International Tax Services (ITS)

16 November 2009

Welcome to your fifteenth PwC International Tax Services Newsalert. In this issue, we will discuss the following topics:

China – Belgium – New Double Tax Treaty between Belgium and China (People’s Rep.)
On 7 October 2009, a new treaty and related protocol on avoiding double taxation were signed between Belgium and China. This new treaty will replace – once it is into force – the Belgium-China income tax treaty of 18 April 1985, as amended in 1996. Read more

European Commission – The EC recommends simplified procedures for claiming back crossborder withholding tax relief
On 19 October 2009, the EU Commission adopted recommendations to Member States to make it easier for investors resident in an EU Member State to claim back withholding tax (WHT) relief on dividends, interest and other securities income received from other Member States. Read more

Germany – German cabinet resolves draft Economic Growth Acceleration Bill including important tax law changes
In a special session on 9 November 2009 the cabinet finalised an Economic Growth Acceleration Bill to send to Parliament. The cabinet intends to introduce specific tax relief measures contained in the coalition agreement of the new government. Read more

Spain - The European Commission qualifies the Spanish goodwill amortisation scheme as State Aid
On October 28, 2009, the European Commission (Commission) issued a press release in which it requests Spain to abolish the goodwill amortisation scheme as laid down in article 12(5) of the Spanish Corporate Income Tax Law. The Commission ruled that the regime provides for a selective advantage for Spanish companies acquiring non-Spanish European companies. Read more

Sweden - Implementation of an advance pricing agreement (APA) programme as from 1 January 2010
On 1 October 2008 the Swedish Government proposed the enactment of a formal APA programme as from 1 January 2010. A tax committee is now to issue an opinion on this proposal before the Swedish Parliament can enact the suggested law. Read more

Poland – Poland -US tax treaty update
Recently, there have been negotiations on the US-Poland tax treaty. Read more

Hungary – Change of corporate income tax rate
There has been a number of changes to Hungarian tax law. They will take effect on 1 January 2010. These include a change to the corporate income tax rate, changes to withholding taxes (WHT), measures targeted at transactions with tax havens, and changes to the sale of shares in an entity holding real estate by non-Hungarian residents. Read more

China – Belgium – New Double Tax Treaty between Belgium and China (People’s Rep.)

On 7 October 2009, a new treaty and related protocol on avoiding double taxation were signed between Belgium and China. This new treaty will replace – once it is into force – the Belgium-China income tax treaty of 18 April 1985, as amended in 1996. Read more

Introduction

On 7 October 2009, the Treaty was signed in Brussels. It will come into upon completion of the respective required approval procedures by both China and Belgium. This treaty is one of the most beneficial treaties currently signed by China: it brings on par by large with Hong Kong and Singapore as an intermediate country for other European countries or Multinational investors into China. The new Treaty shows remarkable changes:

a decrease of the dividend and royalty withholding taxes;
a different definition of a construction- and services permanent establishment (PE);
changed conditions for capital gains exemption; and
general anti-avoidance rule (GAAR).

Reduction of withholding taxes

The maximal withholding taxes (WHT) on dividends and royalties have been substantially reduced.

1. Dividends

The withholding income tax ("WHT") rate is reduced from 10% to 5% for dividends paid by a Chinese company to a Belgium resident, provided that the beneficial owner of the dividends is a Belgium tax resident and it has been holding directly at least 25% of the capital of the Chinese company for an uninterrupted period of at least 12 months prior to the payment of the dividends. And vice versa in the case of dividends paid by a Belgian company to a Chinese resident.

The 5% preferential WHT rate on dividend for a shareholding of at least 25% is the same requirement as that under the China-Hong Kong Tax Arrangement and China-Singapore Tax Treaty.

2. Royalties

The WHT rate for royalties is reduced from 10% to 7%, which is the same as that under the China-Hong Kong Tax Arrangement.

New rules for capital gains

The capital gains article sets out a regulation for gains derived from the alienation of listed shares as well of unlisted shares.

Gains derived by a Belgian company from the alienation of shares of a Chinese company other than shares in which there is substantial and regular trading on a recognized stock exchange may be taxed in China if the Belgian resident holds 25% or more (directly or indirectly) in any 12 month period preceding such alienation and vice-versa. The 12 month look-back period is new compared with the old treaty.

On the other hand, gains derived by a Belgian company from the alienation of shares of a Chinese listed company, the taxing right shall be in Belgium if the Belgian company holds in one fiscal year less than 5% of the shares of this Chinese listed company

Permanent establishment: to a larger extent

1. Construction PE

The time span threshold for a construction PE has been extended from 6 to 12 months and the specification of activities given to a construction PE is also slightly changed.

2. Services PE

The time span for a construction PE, the threshold for furnishing of services has been changed by 6 months to 183 days.

General Anti-Avoidance Rule (GAAR)

The new article 23 states that nothing in the treaty shall prejudice the right of each Contracting State to apply its domestic laws and measures concerning the prevention of tax evasion and avoidance, whether or not described as such, insofar as they do not give rise to taxation contrary to the treaty.

European Commission – The EC recommends simplified procedures for claiming back crossborder withholding tax relief

On 19 October 2009, the EU Commission adopted recommendations to Member States to make it easier for investors resident in an EU Member State to claim back withholding tax (WHT) relief on dividends, interest and other securities income received from other Member States. Read more

National refund procedures across the EU are often so complicated and time consuming that investors may forego the reliefs to which they are entitled, or be discouraged to invest in other Member States. To reduce this dissuasive effect, the EU recommends Member States to:

Apply at source rather than by refund any WHT relief applicable to securities income under double taxation treaties or domestic law;
accept alternative proofs of investors’ entitlement to tax relief besides certificates of residence. Such alterative proofs could include self-certification by the investor and/or residence documentation gathered by financial intermediaries. For instance, when an investment firm provides investment advice and discretionary portfolio management to its clients, it is required under the Financial Instruments Directive 2004/39/EC to obtain information about its clients/investors. The Recommendation suggests that tax authorities might, in particular, find these alternative proofs sufficient in the case of small claims, for example claims of less than Eur 1,000;
consider its suggestions as to how Member States can involve financial intermediaries in making claims on behalf of investors and, in particular, where there is a chain of financial intermediaries, in different Member States, between the issuer of the securities and a beneficiary. For example, it is suggested that financial intermediaries should only have to pass on "pooled" WHT rate information (i.e. information in a format which groups securities income according to the WHT rate applicable without identifying the owners of the securities) to the next financial intermediary in a custody chain;
apply simplified tax refund procedures where investors are not able to obtain WHT relief at source, provided that all necessary information is available. In this respect the Commission explicitly recommends the granting of refunds within a period of 6 months
allow claims to be filed electronically and using common formats for filing such claims.

The Commission’s recommendations should make it easier for investors to obtain an immediate relief at source, or obtain a WHT refund within 6 months after claims have been filed. Despite the fact that this EC Recommendation is not legally binding, the Commission nevertheless hopes Member States to implement them. According to the Commission, Member States are already moving towards less complicated procedures, and by publishing this Recommendation the Commission aims at stimulating this trend. The Commission Recommendation echoes the report that was published by the OECD working group earlier this year. Representatives of the Commission are participating in the ongoing work at the OECD.

Germany – German cabinet resolves draft Economic Growth Acceleration Bill including important tax law changes

In a special session on 9 November 2009 the cabinet finalised an Economic Growth Acceleration Bill to send to Parliament. The cabinet intends to introduce specific tax relief measures contained in the coalition agreement of the new government.

The measures include, for example, relief from the change of control rules impacting NOLs, interest capping rules, and real estate transfer tax. Note that there may be changes during the legislative process which is scheduled to be finalised on 18 December 2009.

NOL Change of Control Rule

Under the current "change of control" rules, a direct or indirect ownership change in a German subsidiary results in a (partial or total) forfeiture of the German subsidiary NOLs. The draft bill includes relief from the broad application of the rule which shall become effective with respect to ownership changes on or after 1 January 2010:

The NOL change of control rule shall no longer apply to 100% intra-group share transfers occurring after 31 December 2009 ("intra-group exception"). An ownership change is no longer considered to be harmful if the same person owns directly or indirectly all shares in the transferring and receiving entity.

In the case of a third party share transfer occurring after 31 December 2009, losses shall survive to the extent of unrealised built-in gains relative to German business assets if these gains will be subject to German tax. In particular, built-in gains in investments in corporations may be disregarded for this purpose due to the German participation exemption. The treatment of fiscal unity ("Organschaft") structures is currently uncertain.

The time limitation for the "recapitalisation exception" shall be eliminated. The exception applies to recapitalisation measures intended to save financially distressed German companies, subject to certain conditions.

Interest Capping Rule

Under the current "interest capping" rule, net interest expense may only be deductible up to 30% of the taxable EBITDA. The following amendments are included in the draft bill:

The increased de-minimis threshold of net interest expense of up to Euro 3 million shall be extended indefinitely (if the de-minimis threshold is exceeded, the total net interest amount is subject to the 30% limitation).
If the 30% threshold in a given fiscal year is not reached, any "unused" EBITDA may be carried forward, thus allowing an additional deduction of net interest expense exceeding the 30% threshold otherwise applicable in future years. The EBITDA carry-forward shall be limited to five years.

Real Estate Transfer Tax

Real Estate Transfer Tax (RETT) shall no longer be assessed on certain intra-group reorganisations occurring after 31 December 2009. This provision is limited to reorganisations within the scope of the German Tax Reorganisation Tax Act and is subject to certain conditions.
For example, this exemption does not apply to property acquired five years before, or sold within five years of the reorganisation. Furthermore, a claw back provision applies if the shareholder in the surviving property owning entity reduces his interest in this entity within a five-year period following the reorganisation.
Many foreign-to-foreign restructurings may not be covered by this exception and may still trigger German RETT.

Other amendments

The add-back for trade tax purposes with respect to the deemed interest component of rental expenses for immovable property shall be reduced to 50%. The effective nondeductible portion of those rental expenses is thereby reduced from 16.25% to 12.5%.

Outlook

Although these tax law changes are subject to amendments during the legislative process, companies should consider the impact of these proposals on currently planned restructures involving German entities. According to the current timeline, the legislation process shall be finalised by 18 December 2009.

Spain - The European Commission qualifies the Spanish goodwill amortisation scheme as State Aid

On October 28, 2009, the European Commission (Commission) issued a press release in which it requests Spain to abolish the goodwill amortisation scheme as laid down in article 12(5) of the Spanish Corporate Income Tax Law. The Commission ruled that the regime provides for a selective advantage for Spanish companies acquiring non-Spanish European companies. Read more

Article 12(5) CITL provides that a Spanish company may amortise the financial goodwill resulting from the acquisition of a significant shareholding in a foreign company during the 20 years following the acquisition. This results in a tax benefit, amounting to the difference between the acquisition cost of the shares and the market value of the underlying assets of the target company.

Spain did not notify the Commission of the scheme before implementing it. This means the Spanish Government may be obligated to recover the aid granted if the scheme did breach the EC Treaty. Five years after implementing the regime, in October 2007, the Commission initiated a formal investigation procedure into the Spanish regime.

The Commission has ruled that the regime clearly constitutes a derogation of the general Spanish tax system, and that it provides a selective advantage for Spanish companies acquiring non-Spanish European companies as compared to Spanish companies acquiring shares in other Spanish companies. Given the fact that this selective advantage cannot be justified by the general logic of the Spanish tax system, the Commission ruled that the regime at hand constitutes State aid.

In order to maintain a level playing field in the single market, especially in the context of competitive takeover bids, Spain must abolish the measure and recover unlawful aid given. However, the Commission decided to limit the scope of the recovery obligation and has ordered Spain to recover the State aid granted from 21 December 2007.

With regards to acquisitions in non-EU companies, a final decision has not been reached. There are ongoing discussions between the Commission and Spain which could lead to the acceptance of a new regime which is compatible with European law requirements.

Those companies affected may consider the possibility of appealing the decision at the European Courts.

Sweden - Implementation of an advance pricing agreement (APA) programme as from 1 January 2010

On 1 October 2008 the Swedish Government proposed the enactment of a formal APA programme as from 1 January 2010. A tax committee is now to issue an opinion on this proposal before the Swedish Parliament can enact the suggested law. Read more

In our experience, legislative proposals on transfer pricing matters are not subject to material changes during this process. Therefore, it is most likely that the final law will be in line with the proposal. The APA programme suggested by the Swedish Government is largely in conformity with the OECD Transfer Pricing Guidelines as well as the Guidelines for APAs within the European Union. However, the access to an APA is still likely to be more restricted than is suggested in these guidelines.

Conditions to apply for an APA

According to the proposal, APAs are to be available to companies resident in Sweden as well as to permanent establishments of overseas companies situated in Sweden. Partnerships may also apply for an APA as long as at least one partner is taxable in Sweden.

The proposal indicates that bilateral and multilateral APAs could be obtained with countries with which Sweden has concluded a tax treaty including a mutual agreement procedure. No unilateral APAs can be obtained.

The duration of an APA should be between three and five years, although shorter or longer periods are also possible. Roll-backs are formally not accepted, although it is indicated in the proposal that a company applying for an APA may at the same time apply for a mutual agreement procedure in order to mitigate or eliminate double taxation following a transfer pricing reassessment.

According to the proposal, an APA is likely to be available only if the Swedish Tax Agency finds that information can be exchanged in the case at hand. That requirement can be fulfilled based on the tax treaty between Sweden and the other country(s) concerned or other tools such as the Mutual Assistance Directive. This requirement can also be met if information can be exchanged based on other tools such as the Convention on mutual administrative assistance in tax matters developed jointly by the Council of Europe and the OECD. Consequently, the proposal deliberately leaves some flexibility on the means by which this requirement can be met.

It is indicated in the proposal that in principle, a fee is to be paid by companies applying for an APA. The Swedish Tax Agency may, however, decrease such fees on a case-by-case basis.

Exceptions to the access to an APA

Issues of too little complexity cannot be covered by an APA. In our view, the scope of this restriction will depend on its practical interpretation by the Swedish Tax Agency. Differences of interpretation may appear between the Swedish Tax Agency on the one hand, and either a company applying for an APA or a foreign competent authority on the other hand.

In addition, the proposal states that transactions with a limited scope cannot be covered by an APA. Whether a transaction has a limited scope is to be decided by the Swedish Tax Agency with regard to its value as well as its extent as part of the company's activities.

Administrative guidelines expected to complete the law on APAs

The Swedish Tax Agency is expected to issue guidelines providing practical indications on the functioning of the APA programme. These guidelines should include information on how to monitor the actual implementation of the APA as well as the amount of the fee.

Poland – Poland -US tax treaty update

Recently, there have been negotiations on the US-Poland tax treaty.

The current Polish-US treaty is one of the last US. treaties without a Limitation on Benefits clause.

The official negotiation round on the new Polish-US treaty occurred September 14 to 19, 2009 and did not result in any conclusions. The Polish Ministry of Finance has confirmed that the negotiations are still in the early stages. The next round of negotiations is scheduled to take place in 2010. The renegotiation of the treaty is one of the priorities of the United States, whereas Poland is treating it as any other multilateral negotiation with no particular time priority.

Given this and the fact that the ratification procedure of a new treaty is quite time consuming, we expect that the new treaty may not come into force before 2012.

Hungary – Change of corporate income tax rate

There has been a number of changes to Hungarian tax law. They will take effect on 1 January 2010. These include a change to the corporate income tax rate, changes to withholding taxes (WHT), measures targeted at transactions with tax havens, and changes to the sale of shares in an entity holding real estate by non-Hungarian residents.

Effective 1 January 2010, the corporate income tax rate will increase from 16% to 19%. At the same time, the special profit tax (previously 4%) payable by businesses will be abolished. The net result is a decrease of 1% in the overall corporate tax rate for most companies.

New withholding tax rules

Currently Hungary does not impose domestic withholding tax on any payments made to foreign entities.

Beginning in 2010, WHT can be levied on royalties, certain service fees and interest paid to entities or foreign persons whose registered seat, or place of management, is in a country with which Hungary has no double taxation convention. The tax rate to be applied to such interest, royalties and service fees will be 30%. The applicable taxes will have to be determined and deducted by the payer.

There will still be no withholding on dividends paid by Hungarian corporations to other corporations.

Taxation of dividends

There are no changes concerning dividends received from non-controlled foreign enterprises. Dividends received from these are still exempt from tax under domestic legislation.

Taxation of interest and royalties

On October 30, 2009, the European Commission issued a press release (IP/09/1657) according to which the Commission has ruled that the Hungarian intra-group interest regime constitutes state aid. Furthermore, the Commission decided that the regime classifies as existing aid. Therefore there are no obligations to repay the aid granted in the past on the basis that: the Hungarian regime was introduced before Hungary’s EU accession; when the regime was introduced, there were uncertainties regarding its qualification as state aid.
As an outcome of the above discussions with the Commission, effective January 1, 2010, the 50% tax-base modification arising from the difference between the interest received from, and the interest paid to, related parties will be abolished.

However, there has been no change to the royalty income deduction rules. Therefore, it will still be possible to decrease the corporate tax base by 50% of the amount accounted for as income derived from royalties, but not exceeding 50% of the pre-tax profit.

Changes related to the real estate industry

A foreign shareholder that sells its shareholding in a company that owns real estate, or withdraws this shareholding by means of a capital decrease, or uses the shareholding as a contribution-in-kind or transfers it without consideration, may be subject to tax in Hungary from the beginning in 2010. A company and its related parties will qualify as companies that own real estate if:

more than 75% of the market value of their assets is domestic real estate;
they have a foreign shareholder that is not resident in a country that has a double tax convention in place with Hungary, or the convention allows the foreign exchange gain to be taxed in Hungary; and
they are not listed on a recognized stock exchange.

However, a relevant treaty can be applied.

Transfer duty on real estate

Under the tax changes affecting the real estate industry effective 1 January 2010, the acquisition of shares in a company that owns real estate will be subject to transfer duty. The rates vary from 2% to 4%.

Effective 1 January 2010, companies will owe duty on the acquisition of capital shares in a company that owns real estate, provided that, as a result of the acquisition, at least 75% of the capital shares will be owned by the acquirer. The capital shares owned by related parties must be taken into account for purposes of this rule. Certain exceptions are available.

The acquisition of a company owning real estate will have to be reported to the Tax Authority.

Other key changes

Corporate income tax regulations were also amended as follows:

the statutory definitions of related parties, bad debt and impairment loss will be significantly modified;
transfer pricing regulations will have to be applied for incorporation of an entity with a contribution-in-kind, and also to transactions between a taxpayer and its foreign permanent establishments.

The effective date of the majority of the new rules is 1 January 2010.

We trust that you find the above information useful. Should you have any question, please contact us.

Best Regards
Axel Smits
Partner & ITS Leader
PricewaterhouseCoopers Belgium
Tel: +32 (0)3 259 3120
axel.smits@pwc.be