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  • Tag Archive: EU

    1. Hong Kong Removed from EU Watchlist Following Tax Regime Amendments

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      Hong Kong Removed from EU Watchlist – Introduction

      Hong Kong has been officially removed from the European Union’s list of non-cooperative jurisdictions for tax purposes, commonly referred to as the EU Watchlist.

      This took place with effect from the 20 February 2024.

      The development comes after the Hong Kong government introduced the Foreign-Sourced Income Exemption (FSIE) regime in January 2023.

      This is aimed at addressing the EU’s concerns over tax cooperation and aligning with international tax standards.

      Background of the FSIE Regime

      The FSIE regime was established in response to Hong Kong’s inclusion on the EU Watchlist in 2021, marking a concerted effort by the local government to ensure the jurisdiction’s compliance with global tax norms.

      The regime applies to certain types of passive income, including dividends, interest, income derived from intellectual property (IP), and disposal gains related to equity interests.

      To benefit from the profits tax exemption under the FSIE regime, multinational enterprises (MNEs) operating in Hong Kong must meet specific economic substance, nexus, and participation requirements relevant to each income type.

      Refinements and Compliance with EU Standards

      Following the EU’s updated Guidance on Foreign-sourced Income Exemption Regimes in December 2022, which called for adequate substance requirements for all passive income types, the Hong Kong government expanded the FSIE regime.

      This expansion included broadening the scope of disposal gains to encompass gains from the disposal of all asset types received by MNE entities in Hong Kong.

      These adjustments, which took effect on 1 January 2024, played a crucial role in demonstrating Hong Kong’s commitment to adhering to international tax standards.

      EU’s Decision to Remove Hong Kong from the Watchlist

      The EU’s decision to remove Hong Kong from the Watchlist was based on a comprehensive review of the amendments made to the territory’s tax regime concerning foreign-sourced passive income.

      By fully aligning with the EU’s requirements and international tax standards, Hong Kong has successfully addressed the concerns that led to its initial inclusion on the Watchlist.

      Implications and Future Developments

      Hong Kong’s removal from the EU Watchlist is a positive development for the region, enhancing its reputation as a cooperative jurisdiction in tax matters and potentially improving its attractiveness as a business and investment destination.

      Stakeholders in Hong Kong and international businesses operating within the territory will benefit from the clarity and stability this resolution provides.

      Hong Kong Removed from EU Watchlist – Conclusion

      As Hong Kong continues to implement and refine the FSIE regime, further updates and guidance are expected to ensure that the territory remains in compliance with evolving international tax standards.

      This proactive approach underscores Hong Kong’s dedication to fostering a transparent and cooperative tax environment on the global stage.

      Final thoughts

      If you have any queries about this article on ‘Hong Kong Removed from EU Watchlist’, or tax matters in Hong Kong more generally, then please get in touch.

    2. CJEU AG Deems Spain’s Regional Hydrocarbon Tax Non-Compliant

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      CJEU AG Deems Spain’s Regional Hydrocarbon Tax Non-Compliant – Introduction

      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.

      Background of the Special Tax on Hydrocarbons

      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.

      Controversy and Legal Challenge

      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’s Opinion

      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.

      Implications and Future Outlook

      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.

      CJEU AG Deems Spain’s Regional Hydrocarbon Tax Non-Compliant – Conclusion

      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.

      Final thoughts

      If you have any queries about this article, or Spanish taxes in general, then please get in touch.

    3. Cologne Tax Court Adapts German VAT Law

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      Cologne Tax Court Adapts German VAT Law – Introduction

      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 Essence of the Ruling

      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.

      Background and Implications

      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.

      Looking Forward

      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.

      Cologne Tax Court Adapts German VAT Law – Conclusion

      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.

      Final thoughts

      If you have any queries about this article or any other general German tax matters then please get in touch.

    4. New minimum tax law in Germany

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      New Minimum tax law in Germany – Introduction

      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.

      Content of the new minimum tax law

      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 two-pillar solution

      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.

      Adjustment of income and foreign tax regulations

      The adjustment of income tax and foreign tax must be accompanied by the introduction of the Minimum Tax Act.

      Who is affected by the Minimum Taxation 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.

      Concept of minimum tax

      General

      The minimum tax applicable under the new implementation law is made up of three factors:

      • the primary,
      • the secondary; and
      • the national supplementary tax amount.

      Primary and secondary

      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.

      National Supplementary Tax

      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.

      New Minimum tax law in Germany – Conclusion

      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.

      Final thoughts

      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.

    5. CJEU Rules in Favour of Amazon and Luxembourg in State Aid Case

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      Amazon and Luxembourg state aid case – Introduction

      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 Facts

      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).

      European Commission’s Stance and General Court’s Judgment

      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.

      CJEU’s Judgment

      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.

      Implications for Other Cases and Taxpayers

      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.

      Amazon and Luxembourg state aid case – Conclusion

      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.

       

      Final thoughts

      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.

    6. New Malta VAT rate – new 12% rate on certain services

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      New Malta VAT rate – Introduction

       

      On 6 October 2023, Legal Notice 231 was published by the Maltese government.

       

      The Notice amended the Eighth Schedule of the Value Added Tax Act in Malta (Chapter 406 of the Laws of Malta). 

       

      Broadly, this amendment introduced a reduced VAT rate of 12% for specific services

       

      New Malta VAT rate – Deeper cuts

       

      The Notice transposes paragraph 5 of Article 105a of Council Directive 2006/112/EC, as amended by Council Directive (EU) 2022/542 in April 2022. 

       

      This obliges Member States to provide detailed rules for applying reduced rates, not lower than 12%, to specific transactions by October 7, 2023.

       

      The Eight Schedule

       

      The Eighth Schedule of the VAT Act in Malta specifies the tax rates for particular supplies and imported goods, offering a reduction from the standard rate of 18%. 

       

      With the publication of this Legal Notice, four new services are included, all subject to the reduced VAT rate of 12%.

       

      Newly introduced services

       

      The newly introduced services are as follows:

        

      • Custody and management of securities;
      • Management of credit and credit guarantees, excluding those who grant credit. (Credit management by those granting credit is already exempt without credit as per the VAT Act.)
      • Hiring of pleasure boats, with the condition that they are not rented for more than five weeks when aggregating rental time during the previous year.
      • Services related to the care of the human body, provided by regulated healthcare professionals in accordance with the Health Care Professions Act (Chapter 464 of the Laws of Malta). This includes services offered in health studio businesses or similar enterprises, excluding exempt supplies. This addition aligns with the guidelines issued by the Malta Tax and Customs Authority (MTCA) in September concerning VAT exemptions for certain healthcare services.

       

      New Malta VAT rate – When is this effective?

       

      The implementation of the 12% VAT rate will become effective from January 1, 2024. 

       

      The MTCA is expected to release further details on its application in the coming weeks.

       

      If you have any queries about this new Malta VAT rate, or Maltese tax matters in general, then please get in touch.

    7. EU Blacklist: Back to black

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      EU blacklist – Introduction

      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”.

      New additions to EU Blacklist

      Four new countries were added to the list:

      • British Virgin Islands,
      • Costa Rica,
      • Marshall Islands, and
      • Russia.

      With these additions, the EU blacklist list now has 16 countries on it. The other countries are as follows:

      • American Samoa
      • Anguilla
      • Fiji
      • Guam
      • Palau
      • Panama
      • Samoa
      • Trinidad and Tobago
      • Turks and Caicos
      • US Virgin Islands
      • Vanuatu

      The Council gave reasons for adding these countries.

      Marshall Islands

      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

      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.

      Bahamas

      The Bahamas was previously removed from the EU blacklist in 2018 but was added back in 2022 and remains on the list.

      Conclusion

      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.

    8. EU agreement on Pillar Two / Minimum Taxation Directive

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      Introduction – EU agreement on Pillar Two

      Eventually, after a number of failed attempts, the EU has reached agreement on the Minimum Taxation Agreement.

      The 27 European Union Member States reached agreement on the 12 December 2022.

      The agreement clears the way for the implementation of a minimum level of taxation for the largest companies. These reforms are also known as the Pillar Two or Minimum Taxation Directive.

      The Directive has to be transposed into Member States’ national law by the end of 2023.

      What is it?

      Broadly, the agreed Directive reflects the global OECD agreement with some adjustments.

      The new agreement will apply to any large group of companies whether domestic or international. The rules will apply to such organisations with aggregate revenues of over €750 million a year. As such, it will only apply to the biggest companies around the globe.

      It should be noted that it is necessary for either the parent company or a subsidiary of the group to be situated within the EU.

      The rate of the minimum tax

      The effective tax rate is established for a location by dividing the taxes paid by the entities in the jurisdiction by their income.

      Where this calculation results in a rate of tax below 15% then the group must ‘top-up’ the tax paid such that the overall rate is 15%.

      What’s next?

      The development means that the EU will be a pioneer around Pillar Two. However, it seems highly likely that other jurisdictions (I.e non-EU) will follow suit.

      Further, by the end of this month (Jan 2023), it is expected that the OECD will publish its own guidelines for Pillar Two. Again, these should act as a catalyst for wider adoption of Pillar Two internationally.

      In addition, it is expected that they will shed some light on some of the key outstanding issues around how the US rules (such as US GILTI rules) will conform with Pillar Two.

      If you have any queries about the EU agreement on Pillar Two, or international tax matters 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