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 asa 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:
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
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.
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:
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.