to adjust its tax framework, the Finance Act 2023 introduced an amendment that impacts non-residents receiving royalty and fees for technical services (FTS) in India.
Since its inception in 1974, the Income Tax Act 1961 has undergone numerous revisions, with the latest changes set to influence multinational corporations and their operations within India.
Previously, the tax rate for royalty and FTS received by non-residents was set at 10% (plus applicable surcharge and cess), as outlined in Section 115A of the Act.
This rate was momentarily increased to 25% in 2013 before being restored to 10% in 2015.
However, the Finance Act 2023 has now doubled this rate to 20% (plus surcharge and cess), effective from 1 April 2023.
The increase in the tax rate to 20% presents a significant shift for non-residents deriving income from royalty and FTS in India.
Given that many tax treaties with countries such as the United Kingdom, Canada, and the United States offer a lower tax rate of 15%, non-residents had previously opted for taxation under Section 115A of the Act due to its beneficial provisions, including specific exemptions from filing tax returns in India under certain conditions.
With the amendment, non-residents are likely to pivot towards claiming benefits under applicable tax treaties, which, while potentially offering lower tax rates, also necessitate additional compliance measures, including tax registrations in India and filing of income tax returns.
The requirement to file tax returns in India, necessitated by claiming treaty benefits, introduces a new layer of compliance for non-residents.
This includes the need for obtaining tax registrations and electronically filing Form 10F, a declaration form used by non-residents to claim treaty benefits.
Although there has been a temporary relief allowing manual submission of Form 10F until 30 September 2023, electronic filing will become mandatory thereafter, adding to the compliance burden for non-residents without a tax registration number.
Moreover, Indian payers making royalty or FTS payments to non-residents must now ensure that they collect and maintain specific documents from the non-residents to apply the treaty rates of withholding tax.
These documents include the Tax Residency Certificate, No Permanent Establishment Declaration, and the electronically filed Form 10F.
Failure to comply with these documentation requirements may result in withholding tax being applied at the higher domestic rate, along with potential penalties for the Indian payer.
The amendment could also have financial implications for Indian payers, especially in cases where royalty or FTS payments are grossed-up to cover the tax liability of the non-resident recipient.
The increased tax rate may lead to higher cash outflows for Indian payers, emphasizing the importance of efficient tax planning and compliance.
The Finance Act 2023’s decision to double the tax rate on royalty and FTS for non-residents marks an important change in India’s tax regime, aiming to align with global taxation practices.
While this may increase the tax burden and compliance requirements for non-residents, leveraging tax treaty benefits could mitigate some of these challenges.
As India continues to refine its tax laws, it is crucial for non-residents and Indian payers alike to stay informed and compliant with the evolving legal landscape.
If you have any thoughts on this article then please get in touch.
Kenya’s Income Tax Act, a cornerstone of the nation’s tax legislation since 1974, has witnessed significant modifications following the enactment of the Finance Act 2023.
These changes are particularly relevant for multinational corporations operating in Kenya through permanent establishments.
The recent adjustments aim to modernize and adapt Kenya’s tax system to the evolving global business landscape, especially in light of advancements in technology that enable remote work.
A critical update in 2021 broadened the scope of what constitutes a permanent establishment in Kenya.
Specifically, the provision of services, including consultancy by employees or personnel engaged for such purposes, can establish a permanent establishment if the activities exceed 91 days within any twelve-month period.
This expansion reflects the modern work environment’s flexibility and underscores the need for multinationals to monitor their operations closely to avoid unintended tax implications.
Starting 1 January 2024, profits repatriated by permanent establishments will incur a 15% tax.
This move, initially proposed in the Income Tax Bill, 2018, signifies Kenya’s intention to ensure that profits generated within its borders contribute to the national revenue, even when they are sent abroad.
The formula for computing repatriated profits takes into account net assets at the beginning and end of the year, net profit, and tax paid on chargeable income, excluding asset revaluation.
In a bid to stimulate business growth and investment, the corporate tax rate for permanent establishments will be reduced from 37.5% to 30%, effective from 1 January 2024.
This reduction aligns Kenya’s tax regime with international standards and makes the country a more attractive destination for foreign investment.
The Finance Act, 2023 removes previous restrictions on the deductibility of remuneration paid to non-resident directors who hold a controlling interest in the company.
Previously, deductions for such remuneration were limited if they exceeded 5% of the total income of the company.
This amendment, effective from 1 July 2023, allows permanent establishments more flexibility in compensating non-resident directors, enhancing Kenya’s appeal as a conducive environment for international business operations.
These changes underscore Kenya’s commitment to fostering a competitive and equitable business environment.
By equalizing the corporate tax rate for both subsidiaries and permanent establishments and introducing a tax on repatriated profits, Kenya aims to balance the need for foreign investment with the imperative of ensuring that such investments contribute fairly to the national economy.
Multinational companies operating in Kenya through permanent establishments must carefully navigate these changes.
The introduction of the repatriation tax, in particular, necessitates strategic planning to optimize tax liabilities while complying with the new regulations.
Moreover, the ability to deduct remuneration for non-resident directors without restrictions could influence corporate governance and financial planning strategies.
As Kenya’s tax landscape continues to evolve, staying abreast of legislative changes and understanding their implications will be crucial for multinational corporations seeking to maximize their operational efficiency and tax compliance in the country.
If you have any queries on this article about the Kenyan changes to Permanent Establishments or any other tax matters in Kenya, then please get in touch
The Supreme Court of Pakistan has delivered a key judgement in the Snamprogetti Engineering case, offering clarity on the contentious issue of what constitutes a permanent establishment (PE) and the consequent tax obligations of foreign entities providing services in Pakistan under the Pakistan-Netherlands Double Taxation Treaty (DTT).
The case involved a Dutch-resident company, Snamprogetti Engineering, engaged by a Pakistani firm to deliver engineering services and procure spare parts over two years for a fertilizer complex project in Pakistan.
The company filed its tax return, claiming exemption from income tax for its engineering services income based on Article 7 of the DTT, asserting it had no PE in Pakistan.
The Assessing Officer (AO) contended that Snamprogetti had established a PE in Pakistan under paragraphs 3 and 4 of Article 5 of the DTT, due to its involvement in the project’s construction and engineering aspects and the necessity of its physical presence in Pakistan.
This interpretation was initially contested and led to a series of appeals.
The Appellate Tribunal Inland Revenue (ATIR) initially sided with the AO, asserting the project’s indivisibility and exceeding the four-month threshold for constituting a PE.
However, the Supreme Court’s analysis diverged, focusing on the specifics of Article 5 of the DTT and international tax principles.
The Supreme Court found no evidence of the petitioner’s involvement in construction activities, rendering paragraph 3 of Article 5 irrelevant.
It concurred with the Commissioner Appeals (CIRA) in calculating the service duration, emphasizing that breaks between service periods could be aggregated.
If these periods totaled more than four months within a twelve-month span, a PE would be established.
Nonetheless, since Snamprogetti’s personnel were present in Pakistan for only 97 days, falling short of the four-month criterion, the court concluded that the company did not constitute a PE under paragraph 4 of Article 5 of the DTT.
This landmark decision underscores the importance of accurately interpreting the terms of international tax treaties, particularly concerning the designation of a PE.
It reinforces the principle that the aggregate service duration, interspersed with breaks, is crucial in determining the existence of a PE.
The ruling provides significant relief and clarity to foreign companies engaged in similar contractual arrangements in Pakistan, confirming that the absence of a PE negates the local tax obligations on income derived from such services, provided the conditions of the applicable DTT are met.
The Supreme Court’s judgement is a definitive stance on the application of the Pakistan-Netherlands DTT to cases of foreign entities providing services in Pakistan.
It establishes a clear precedent for evaluating the taxability of international companies’ operations in Pakistan, ensuring that tax obligations are adjudicated in strict accordance with the stipulated treaty provisions.
If you have any queries about this article on this case and / or the Pakistan Netherlands double tax treaty, or any other Pakistani tax issues, then please get in touch.