For purposes of the French-Italian double tax treaty, Italy’s Supreme Court has rendered an important decision re: holding companies and the level of substance required to determine beneficial ownership. This decision is fact specific, although is significant as it applies to pure holding companies and the subjective interpretations of beneficial ownership that are being applied globally.
The Supreme Court held that the status of beneficial owner is ultimately to be determined, as a matter of fact, based on the particular nature of the recipient holding company and the functions typically performed in its operations.
For a pure holding company, a level of organizational structure able to carry out an activity of mere coordination and control over the subsidiary, attend the shareholders’ meetings and collect dividends, should be deemed as adequate. The analysis should instead be based on the actual capability of retaining the dividends received as opposed to having the obligation to repay them to another entity.
In particular, the Supreme Court did not find any merit to the proposition that the French company should be regarded as a conduit, concluding that a holding company that does not have the same organizational structure (premises, personnel, etc.) as an operating company does not necessarily mean that it would be regarded as not being the beneficial owner of dividends.
This case is very interesting as it does not rely on the regular substance of a regular operating company, and thoughtfully distinguishes the legal rights of a holding company to receive and hold dividends without an intertwined obligation to distribute such monies as one may find in a tax-driven conduit structure.
EY’s Global Tax Alert, provided for reference, is an interesting and refreshing insight into this subjective issue that merits no consistency on a global basis.
Brazil has placed Dutch holding companies back on its list of privileged tax regimes, as it has determined that such companies that do not have “substantial economic activity” will be subject to adverse Brazilian tax consequences. EY’s Global Tax Alert provides additional details:
Click to access 2015G_CM6098_BR%20places%20Dutch%20holding%20cos%20wout%20substantial%20eco%20activity%20back%20on%20PTR%20list.pdf
Best Practices: All multinationals should review not only Dutch holding companies, but all holding companies to test economic substance. Russia has enacted recent rules on beneficial ownership, also looking at economic substance to determine the availability of treaty benefits. Other countries are expected to be more active in this subjective determination, thus this will be a topic for disputes gong forward.
The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations. A summary and full content of the proposal are referenced herein:
- Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
- Establish a consistent definition of “tax havens” by the end of 2015.
- Provide a blacklist of countries that do not combat tax evasion or that accept it.
- New treaties with developing countries should tax profits where value is created.
- EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
- The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
- Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
- Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
- Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.
These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.
Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information. Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.
As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis. The training should also be reviewed and updated annually for new developments.
Examples of topics for discussion:
- Beneficial ownership & disclosures (coordinated with Treasury Know Your Customer perspective)
- Permanent Establishment (PE)
- General Anti-Avoidance rules (GAAR)
- Transfer pricing methodologies, internal governance procedures
- Transfer pricing documentation process
- BEPS governance strategies
- Financial statement tax reserve criteria and timing
- Interrelationship of domestic law and double tax treaties
- Tax policy
- Elements of tax risk framework
- Tax audit protocol
- Tax audit methodologies
- Customs / Transfer pricing coordination
- BEPS Country-by-Country report, future trends
The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.
The European Parliament, following its recent push for public disclosure (03 June 2015 post), passed a non-binding resolution by 550 votes to 57 to make this happen.
A copy of the press release is provided for reference:
- Country-by-country tax reporting (CbCR) should be publicly disclosed to fight tax evasion and avoidance.
- Perceived benefits of public disclosures include better tax justice and an end to tax havens.
- All countries should adopt CbCR.
- Company ownership should be in the public domain.
- EU institutions should monitor actions by the Member States to determine ongoing funding decisions.
The EU continues to be a proactive force in introducing public disclosure changes, which will be a spark for all other countries to follow. Accordingly, monitoring such activities will be a key to understanding future trends and disclosures that can be planned for currently.
The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems. A copy of the press release is provided for reference:
- All countries to adopt country-by-country (CbC) reporting, with all information available to the public
- Beneficial ownership information to be made publicly available
- Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
- Request to the Commission for an ambitious action plan, without delay
The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe. Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.
The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues. Currently, it is a sign of an incoming tsunami that cannot be completely avoided.
The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive. The new rules must be introduced in all EU Member States within the next 2 years.
A KPMG Euro Tax Flash outlines details of this proposal:
Click to access etf-248.pdf
- Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity. The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
- Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
- Member States have 2 years from adoption to implement its provisions into their domestic legislation.
In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.
Today’s tax climate, OECD Base Erosion & Profit Shifting (BEPS) Action Plans, 2014 changes to the OECD Model Tax Convention re: “Beneficial Ownership” (refer to 22 July 2014 post), and General Anti-Abuse Rules (GAAR) all focus on increased substance of activities in an entity, versus pure legal form, to derive relevant treaty benefits.
A recent Austrian Administrative High Court decision (VwGH 26/6/2014, 2011/15/0080-13) focused on the EU Parent-Subsidiary Directive (PSD) re: “directive shopping.” There were dividend distributions from an Austrian company to a pure holding company in Cyprus with no people or physical assets. Withholding tax was paid by the Austrian company, with a refund claimed by the Cypriot company in accordance with the EU PSD. (Note the Cypriot company had a Russian shareholder, for which direct distributions from Austria to Russia would not have the benefit of the EU PSD.)
The High Court, confirming the tax authority’s view, stated the Cypriot company structure was abusive. Accordingly, the withholding tax refund application of the Cypriot company was denied.
The substance vs. form application of the case highlights the potential withholding tax issues for a pure holding company located in a tax favorable jurisdiction. Thus, all holding company structures should be reviewed under current law, and most importantly with respect to future international tax changes focusing on the proper substance to receive treaty benefits.
The EU Policy Paper, issued by Transparency International, is entitled :”Fighting Money Laundering in the EU: From Secret Ownership to Public Registries.” The stated objective is to provide company ownership information freely available as a shared objective in the public interest. The Policy Paper is referenced herein:
Click to access TI-EU-Policy-Paper-Beneficial-Ownership.pdf
The primary objective of this initiative, as stated in the Policy Paper, is: “To keep a level playing field and maximize their benefit, public registries must be made public in all EU Member States as well as internationally.” The ultimate Beneficial Owner is to provide detailed information. This recommendation is pursuant to a review of the 3rd EU Anti-Money Laundering Directive, forming a basis for the 4th EU Directive.
As a Best Practice, this initiative should be monitored from a tax policy perspective in alignment with the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan steps, as well as similar trends meant to uncover complex and non-transparent ownership schemes. It is noted that the EU Policy Paper is meant to extend the transparency reporting internationally, not only for EU Member States.
Holding companies in the Netherlands that conduct finance and leasing operations must meet substance requirements as of 1/1/2014, with confirmation provided in the annual income tax return. To the extent that one, or more, of the requirements are not fulfilled, such information is required to be disclosed, with such disclosures spontaneously provided to the relevant treaty partner who can use it to review tax treaty benefits. A Tax Flash from Loyens & Loeff provides a summary of these requirements, as well as an interesting comparison of the substance requirements to those relevant for an APA of a group financing company.
A taxpayer must meet all of the following substance requirements:
- 50% or more of decision-making board members reside in the Netherlands, and have the relevant professional knowledge to perform their duties
- Qualified employees are in place to implement and register transactions
- Management decisions are taken in the Netherlands
- (Authority for) main bank accounts is retained in the Netherlands
- Books are kept in the Netherlands
- Business address is in the Netherlands
- The taxpayer is not a dual resident with another country
- Risks are evident for financing, licensing or leasing activities
- An appropriate equity is maintained with regard to the functions performed
Beneficial ownership rules are subject to additional review and attention by OECD and global tax authorities, and Netherlands is using this prescriptive approach to ensure that substance is maintained and exchange of information provisions are in place to identity taxpayers not meeting such requirements. All multinationals should monitor this topic, while also ensuring that Dutch holding companies meet the relevant substance requirements
A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits. A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.
Beneficial ownership benefits may be challenged if the applicant:
- Has the obligation to distribute more than 50% of the income to another entity,
- Only has business activities consisting of asset ownership or the right to generate income,
- Has an amount of assets, business scale or employees not commensurate with the income received,
- Does not have control or power over the assets of has low risks for such assets or income,
- Has a back-to-back arrangement for lending, royalties or technical services with a third party,
- Is resident of a country which has no, or a low, income tax, or
- Is an intermediary solely for the purpose of accessing treaty benefits.
The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences. This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities. For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).
Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”
Click to access PwC%20Vietnam%20Newsbrief%20-%20Draft%20Circular%20on%20treaty%20shopping%20provisions_EN.pdf