here

Volume 4 Issue 1 – April 2014
European Tax Brief
Tax
PRECISE. PROVEN. PERFORMANCE.
Editorial
Welcome to the latest issue of Moore
only and should not be acted upon
Stephens European Tax Brief. This
without first obtaining professional
newsletter summarises important recent
advice tailored to your particular needs.
tax developments of international interest
European Tax Brief is published quarterly
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suggestions concerning European Tax
Brief, please contact the Editor, Zigurds
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or would like to discuss their implications
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the person named under the item(s). The
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Inside
“Austria: Changes to
corporate taxation.”
Page 2
“France: Corporate tax
surcharge increased.”
Page 5
“Netherlands: Fiscal unity
(tax group) rules may
need to change.”
Page 8
“OECD issues four BEPS
discussion drafts.”
Page 9
“Portugal: Patent box
régime introduced.”
Page 9
“United Kingdom: Budget
brings important tax
changes.”
Page 11
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European Tax Brief – April 2014
Austria
Changes to corporate taxation
From 1 March 2014, that part of an employee’s remuneration
from 1 January 2015, whereas the law currently allows for the
exceeding EUR 500 000 per annum is no longer deductible for
parent to offset 100% of the aggregate taxable profits of the
tax purposes. The same rule applies to termination payments.
Austrian members. This 75% rule mirrors the situation outside a
Directors who are members of the executive (management)
group relationship, since a company may not reduce its own
board (Vorstand) are also affected by this rule. It is already the
taxable profits by current-year losses or losses brought forward
case that 50% of directors’ fees paid to members of the
from previous years by more than 75%. Losses disallowed by
supervisory board (Aufsichtsrat) are non-deductible, whatever
this rule in any one year may be carried forward indefinitely.
the level of the remuneration.
Other changes include a rule that provisions for long-term
There are also changes to group taxation, which narrow the
liabilities and charges must now be discounted at a rate of
range of companies that may be included in a tax group. As
3.5% per annum.
from 1 January 2015, a foreign company may be a member of
an Austrian tax group only where it is resident in another EU
A new anti-avoidance measure, also in effect from
Member State or in a jurisdiction with which Austria has a tax
1 March 2014, denies a tax deduction for interest and
treaty or other agreement providing for mutual administrative
royalty payments to related parties resident in a low-tax
assistance. Any losses incurred by companies disqualified as a
jurisdiction where the income will be subject to an effective
result of this change and already used to offset Austrian tax will
rate of tax of less than 10%.
be recaptured over a three-year period.
There is also a measure of relief in that the 1% capital duty
Within an Austrian tax group, losses incurred by group members
on contributions to share capital is to be abolished from
may be set off against the taxable profits of the Austrian parent
1 January 2016. Austria is one of the few remaining EU
company. A further change limits the amount of this set-off of
Member States that still charges a capital duty.
losses in any one year to a maximum of 75% of the
consolidated profit of all Austrian-resident group members as
[email protected]
Belgium
Lump-sum foreign tax credit rules unconstitutional
Belgium’s Constitutional Court (Cour
The problem lies where there is
be fully credited was unconstitutional, as
constitutionelle; Grondwettelijk Hof) has
insufficient Belgian corporate tax to
it discriminated between companies that
held that features of the lump-sum
absorb the foreign tax credit, since only
were in a position to take the full credit
foreign tax credit rules for companies
so much of the foreign tax as does not
and those who were not.
are unconstitutional.
exceed the Belgian tax may be deducted.
Where a company makes a loss, for
As a result of the Court’s judgment,
Under these rules, Belgium gives credit
example, and therefore has no Belgian
companies need only gross up their
for foreign tax imposed on inbound
tax to pay (or where it has tax losses
taxable income by the amount of foreign
interest and royalty payments received by
brought forward from previous years), it
tax for which they can claim the full credit.
a Belgian company by first adding back
must still gross up the interest or royalties
Companies adversely affected by the
the foreign tax to the company’s taxable
received. The result is that tax losses are
unconstitutional rule who are still in time
income (‘grossing up’) and then allowing
reduced by the grossed-up foreign tax.
to reopen previous years’ assessments
should therefore apply to do so. that foreign tax as a credit against the
Belgian corporate income tax due. This is
The Court held that the requirement to
a standard procedure followed in many
include the whole of the foreign tax in
other countries.
taxable income whether or not it could
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European Tax Brief – April 2014
Are multiple deadlines for tax returns unconstitutional?
By refusing to hear an appeal by the tax authorities from the
appeal against this judgment is inadmissible, on the grounds
judgment of a lower court, the Belgian Supreme Court (Cour de
that the authorities did not demonstrate any objective and
cassation; Hof van Cassatie) has further cast into doubt whether
the tax authorities’ practice of setting different deadlines for
filing tax returns, depending on by whom and in what format
the return is filed, violates the constitutional principle of equality
and good administration.
reasonable criteria in their submission how the current practice
might respect the principle of equality and good administration.
However, because the court did not pronounce on the
substance of the issue, the situation is not beyond all doubt.
The Court of Appeal judgment remains the most authoritative
In the absence of a statutory deadline, the tax authorities set a
jurisprudence on this question.
deadline each year. In the last few years, as respects income tax,
they have set three deadlines: one for paper filing, a later one
Nevertheless, as regards the year of assessment 2014 (income
for electronic filing and a later one still where an electronic
year 2013), the tax authorities have not altered their practice.
return is filed on behalf of the taxpayer by a tax adviser.
They have already announced separate filing deadlines for 2014
dependent, as previously, on whether the return is in paper or
In February 2013, the Ghent Court of Appeal held that a
electronic format and on whether it is filed by the taxpayer or
taxpayer who had filed a paper tax return after the paper
on the taxpayer’s behalf by a tax adviser. They will, however, set
deadline but within the electronic deadline was not in default.
out objective and reasonable criteria that in their view justify
The Supreme Court has now ruled that the tax authorities’
this different treatment.
Payments to Luxembourg and Cyprus may need to be reported
Following the appearance of Luxembourg
payments exceed EUR 100 000 on an
Tax-haven jurisdiction
(and Cyprus) on the Organisation for
annual basis. These payments should be
A tax-haven jurisdiction for this purpose
Economic Cooperation and Development
reported in an annex attached to the
is one that either:
(OECD) list of jurisdictions not compliant
company’s corporate tax return.
• Has zero corporate tax or a
with the OECD standard of transparency
Payments to tax-haven countries
substantially lower corporate tax rate
and exchange of information, Belgian
exceeding the threshold and not reported
than Belgium. These countries are all
law requires all payments exceeding an
are considered as non-deductible for
specifically identified in Belgian tax
accumulated maximum of EUR 100 000
corporate income tax purposes. However,
law. Amongst this list are typical
to an individual or a legal entity in those
reporting these payments does not
low-tax jurisdictions such as the
countries to be reported.
automatically result in a tax-deductible
Cayman Islands, Jersey, Monaco, the
cost. The Belgian taxpayer reporting the
Bahamas etc or
As of 2010, Belgian companies are
payments must also prove that the
required to report all payments made to
payments are part of a bona fide
substantially apply the OECD standard
individuals or legal entities in ‘tax haven’
commercial transaction and do not
on transparency and exchange of
jurisdictions, as from the moment the
involve artificial structures.
• Jurisdictions that do not wholly or
information
The OECD ‘blacklist’
The appearance of a jurisdiction in the
second category initially had no tax
consequences in Belgium. In 2009
however, the OECD first published
so-called ‘black’, ‘grey’ and ‘white’ lists
of jurisdictions that were, respectively,
non-compliant, partially or largely
compliant and fully compliant with the
OECD’s standards on transparency and
exchange of information.
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European Tax Brief – April 2014
However, upon the publication in
for accounting periods beginning after
If Luxembourg is not removed from the
November 2013 of the new OECD
30 November 2013.
list, its appearance there will have a
‘blacklist’ of non-compliant jurisdictions,
significant impact. All payments
the Belgian Minister of Finance
Even so, the reporting duty with respect
exceeding EUR 100 000 on an annual
announced that the new blacklist will be
to payments to Luxembourg (or other
basis must be reported. This also includes
used to select the payments to be
jurisdictions on the list) is not entirely
regular transactions, for example
reported. Hence, payments made to
clear. Belgian tax law states that the
payments for goods or services delivered,
individuals or legal entities in one of the
jurisdiction to which the payments have
debt settlements or repayments of
jurisdictions mentioned on the OECD
been made should appear on the
capital. Moreover, indirect payments
blacklist must be reported to the Belgian
blacklist for the whole year. Hence, if
(payments made by a third party, e.g. a
tax authorities as soon as they exceed
Luxembourg is able to persuade the
bank on the company’s behalf) should
EUR 100 000 on an annual basis. The
OECD to remove it from the blacklist,
also be mentioned. Finally, it is of no
reporting duty based on the second
payments to Luxembourg, even
importance where the individual or legal
category of jurisdictions, those appearing
exceeding EUR 100 000, need not
entity is located: if the payments are
in the OECD black list, is only mandatory
be reported.
made to a Luxembourg bank account,
the reporting duty arises.
Reporting duty for founders and beneficiaries of foreign legal structures
As of tax year 2014 (income year 2013), individual taxpayers
The law also envisages individuals who contribute assets to
who are founders or beneficiaries of foreign legal structures
these structures. Finally, also the direct and indirect heirs of the
mostly created for tax purposes must report this fact to the
abovementioned individuals are to be considered as founders,
Belgian tax authorities. Belgian individuals must already report in
as from the time of death of the testator/founder unless they
their income tax return, where applicable, that they are the
can prove that they do not ever stand to benefit – financially or
beneficiary or owner of a foreign bank account as well as of a
otherwise – from the legal entity.
foreign life insurance policy.
Rationale
Which legal structures should be reported? Belgian tax law
It is important to note that the duty to report the existence of
provides for two possibilities:
these structures is based on the need to increase transparency
• All legal relationships that put goods or rights under the
and is consistent with the obligation under the EU Savings
power of an administrator in order to control the assets for
Directive to identify the beneficial owner. It does not, of course,
the benefit of one or more beneficiaries or for a particular
prohibit the use of such structures.
purpose (e.g. trusts and foundations).
• All non-resident legal entities that are resident in a jurisdiction
with zero corporate tax or a substantially lower tax rate than
Belgium. These entities are listed in a Royal Decree. A
selection from this list includes a Hong Kong plc, a Jersey or
Guernsey foundation, a Monegasque foundation, a Swiss
foundation, a Liechtenstein Stiftung or Anstalt, a Luxembourg
SPF etc, but also LLCs (limited-liability companies)
incorporated in Delaware or Wyoming. The list totals 69
entities in 57 different jurisdictions
Who is a founder or beneficiary?
In the first place, all founders of such structures who founded
them except in the course of their professional activity.
4
[email protected]
Tax
European Tax Brief – April 2014
European Union
Savings Tax Directive strengthened and expanded
On 24 March, after six years of deadlock, the European Union
Luxembourg still levy the withholding tax because they did not
adopted a Directive strengthening and extending the Savings Tax
wish to exchange information automatically.
Directive (2003/48/EU), after Austria and Luxembourg had
withdrawn their opposition to automatic information exchange.
The amendments now agreed extend the scope of the Directive
to cover a broader range of savings products, including life-
Under the Savings Tax Directive in its present form, the tax
insurance contracts and those channelling interest payments
authorities of a Member State are required to report all interest
through intermediate tax-exempted structures. They also do
payments made by paying agents established in their territories
away with the withholding-tax option. Member States have until
to individuals resident in other Member States to the tax
1 January 2016 to transpose the Directive into their own law.
authorities of the state of residence. The Directive covers interest
from most kinds of debt-claim, including most collective
The European Union has agreements with Andorra,
investment undertakings (UCITS, unit trusts etc). However,
Liechtenstein, Monaco, San Marino and Switzerland, which
instead of exchanging information, tax authorities may opt to
mirror the Savings Directive. Negotiations are already under way
levy a withholding tax (originally 15% and now 35%) on the
with those countries to extend their agreements accordingly.
payments; three-quarters of this withholding tax is subsequently
transferred to the state of residence. Only Austria and
[email protected]
France
Corporate tax surcharge increased
The temporary surcharge (contribution
The surcharge applies only to companies
exceptionnelle) on corporate income tax
for large companies, first imposed in
respect of the 2011 financial year, and due
to expire at the end of 2013, has been
extended to the end of 2015 and the rate
has been increased from 5% to 10.7%.
The new rate first applies to taxable
periods ending on 31 December 2013 and
subsequently.
with a turnover of over EUR 250 million.
The normal rate of corporate income tax
in France is 33.33%. Taken together with
the social surcharge (contribution sociale)
of 3.3% on that part of the corporate tax
liability that exceeds EUR 763 000 of
companies with a turnover exceeding
EUR 7.63 million, the aggregate effective
rate where both surcharges apply is thus
now 38.0%.
Interest payments on hybrid debt instruments restricted
Another measure in the 2014 Finance Act is the disallowance of a
With effect from 25 September 2013, French companies may only
deduction for interest paid to related parties on certain hybrid
deduct interest paid to a related entity if they are able to show that
debt instruments. The instruments in question are those where
the interest will be subject to tax in the lender’s jurisdiction of at
the instrument is treated as debt in the borrower’s jurisdiction (so
least 25% of the corporate income tax that would have been due
that a deduction is available for the interest paid) but as equity in
in France on that interest. Parties are related for this purpose if one
the lender’s jurisdiction (so that the interest income is treated as a
controls the other or both are controlled by the same third party.
tax-exempt dividend).
[email protected]
5
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European Tax Brief – April 2014
Greece
Blacklist of jurisdictions updated
The Greek Ministry of Finance has
can prove that the expenditure has a
company) rules only apply if, inter alia,
updated the lists of non-cooperative
bona fide commercial purpose and
the controlled company is resident in a
jurisdictions and jurisdictions with
does not involve a tax-avoidance
jurisdiction that is either non-
preferential tax régimes. The
purpose.
cooperative or has a preferential tax
consequences of inclusion in either or
• Dividends received by a Greek
régime. In the case of an EU Member
both lists are as follows:
company from a company resident in a
State that has a preferential régime
• Payments to an entity located in a
non-cooperative jurisdiction do not
(i.e. currently Bulgaria, Cyprus and
jurisdiction on the non-cooperative list
qualify for the participation exemption
Ireland), the CFC rules apply only if the
or the preferential-régime list are
and are therefore taxable in Greece.
structure is wholly artificial and has a
disallowed unless the Greek taxpayer
• Greece’s CFC (controlled foreign
tax-avoidance purpose.
List of non-cooperative jurisdictions as at 1 March 2014
Andorra
Lebanon
Panama
Antigua and Barbuda
Liberia
Philippines
Bahamas
Liechtenstein
St Kitts and Nevis
Bahrain
(FYR) Macedonia
St Lucia
Brunei
Malaysia
St Vincent and the Grenadines
Cook Islands
Marshall Islands
Samoa
Dominica
Mauritius
Seychelles
Grenada
Monaco
Singapore
Guatemala
Nauru
Uruguay
Hong Kong
(former) Netherlands Antilles
US Virgin Islands
Jersey
Niue
Vanuatu
List of countries with preferential tax régimes as at 1 March 2014
6
Albania
Gibraltar
Montserrat
Andorra
Guernsey
Nauru
Bahamas
Ireland
Oman
Bahrain
Isle of Man
Paraguay
Belize
Jersey
Qatar
Bermuda
Liechtenstein
San Marino
Bosnia Herzegovina
(FYR) Macedonia
Saudi Arabia
British Virgin Islands
Macau
Seychelles
Bulgaria
Marshall Islands
Turks and Caicos Islands
Cayman Islands
Monaco
United Arab Emirates
Cyprus
Montenegro
Vanuatu
Tax
European Tax Brief – April 2014
CFC rules introduced
With effect from 1 January 2014, Greece now has CFC
• More than 30% of the foreign company’s net income before
tax consists of:
(controlled foreign company) legislation for the first time.
–– Interest or income from other financial assets
They apply where:
–– Royalties
• A Greek-resident company directly or indirectly holds over
–– Dividends or capital gains from the transfer of shares
50% of the capital of a foreign company or is entitled to
–– Income from movable assets
receive over 50% of that company’s profits
–– Income from real estate property
–– Income from banking, insurance, and other financial activities
• The foreign company is not a company with a principal class
of shares that are traded in an organised market
• The foreign company is subject to taxation in a non-
Where the CFC rules apply, the undistributed income of the CFC
cooperative jurisdiction (see above) or one having a
is attributed to the Greek company and taxed as part of its
preferential tax régime (see also above) and
business profits.
Restriction of interest deduction
A further change in the law applies to
decrease to 50% in 2015, 40% in 2016
expense (as reflected in the accounting
restrict the deduction of interest
and to 30% thereafter.
records) does not exceed EUR 5 million
(EUR 3 million from 2016); nor does it
exceeding a certain percentage of
earnings. Where the net interest expense
The excess interest that is not deductible
(interest payable less interest receivable),
according to the above rule may be
regardless of its nature, exceeds 60% of
carried forward indefinitely.
apply at all to credit institutions.
The rule applies in respect of accounting
periods beginning after 31 December 2013.
EBITDA (earnings before interest, taxes,
depreciation and amortisation), the
The new rule does not apply where the
excess is not deductible from the taxable
company is not a member of a group
profit. The allowable percentage will
of companies and the net interest
[email protected]
Luxembourg
Expatriate régime extended to EEA company employees
Luxembourg’s special tax régime for incoming expatriates has
been extended to employees of companies established in other
EEA countries, with effect from 1 January 2014.
Under the régime, an employee from an international group
coming to work in Luxembourg for an EEA company that is a
group member is exempt from income tax (within limits) on
benefits such as relocation allowances, school fees and
cost-of-living allowances. Previously, only expatriates coming to
work for Luxembourg-incorporated companies qualified.
The EEA consists of the 28 Member States of the European
Union together with Iceland, Liechtenstein and Norway.
[email protected]
7
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European Tax Brief – April 2014
Netherlands
Fiscal unity (tax group) rules may need to change
The Netherlands may need to change its
definition of which companies qualify as
members of a tax group (fiscal unity) for
corporate tax purposes if the Court of
Justice of the European Union (CJEU)
agrees with the Opinion of its AdvocateGeneral in joined tax cases currently
before the court.
Under the rules for forming a fiscal unity
in the Netherlands, the Netherlands
parent company must directly or indirectly
hold at least 95% of the shares of each
group member and all group members
must be resident in the Netherlands or
have a permanent establishment in the
Netherlands. What is more, when
The groups concerned appealed against
Although the judges of the European
considering an indirectly held company
the denial of fiscal-unity status on the
Court are not bound to follow the
(subsubsidiary), the intermediate (link)
grounds that the rule was in breach of
Advocate-General’s opinion, they do so
company or companies must also be
the freedom of establishment guaranteed
in the majority of cases, and given the
members of the group. This means that a
under Articles 49 and 54 of the Treaty on
similarity of the fact pattern to the
subsidiary, although itself resident in the
the Functioning of the European Union
Netherlands and under 95% indirect
(TFEU). The competent court in the
Papillon case, it would be surprising if
they did not do so here.
ownership of the parent, may not be a
Netherlands referred the question to the
member of the group if any of the link
European Court.
companies through which the parent’s
A recent judgment of the European
Court makes it even more likely that the
ownership is derived is not resident in the
As the first stage of the European Court’s
Advocate-General’s Opinion will be
Netherlands. In a simple case, therefore, if
judgment, an Opinion has now been
followed. On 1 April 2014, the Court
Company A (resident in the Netherlands)
delivered by Advocate-General Kokott.
ruled in the Felixstowe Docks case that
holds 100% of Company B, which holds
With reference to the similar Papillon
the United Kingdom’s group-taxation
100% of Company C (resident in the
case (Société Papillon v Ministère du
legislation was also in breach of
Netherlands), Company C cannot be a
Budget, des Comptes publics et de la
Fonction publique, C-418/07), where a
French tax group could not be formed
between two French companies due to
the presence of a Netherlands link
company, the Advocate-General opined
that the denial of group status solely due
to the presence of a link company
resident elsewhere in the European Union
was indeed in breach of the Treaty, and
could not be justified on the grounds of
an overriding reason in the public interest
or the need to maintain coherence of the
tax system.
European law in analogous circumstances
member of Company A’s group if
Company B is resident elsewhere.
In the cases before the European Court,
C-39, 40 and 41/13 (SCA Group Holding
and others), there were essentially two
different group structures. One was an
example of the simple case above, where
Company B in that example was resident
in Germany; the other involved three
Netherlands fellow subsidiaries held by
the same German parent company.
Fiscal-unity status was denied in all cases
because of the presence of the German
link companies.
8
(see ‘Consortium-relief rules found not
EU-compliant’ under United Kingdom).
However, it should be noted that a
judgment in favour of the taxpayers in
the SCA Group Holding case would
probably not extend to cases where the
link company is resident outside the
European Union or the European
Economic Area (EEA), since the freedom
of establishment (as opposed to the
freedom of movement of capital) does
not apply vis à vis third countries.
[email protected]
Tax
European Tax Brief – April 2014
OECD
OECD issues four BEPS discussion drafts
Experts at the OECD (Organisation for Economic Cooperation
and Development) have been very busy lately, and issued no less
than four discussion drafts under the BEPS (Base Erosion and
Profit Shifting) initiative and Action Plan last month.
A discussion draft on Action 6: Preventing the Granting of
Treaty Benefits in Inappropriate Circumstances, aimed at
measures to counteract treaty-shopping, was published on
14 March. It contains proposals in three areas:
• Model treaty provisions and recommendations regarding the
design of domestic rules to prevent the granting of treaty
benefits in ‘inappropriate circumstances’
• Clarifying that tax treaties are not intended to be used to
generate double non-taxation and
• Identifying the tax-policy considerations that countries should
generally consider before deciding to enter into a tax treaty
with another country
Arrangements. These are aimed at counteracting the use of
hybrid entities and instruments to generate double non-taxation,
double deductions or long-term deferment of tax liabilities. One
of the drafts contains recommendations for domestic laws in
this area to counter or neutralise these ‘loopholes’ and the other
discusses the impact of the OECD Model Convention on those
laws and sets out recommendations for further changes to the
Convention to clarify the treatment of hybrid entities.
Comments on these drafts must be made no later than 2 May.
Then on 24 March, the OECD published a discussion draft under
Action 1: Tax Challenges of the Digital Economy. Comments on
this draft, were due no later than 14 April, and comments
received were published on 16 April. The draft contains a
detailed description of identified BEPS strategies prevalent in the
digital economy and discusses how the anti-BEPS measures
envisaged in the Action Plan and the OECD’s work on indirect
Comments on the discussion draft were required no later than
taxation may be expected to address them. It goes on to identify
9 April, and comments received have already been published
the broader tax challenges raised by the digital economy and
(11 April).
summarises the potential options tax authorities and states may
exercise in the face of these.
On 19 March, two discussion drafts were published under
Action 2: Neutralise the Effects of Hybrid Mismatch
[email protected]
Portugal
Participation exemption amended and extended to gains
As part of its corporate tax reform for
distribution. Previously, the minimum
2014, Portugal has changed the qualifying
holding was 10%, which had to have
conditions for its participation exemption,
been held for at least 12 months. If the
which exempts dividends from significant
distribution is made before the 24-month
shareholdings from corporate income tax.
period has elapsed, it will still qualify for
Furthermore, capital gains from such
exemption provided that the 24-month
shareholdings are now also exempt.
period is fulfilled subsequently. Before
1 January 2014, capital gains derived by
As from 1 January 2014, for the
Portuguese companies from significant
participation exemption to apply with
shareholdings did not benefit from the
respect to dividends and gains derived by
participation exemption.
a resident company, a minimum direct or
indirect shareholding of at least 5% has
Where the shareholding is in another
to have existed for an uninterrupted
Portuguese company, that company must
period of at least 24 months before the
itself be subject to corporate income tax.
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European Tax Brief – April 2014
Where the shareholding is in a foreign
of no less than 60% of the
Mozambique, São Tomé e Príncipe) or
company, the participation exemption
standard Portuguese rate (i.e. no
East Timor.
now applies to dividends and capital gains
less than 13.8%)
Capital gains from shareholdings in
from shares in a company established in
any jurisdiction worldwide, provided that:
• The company is not resident in a listed
tax haven and
• It is subject in its home state to a
corporate tax on income at a rate
Before 1 January 2014, for the
Portuguese companies more than 50%
participation exemption (on dividends) to
of whose assets consist of immovable
apply, the foreign company had to be
property (except property used in an
resident in another EEA state or in one of
agricultural, commercial or industrial
Africa’s Portuguese-speaking countries
business) are excluded from the
(Angola, Cape Verde, Guinea Bissau,
participation exemption.
Patent box régime introduced
Portugal is the latest country to introduce a patent box, under
and development carried out by or on behalf of the taxpayer.
which income from certain qualifying intellectual property
The licensee or transferee must use the patents in an
benefits from lower taxation, in this case from a 50% exemption
agricultural, commercial or industrial business and must not be
from corporate income tax.
resident in a listed tax haven.
The relief applies to income from both the licensing and sale
All patent box régimes in the European Union are currently
of patents and industrial designs or models registered after
under investigation by the European Commission.
31 December 2013. The patents etc must derive from research
Optional exemption régime for foreign permanent establishments
Also with effect from 1 January 2014,
an EEA corporate income tax or to a
losses from those PEs have been taken
Portuguese-resident companies with
corporate income tax at an effective rate
into account in reducing the Portuguese
permanent establishments (PEs) abroad
of no less than 60% of the standard
company’s taxable income in the last 12
may opt to derecognise the profits (and
Portuguese rate (i.e. no less than 13.8%).
taxable periods, an equivalent amount of
by extension, the losses) of those PEs
PEs in a listed tax haven are excluded.
profits are excluded from the option.
from corporate income tax.
The option may be exercised in respect of
When and if the option is revoked, PE
The option may only be exercised in
each applicable foreign jurisdiction
losses of an amount equal to exempted
respect of PEs whose profits are subject in
separately, and may not be revoked until
profits from those PEs in the previous 12
the state in which they are established to
at least three years have elapsed. Where
taxable periods will not be recognised.
Corporate tax rate cut
The standard rate of corporate income tax has been cut from
25% to 23%, with effect from 1 January 2014. A reduced 17%
rate applies to the first EUR 15 000 of taxable income of a small
or medium-sized enterprise carrying on a productive business.
Previously, the reduced rate was 12.5%, applied to the first
EUR 12 500 of taxable income.
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European Tax Brief – April 2014
International Business Centre of Madeira
The International Business Centre of
legal framework of the IBCM, with full
network of tax treaties as well as the EU
Madeira (IBCM) was created in the 1980s
integration in the Portuguese legal
directives such as the Parent-Subsidiary
as a tool of regional economic policy. It
system and with the formal approval of
Directive.
consists of a set of incentives, mainly of a
the European Union.
tax nature, formally approved by the
Moreover, the recent tax reform
European Union as valid State aid and
A reduced corporate tax rate of 5% is
introduced in Portugal, particularly the
granted with the objective of attracting
applicable to the net profits of all duly
new participation-exemption régime and
inward investment into Madeira to
licensed companies until the end of
the patent box are also fully applicable to
modernise, diversify and internationalise
2020. In addition, there is full exemption
companies licensed within the legal
the regional economy. Industrial activities,
from stamp duty and local taxes. There
framework of the IBCM.
international services and shipping
is full application of the Portuguese
[email protected]
activities may be carried out within the
United Kingdom
Budget brings important tax changes
As is now established practice, the Budget speech delivered on
High-value ‘enveloped’ UK residential property
19 March by the Chancellor of the Exchequer contained
Last year’s Finance Act introduced a number of new measures
measures that had been previously announced or consulted upon
aimed at charging the acquisition and ownership of high-value
and new surprises. Taken together, the package is one containing
residential property through corporate vehicles and other non-
several important changes across a broad range of taxes.
natural persons to higher effective rates of tax. These included:
• A special 15% rate of stamp duty land tax (SDLT) on
Business tax
As previously announced, the main rate of corporation tax
decreases to 21% as from 1 April 2014, and will be further
reduced to 20% with effect from 1 April 2015. From that
date, the special small profits rate will become redundant and
acquisitions of residential property
• Capital gains tax of 28% on capital gains (as measured from
6 April 2013 only) from the disposal of residential property and
• A new annual property tax (the annual tax on enveloped
dwellings – ATED) on residential property held on 1 January
will be abolished.
All of these measures applied only to residential property of a
The annual investment allowance, enabling 100% tax
value exceeding GBP 2 million. The threshold value for these
depreciation of capital expenditure on plant and machinery,
taxes is now to be decreased to GBP 500 000 in stages.
is increased to a maximum of GBP 500 000 per year as from
• The 15% SDLT rate applies to acquisitions by non-natural
1 April 2014. The current maximum of GBP 250 000 was due
to expire on 31 December this year (at which point the
maximum would reduce to a mere GBP 25 000). The new
persons of property valued at more than GBP 500 000 as
from 21 March 2014
• ATED will be charged in an annual amount of GBP 7000
maximum will remain in place until 31 December 2015. There
on properties valued at over GBP 1 million but not more
are transitional rules for companies with accounting years
than GBP 2 million as from 6 April 2015 and in an annual
straddling 1 April 2014. For unincorporated businesses, these
amount of GBP 3500 on properties in the GBP 500 001 to
changes take effect from 6 April 2014 rather than from 1 April.
GBP 1 million band as from 6 April 2016. The capital gains
charge on disposals will follow suit
The rate at which loss-making small and medium-sized
companies (SMEs) can claim repayment of research &
It should be emphasised that these measures do not apply to
development tax credits is increased from 11% to 14.5% for
properties acquired, held or disposed of by natural persons,
expenditure incurred after 31 March 2014. The tax credits
whether or not UK-resident, although the Government is also
replace the 225% deduction that SMEs may claim on qualifying
consulting on means of extending capital gains tax to disposals
R&D expenditure in normal circumstances.
of residential property by non-residents generally.
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European Tax Brief – April 2014
Enforced payment of disputed tax in avoidance cases
persons who have reached the stipulated retirement age may
Measures previously announced will require users of tax-
commute up to 25% of their pension savings in the form of
avoidance schemes to pay disputed tax ‘upfront’ (i.e. in advance
cash, tax-free, but are obliged, with certain exceptions, to
of any final settlement in their own case) where the tax effect of
purchase an annuity (pension) with the remainder. If they do not
the scheme has been defeated in other litigation. This applies to
do so, they face a tax charge of 55% on any excess over the
both taxpayers who have had PAYE (payroll) tax refunded by the
25% cap that they withdraw. Individuals with pension savings
tax authorities (HMRC) as well as to those using schemes to
are also obliged to purchase an annuity if they have not already
shelter untaxed income or gains. Scheme users in such ‘follower
done so by the age of 75. In future, amounts taken in excess of
cases’ also risk a penalty if they do not amend their tax returns
the 25% cap will be taxed at the individual’s marginal rate of
in accordance with the outcome of a litigated case, unless they
income tax.
can justify why their own case should be treated differently: for
example where the facts are sufficiently distinguishable from
The exception from the obligation to purchase an annuity
those in the decided case.
consists of ‘drawdown’ rules, which allow amounts to be
withdrawn gradually. There are both limits on the amount that
The Budget also confirmed that the advance-payment provisions
may be ‘drawn down’ each year and minimum-income
will also apply to tax schemes notified to HMRC under the
requirements for those eligible for drawdown. Both sets of limits
Disclosure of Tax Avoidance Schemes (DOTAS) rules or those
are being relaxed.
where HMRC has taken action under the new General AntiAbuse Rule (GAAR).
These changes do not apply to defined-benefit schemes, where
the pension is linked to the individual’s salary in his or her
The measures will have effect from the date of Royal Assent to
employment years rather than to the value of investments (these
the Finance Bill (around mind-July 2014) and (for follower cases)
are defined-contribution schemes).
will apply to all cases where there is an open enquiry or open
appeal on or after that date and where there has been or will be
Limited-liability partnerships
a ‘relevant qualifying judgment’. HMRC expects to issue around
As previously announced, legislation is being introduced to treat
40 000 payment notices covering approximately GBP 5000
certain partners in limited-liability partnerships (LLPs) as if they
million of disputed tax, the majority over the course of the
were in fact employees of the partnership. The individuals
2014-15 and 2015-16 tax years. Assuming Royal Assent to the
affected, who are (broadly) either:
2014 Finance Bill is granted in July, bills issued by HMRC may be
• Salaried partners or
payable as soon as October.
• Partners who work for the LLP on terms that are equivalent to
employment
Users of tax-avoidance schemes in litigation, those notified
under DOTAS or subject to a GAAR counteraction notice are
will thus have PAYE (income tax and social security
likely to be affected by these measures. HMRC expects to
contributions) deductions made from their partnership income
receive a range of legal challenges to these new rules,
and pay national insurance (social security contributions) on a
particularly as it seeks to enforce payment of the disputed tax.
marginally higher basis than hitherto.
Those with open HMRC enquiries into tax-avoidance schemes or
Limited-liability partnerships are hybrid vehicles, with their own
other arrangements that involve a DOTAS notification should
legal personality and certain other corporate characteristics, but
review their position urgently and consider making financial
nevertheless remain tax-transparent (as other partnerships are),
provision in advance of receiving a payment demand from
so that their partners are taxed as self-employed individuals on
HMRC. For a number of schemes HMRC has open Settlement
their share of partnership profits, paying income tax twice a
Opportunities, which users may wish to revisit in the light of the
year. A significant advantage of partners’ self-employment
Budget 2014 measures.
status from the partnership’s point of view is that the
partnership is not obliged to pay 13.8% employers’ social
Pension restrictions relaxed
security contributions on the partners’ earnings. The
In a major change to pensions legislation, the Chancellor
Government became concerned that LLP status was being used
announced that as from April 2015, individuals in ‘money
as a tax-avoidance vehicle in the way described. These measures
purchase’ (or ‘defined contribution’) schemes will be able to
apply as from 6 April 2014.
take the whole of their pension savings in cash. Currently,
12
Tax
European Tax Brief – April 2014
Consortium-relief rules found not EU-compliant
The Court of Justice of the European
Kong. The link company, the company
that might justify such a restriction –
Union (CJEU) has held, in a fact pattern
that was both a member of the group and
namely the need to combat tax
similar to the Netherlands case discussed
of the consortium, was Hutchinson 3G UK
avoidance and the objective of preserving
earlier (see ‘Fiscal unity rules may need to
Investment sàrl, which was resident in
a balanced allocation of powers of
change’), that the United Kingdom’s
Luxembourg. There was no other link
taxation between the Member States –
consortium-relief rules are in breach of
company resident or with a permanent
could not be invoked in this case. Also,
the freedom of establishment guaranteed
establishment in the United Kingdom.
the fact that the group parent company
and certain intermediate companies
under the EU Treaties.
The UK tax authorities (HMRC) therefore
owned by it were established outside the
A UK-resident company or UK permanent
rejected the claim for consortium relief
European Union did not, as some
establishment that is a member of a UK
of Hutchinson 3G UK Ltd. On appeal,
governments had argued, affect the right
group of companies (‘the surrendering
the question of whether the requirement
of the companies in the group or
company’) may surrender its tax loss to
for the link company to be resident or
consortium that were established in the
one or more other group companies
have a permanent establishment in the
European Union to rely in full on freedom
(‘the claimant companies’). There are
United Kingdom was referred to the
of establishment. The origin of the
also other tax reliefs and benefits, such
European Court.
shareholders of those companies had no
effect on the rights that those companies
as the tax-free transfer of assets between
group members.
The Court held that the residence
derive from the EU legal order.
condition laid down for the link company
Consortium relief allows losses to be
introduced a difference in treatment
Accordingly, the Court decided that the
surrendered between
between resident companies connected
contested legislation was not compatible
• a trading company directly or indirectly
by a UK link company, which were
with the freedom of establishment.
owned by a consortium of five or
entitled to consortium relief, and resident
fewer other companies and members
companies connected by a link company
As a result, the United Kingdom will have
of the consortium or
established in another EU Member State,
eventually to amend its legislation in this
which were not entitled to it. That
respect. In the meantime, companies in a
group and another company owned by
difference in treatment, which made it
similar position to the companies in this
a consortium where a third company
less attractive in tax terms to set up a link
case should consider whether they are
(‘the link company’) is both a member
company in another Member State,
entitled to claim a repayment of tax. The
of the group and of the consortium
therefore constituted a restriction on
judgment of the European Court does
freedom of establishment.
not extend to link companies established
• a company that is a member of a
outside the European Union, as the
It is, however, a condition that the link
company, as well as the surrendering and
The Court also observed that the
freedom of establishment applies only
claimant companies, be UK-resident or
overriding reasons in the public interest
within the European Union.
have a UK permanent establishment.
In Felixstowe Dock and Railway Company
Ltd and others v The Commissioners for
Her Majesty’s Customs and Excise (Case
C-80/11), the loss-making company,
Hutchinson 3G UK Ltd, was owned
indirectly by a consortium, and the
companies claiming the loss were
members of a group, the ultimate parent
company of which was resident in Hong
13
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European Tax Brief – April 2014
FII repayment claims may extend back to 1973
In a judgment that may prove extremely expensive to the UK
Treasury, the Court of Justice of the European Union (CJEU) has
held that the United Kingdom acted unlawfully by retroactively
curtailing the limitation period for making claims for the
restitution of tax paid under a mistake of law and allowing for
no transitional period for the submission of claims thereby
becoming time-barred.
There are essentially two remedies under English common law
for the wrongful payment of tax. The first, the so-called
‘Woolwich remedy’ is for the restitution of tax unlawfully
demanded or charged. The time limit applying to claims under
this remedy is six years from the date the tax was paid. The
second remedy, the so-called ‘DMG remedy’ is for restitution of
tax paid under a mistake of law (broadly speaking, tax paid by
error of law on the part of the taxpayer). It is this remedy, and
the time limits imposed on it, that was the subject of the
litigation discussed here.
Finance Act 2007 section 107, which disapplied the extended
In 2006, the UK Supreme Court (at that time, the House of
time limit for Deutsche Morgan Grenfell claims also in respect
Lords) confirmed (in Deutsche Morgan Grenfell Group v IRC)
of cases brought before 8 September 2007. Both section 320
that claims for restitution of tax paid under a mistake of law
and section 107 applied retroactively and allowed for no
could be made under the rules and within the time period
transitional period.
applying to payments (in general) made under mistake of law.
The time limit applicable to claims under this head was originally
When the issue of what remedies were available to the test
six years from the date the taxpayer discovered the error or
claimants and whether sections 320 and section 107 were in
could with reasonable diligence have discovered it.
breach of EU law came before the UK Supreme Court, the
claimants argued that section 320 and section 107 were
As litigation initiated in the late 1990s against the treatment of
contrary to the EU-law principles of effectiveness, legal certainty
foreign dividends received by UK companies progressed, the UK
and the protection of legitimate expectations. The Supreme
tax authorities began to suffer defeats on various aspects of the
Court found unanimously that section 107 was contrary to
régime, which had been in place since 1973. In 2003, came the
those principles but was divided on the question of section 320.
first judgment in the linked Deutsche Morgan Grenfell case. In
The majority opinion was that it was also contrary to those
an attempt to limit the cost to the Treasury of these decisions,
principles, but a minority opinion was that because the
the UK Parliament enacted Finance Act 2004 section 320, which
Woolwich remedy was open to the claimants, it did not matter
had retroactive effect from 8 September 2003, the date on
that section 320 closed off the DMG remedy. The section 320
which the Government announced that the action would be
point was referred to the European Court.
taken. Section 320 provided that the extended time limit in
respect of claims for the Deutsche Morgan Grenfell remedy
In its judgment (Test Claims in the FII Group Litigation v The
would no longer apply to claims for restitution of tax paid under
Commissioners for Her Majesty’s Revenue and Customs, Case
C-362/12), the European Court reviewed section 320 by
reference to the three principles. The principle of effectiveness
required that national law should not render it excessively
difficult or impossible in practice to exercise rights (in this case
the right to repayment) conferred by EU law. The principle of
legal certainty required limitation periods to be set in advance.
The principle of legitimate expectations precluded a national
legislative amendment that retroactively deprived a taxpayer of a
right enjoyed prior to that amendment.
a mistake of law in cases brought after 7 September 2003.
There followed the European Court’s judgment against the
United Kingdom in the FII Group Litigation case (Case C-446/04)
in December 2006; the 2007 final decision of the House of
Lords in the Deutsche Morgan Grenfell case, and the
subsequent dismissal of the United Kingdom’s effort to limit
the temporal effects of the December 2006 judgment. In the
light of these reversals, Parliament enacted another measure,
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Tax
European Tax Brief – April 2014
Whereas the principle of effectiveness did not preclude national
enactment of section 320, taxpayers were entitled to rely on the
legislation curtailing the period in which claims for recovery of
DMG remedy before the national courts. As a result of the
tax could be made, and whereas a six-year period for such
enactment of section 320, however, they were deprived of that
claims dating from the payment of the tax was reasonable in
right retroactively and without any transitional arrangements.
itself, the new legislation had also to provide for transitional
That provision thus brought about a change that adversely
arrangements allowing an adequate period after the enactment
affected their situation without their being able to prepare for it.
of the legislation for lodging the claims that taxpayers were
Section 320 therefore infringed the principles of legal certainty
entitled to submit under the previous legislation.
and the protection of legitimate expectations also.
The requirement for transitional arrangements was not satisfied
In the European Court’s view, it made no difference to this
by section 320, which had the effect of curtailing the limitation
conclusion that at the time the claimants made their claim, the
period for actions to recover sums paid but not due so that,
availability of the DMG remedy, with its longer limitation period,
instead of six years from discovery of the mistake giving rise to
had only recently been recognised by a lower court and was not
payment of the tax, that period was six years from the date of
confirmed by the highest judicial authority (the House of Lords)
payment of the tax, and which provided for its immediate
until later.
application to all claims made after the date of its enactment as
well as to claims made between that date and the earlier date
Although the decision is not a surprising one, it is nevertheless a
on which the proposal to adopt that provision was announced,
heavy blow to the UK Treasury, as it finally and definitively opens
which was also the date on which the provision took effect.
the door to all the claimants in the FII Group Litigation (all groups
Such legislation made it impossible in practice to exercise a right
with UK-resident parent companies and foreign subsidiaries) to
previously available to taxpayers to recover tax paid but not due.
make claims for repayment of tax dating back to 1973, as well
It followed that legislation such as section 320 was incompatible
as to other claimants in parallel litigation. HMRC is likely to
with the principle of effectiveness.
demand strict proof of when claimants became aware of their
mistake and impose exacting documentation requirements.
As to the principles of legal certainty and the protection of
legitimate expectations, it was apparent that before the
Commission gives go-ahead to video game relief
The European Commission has approved
the European Economic Area. Companies
the United Kingdom’s proposed tax relief
in a loss-making position may be able to
for video-game developers, after
claim a repayable 25% tax credit instead
completing a State Aid investigation into
of the deduction. The games must be
the measure.
intended for release to the public and
have a sufficient cultural content. Games
The legislation for the relief appears in the
produced for promotional or gambling
Finance Act 2013, section 36 and
purposes are excluded. The relief is
Schedule 17, but had not entered into
available to companies only.
force pending the investigation, notice of
which was given on 16 April 2013.
The Commission’s approval was given
after the United Kingdom agreed to
The relief consists of an additional
certain changes, which are included in the
deduction of up to 80% of the qualifying
Finance Bill currently before Parliament.
costs of producing, designing or testing a
The relief has now come into effect from
video game, provided that at least 25%
1 April 2014.
of the core expenditure on the game is on
goods or services provided from within
15
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Tax
European Tax Brief – April 2014
Currency table
For ease of comparison, we reproduce below exchange rates against the euro and the US dollar of the various currencies mentioned
in this newsletter. The rates are quoted as at 23 April 2014, and are for illustrative purposes only.
Currency
Equivalent in euros
(EUR)
Equivalent in US dollars
(USD)
Euro (EUR)
1.0000
1.3839
Pound sterling (GBP)
1.2131
1.6789
Up-to-the-minute exchange rates can be obtained from a variety of free internet sources (e.g. http://www.oanda.com/currency/
converter).
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We believe the information contained in European Tax Brief to be correct at the time of going to press, but we cannot accept any responsibility for any loss occasioned to any person as a
result of action or refraining from action as a result of any item herein. Published by Moore Stephens Europe Ltd (MSEL), a member firm of Moore Stephens International Ltd (MSIL). MSEL is
a company incorporated in accordance with the laws of England and provides no audit or other professional services to clients. Such services are provided solely by member firms of MSEL in
their respective geographic areas. MSEL and its member firms are legally distinct and separate entities owned and managed in each location. DPS24895 ©April 2014