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Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.
In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.
The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.
Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.
The European Council is not bound by the amended text and may still amend or decide not to issue the directive.
The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.
Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.
ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.
The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.
Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.
If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.
Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.
If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.
If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.
Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.
Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.
The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.
If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
On March 28, 2023, Canada’s Finance Minister presented budget materials suggesting major modifications to the country’s General Anti-Avoidance Rule (GAAR).
These alterations will lead to considerable uncertainty, elevate corporate tax risks, and generate volatility in the Canadian tax disputes domain.
The three most critical proposed GAAR changes involve:
Other important suggestions encompass the introduction of a new preamble to GAAR and a revision of the purpose test required for GAAR application.
The proposed “economic substance” analysis amendments deviate significantly from the Canadian standard, as Canadian courts have typically taxed transactions based on their legal form.
The economic substance aspect is incorporated as a factor in determining transaction abusiveness, rather than as an independent test to deny benefits.
The amendments list non-exhaustive factors to determine if a transaction lacks significant economic substance.
However, the budget materials emphasise that not all transactions without economic substance are abusive, and existing GAAR jurisprudence remains relevant when a transaction does not lack economic substance.
The budget materials propose a 25% penalty on the tax benefit when GAAR applies to undisclosed transactions.
This penalty should be considered by taxpayers when determining the level of aggressiveness in future Canadian tax planning.
The budget suggests extending the limitation period for the CRA to apply GAAR by three years if a transaction was not disclosed.
This extension would result in a possible GAAR reassessment issuance up to seven years after the original assessment, matching the statutory limitation period for transfer pricing rule reassessments.
Two more significant GAAR changes are proposed:
The Department of Finance has requested feedback on these provisions by May 31, 2023. Following this, revised legislative proposals will be published, and the application date for the amendments will be announced.
If the final legislation reflects current proposals, taxpayers will face substantial uncertainty in compliance. Economic substance will become a legislated factor, alongside a 25% penalty, that Canadian taxpayers must consider when assessing GAAR risk.
Though some pitfalls may be avoided through increased disclosure, the proper role of these new provisions will remain unclear until a comprehensive jurisprudence is established.
If you have any queries about GAAR changes in Canada or other Canadian tax matters then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
The Australian Taxation Office (ATO) has announced that a new Register of Foreign Ownership of Australian Assets is set to come into effect on 1 July 2023.
This Register will create several new reporting obligations for foreign investors and Australian entities that become “foreign persons”, in relation to certain interests in Australian land, entities and businesses.
Foreign investors will be required to provide notice to the Commissioner of Taxation (the Registrar) of certain events relating to interests in land, entities and businesses in Australia. Such events include acquisitions, disposals, lease arrangements, options to purchase or lease arrangements, as well as the creation or transfer of interests in a trust.
These reporting obligations are in addition to the approval processes and reporting obligations that already apply under Australia’s Foreign Acquisitions and Takeovers Act (FATA).
In anticipation of the Register’s commencement, Treasury has released an exposure draft of amendments to the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) which is open for consultation until 31 March 2023. The ATO, which will administer the Register, has also released draft data standards prescribing how and what information must be reported for inclusion in the Register.
When a “registrable event” occurs, foreign investors must give notice to the Registrar within 30 days of the “registrable event day”. This day varies depending on the type of event but is generally the date on which the notifiable event occurs, or when the person is aware or should have been aware that the relevant event has occurred.
The ATO will be launching a new online platform through which investors will be able to report interests for the new Register. A third party will also be able to be authorised by a foreign investor to give notice on behalf of the foreign investor. Civil penalties will apply for a failure to give notice within the requisite 30-day period.
The Register will not be public. The information on the Register will be subject to similar rules as those that apply to other information relating to foreign investment in Australia under the FATA. That is, the information can be disclosed to other government bodies to enable them to perform their functions or exercise their powers under the FATA.
Information on the Register will also be permitted to be disclosed to a person to whom information on the register relates.
Under the FATA, a person must notify the Treasurer within 30 days of taking certain actions approved under a no objection notification or an exemption certificate, as well as certain notifiable situations after the action has been taken. These situations include when the relevant interest ceases or changes, or the entity or business the interest relates to ceases to exist.
From 1 July 2023, these circumstances will also need to be notified to the Registrar in order to be recorded on the new Register. To reduce duplication, the draft regulations provide that by giving a notice to the Registrar of a registered circumstance, this will also satisfy any other equivalent reporting obligations to the Treasurer under the FATA in relation to the same action.
On commencement of the new Register, the registers maintained by the ATO, including the Register of Foreign Ownership of Agricultural Land, the Register of Foreign Ownership of Water Entitlements, and the Register of Residential Land, will be repealed, and all information will be incorporated into the new Register. All circumstances required to be reported in relation to these registers will instead be reported to the Registrar and recorded on the new Register.
The Register of Foreign Owners of Media Assets maintained by the Australian Communications and Media Authority and the Register of Critical Infrastructure Assets administered by the Cyber and Infrastructure Security Centre will continue to operate
These key dates related to the new Register of Foreign Ownership of Australian Assets:
If you have any queries about the New Register of Foreign Ownership , or Australian tax issues or tax matters in general, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
This article discusses a rather unexpected move by the Australian Treasury to tighten tax rules on multinational corporations operating in the country.
Specifically, the Treasury has proposed changes to the way that companies can deduct interest expenses incurred in capitalizing or buying foreign subsidiaries.
Under current rules, Australian companies can deduct interest on money borrowed onshore to invest in foreign subsidiaries or acquire shares in other companies.
However, the proposed changes would remove the ability to deduct interest expenses for investments that generate non-assessable, non-exempt (NANE) income.
This would effectively repeal a provision that has been in place for the past 20 years.
The proposed changes are part of a wider effort to combat profit-shifting by multinational corporations, and are designed to prevent excessive levels of debt being carried by Australian operations.
The changes were unexpected, as they were not part of previous policy proposals or announcements. They are likely to have significant implications for multinational corporations operating in Australia.
Overall, the article provides a comprehensive overview of the proposed changes and their potential impact on multinational corporations operating in Australia.
If you have any queries about this article, or Australian tax issues or tax matters in general, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
On February 14, 2023, the Council of the European Union made changes to the list of countries that do not cooperate with the EU on tax matters.
This is called the “EU blacklist”.
Four new countries were added to the list:
With these additions, the EU blacklist list now has 16 countries on it. The other countries are as follows:
The Council gave reasons for adding these countries.
For example, the Marshall Islands was added because they have a tax system that encourages businesses to move profits offshore without any real economic activity.
Costa Rica was added because they do not provide enough information about tax matters, and they have tax policies that are considered harmful. Russia was added for the same reason.
The Bahamas was previously removed from the EU blacklist in 2018 but was added back in 2022 and remains on the list.
The new list will be officially published in the Official Journal of the EU, and the next revision will take place in October 2023.
If you have any queries relating to the EU Blacklist or tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
In 2020, the EU’s Anti-Tax Avoidance Directive II (“ATAD II“) came into force.
This led to EU Member States being required to implement into domestic law a suite of so-called “anti-hybrid” laws.
The aim of the anti-hybrid rules is, unsurprisingly, to eliminate the potential to exploit ‘hybrid features’ in a structure.
For example, the rules might address a hybrid instrument that is treated as debt in one jurisdiction but equity in another jurisdiction. Alternatively, they might target a hybrid entity which is treated as tax transparent in one jurisdiction and tax opaque in another jurisdiction.
One such anti-hybrid rule is the “reverse hybrid” rule.
This was introduced in a number of countries including Luxembourg.
The purpose of the “reverse hybrid” rule is to counteract “double non-taxation outcomes”.
Such an outcome might arise where an entity, e.g. a Luxembourg fund partnership, is treated as tax transparent in Luxembourg but tax opaque in the jurisdiction of one of its investors.
Why might this lead to ‘double non-taxation?’
Running with the example above, the Luxembourg fund partnership is not taxed in Luxembourg because it transparent for tax purposes. In other words, the entity does not pay tax, only the partners in the partnership.
However, that same income is also untaxed in that investor’s jurisdiction as a result of that jurisdiction deeming the income to have been paid by an opaque entity.
The rule may be triggered if:
This is subject to certain aggregation or “acting together” rules.
Where it is engaged, our fund partnership would be treated as a corporate for tax purposes in Luxembourg. As such, it becomes subject to Luxembourg corporate income tax.
Luxembourg amended its “reverse hybrid” on 23 December 2022.
This was to clarify certain conditions that must be satisfied in order for it to be engaged.
The conditions can be summarised as follows:
The reason for the amendment was that they overreached and counteracted certain mismatches that were not caused by hybridity – but rather as a result of an investor’s tax exempt status.
The amendment has retrospective effect from 1 January 2022.
If you have any queries relating to Luxembourg’s Reverse Hybrid Rule Amendments or tax matters in the Luxembourg more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Last month, the Swiss Federal Council took the decision to suspend co-operation under the Automatic Exchange of Information (AEoI) between itself and Russia.
Obligations under AEoI stem from the Common Reporting Standard (CRS). However, similar data sharing obligations arise under other tax-related information exchange including:
These are also suspended.
In respect of the CRS based obligations, this means that where a Swiss Reporting Financial Institution (FI) has submitted information for 2021 to the Swiss Federal Tax Administration (FTA) on its Russian resident clients then the FTA will not provide the Russian authorities with the data.
It is worth pointing out that all obligations of a Swiss Reporting FI remain in place following the move. It is simply that the FTA will not pass this information over the Swiss authorities as would normally be the case.
If you have any queries about this article, or Swiss 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