Tax Newsletter. The new Greek Income Tax Code. Issue 49 September 2013

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1 Tax Newsletter Issue 49 September 2013 The new Greek Income Tax Code This newsletter outlines some of the key rules introduced by the new Greek Income Tax Code published on 23 July 2013 (Law 4172/2013)

2 Contents Introduction; The new ITC in a nutshell Key Concepts 4 - Tax Residence When Individual 4 - Tax Residence When Legal Entity 4 - Permanent Establishment 4 - Fiscal Year Income from rentals, dividends, interest and royalties 9 - Tax rates 9 - OECD inspired definitions 10 - WHT exemption on intercompany payments 10 - Intercompany dividends participation exemption regime Salary & Pensions 5 - Tax rates 5 - Benefits in kind 5 - Pension plans: clarification of tax treatment Business income 6 - Rates 6 - Tax losses 6 - Deductibility of business expenses 6 - Some of the non-deductible expenses 7 - Bad debts 7 - Depreciations 8 - New earnings-stripping rules 8 - Transitional rules for untaxed profits reserves Income from transfer of capital assets 11 - Transfer of real estate 11 - Transfer of other assets Combatting potential tax abuse 12 - Controlled Foreign Corporation ( CFC ) rule 12 - Payments to non-cooperative/preferential tax regimes 12 - General Anti-Abuse Rule ( GAAR ) 13 - Extension of imputed income sources 13 - Transfer pricing Tax deferral for corporate restructurings 14 - Scope of new rules 14 - Tax deferral regime

3 Introduction; The new ITC in a nutshell Effective January 1, 2014 The new Income Tax Code (ITC) (Law 4172, published on 23 July 2013) is announced in the relevant introductory report as part of Greek government s effort to overhaul the Greek fiscal system towards enhancing transparency and combatting tax avoidance and evasion. In addition to the recently enacted Codes of Fiscal Depiction of Transactions and Fiscal Procedure, the new ITC is expected to be complemented with a new framework for the rationalization of existing fragmented- tax incentives and special tax regimes. In principle, the ITC becomes effective in respect of revenues and expenses occurring in fiscal years starting on or after 1 January Influenced by international literature but in a questions raising context To a certain extent the new ITC adopts rules and definitions already existing in EU and international tax materials (e.g. the OECD Model Tax Convention, the EU Merger Directive, the EU Council resolution regarding Controlled Foreign Corporations and thin capitalization rules). On the other hand, the formulation of some of the new rules seems to be elliptical or with conflicting provisions whereas there is a degree of uncertainty as regards the applicability of the previous income tax code (Law 2238/1994) which is not repealed. In general, assuming that the new Income Tax Code remains as enacted, its application in pragmatic terms may give rise to interpretational issues exceeding the level of those expected in a new piece of legislation. Strengthening tools against tax abuse As regards contents, the new ITC contains rules for combatting tax evasion and avoidance including on CFC and thin capitalization, imputation of income from one s expenditure levels, disallowance of payments to non-cooperating jurisdictions and preferential tax regimes. Moreover, the so called private tax audit procedure run by statutory auditors that applied for fiscal years 2011 and 2012 and which could, to a certain extent, replace tax audits by the tax authorities is not retained, at least in this current version of the income tax code. Structure-wise, the new ITC retains the principle of income taxation on the basis of (i) worldwide income in respect of domestic tax residents and (ii) Greek source income in respect of non-domestic tax residents. Four (4) distinct revenue categories for individuals As regards individuals, the taxable basis and the applicable tax rate are determined depending on the classification of taxable revenues as revenues from: salary and pensions, business, capital assets and transfer of capital assets. However, broad thresholds apply for transactions to be considered as giving rise to business revenues. On the other hand, the catch-all category of other income is not being retained in the new ITC. For all other entities except individuals, all revenues are classified as business revenues and taxed at separately determined rates depending on the applicable book-keeping system. Withholdings & prepayments to boost collection The remittance of taxes by way of withholding is applicable in respect of salaries and pensions, dividends, interest, royalties, technical, management and consulting fees, capital gains from the transfer of real estate and payments and annuities under collective pension plans. Compliance rules for the reporting and prepayment of income tax and tax deferrals for qualifying restructuring operations are also comprised as separate chapters. New Code of Fiscal Procedure To be noted that the assessment and collection of taxes as well as the relevant administrative sanctions are regulated by the Code of Fiscal Procedure (Law 4174/2013), enacted three days after the new ITC. The Code of Fiscal Procedure introduces, for the first time in Greece, a general anti-abuse clause, which is briefly described in slide 12 of this presentation.

4 Key Concepts 4 Tax Residence when individual Triggering events: place of residence, habitual abode or vital interests in Greece, or presence in Greece for more than 183 days per year The over-restrictive previous rules against transferring residence out of Greece are now repealed Tax Residence when legal entity Triggering events: Incorporation Registered seat Place of effective management; takes into account place of: - exercise of day-to-day business - strategic decision-making - annual shareholders meetings - bookkeeping - BoD meetings - residence of BoD members In addition to the above, residence of the majority shareholders may potentially be considered along with the other factors Permanent establishment Definition is aligned with the OECD Model Tax Convention, adopting: Fixed place of business test Dependent agency test Auxiliary activities exemption Trading partners in jurisdictions with no DTC with Greece (e.g. Australia, Japan) were up to now faced with a disadvantage which seems to be alleviated under the new rules Fiscal year Fiscal years may no longer exceed twelve months, under any circumstances Rules on fiscal year end date remain unchanged (i.e. either on or on or on foreign majority shareholder s date) Legal entities shall no longer have the right to extend their first fiscal year for a period exceeding twelve months, as allowed under corporate law Unclear whether branches can follow the head office year-end date

5 Salary & Pensions 5 Tax rates Pension plans; tax treatment INCOME BRACKET TAX RATE 0-25,000 22% OCCUPATIONAL PENSION FUNDS RATIFIED BY LAW PENSION PLANS 25,001-42,000 32% Excess amounts 42% PREMIUMS PAID BY EMPLOYER Tax exempt in the hands of the employee Tax exempt in the hands of the employee Fees paid to BoD members are taxed as salary income irrespective of the contractual relationship between the BoD member and the company Benefits in kind Benefits in kind, including passenger cars, rentals and stock options are still classified as taxable salary income Loans granted to shareholders, partners or employees are now also treated as taxable benefits in kind; 3-month salary advance payment is classified as loan In the absence of a written loan agreement, loan capital from employer qualifies as taxable salary. Otherwise, the tax is imposed on the benefit from a lower than market interest rate PREMIUMS PAID BY EMPLOYEE LUMP SUM TO EMPLOYEE ANNUITIES TO EMPLOYEE Deductible from taxable salary Tax exempt Taxable under salary income tax scale (42% marginal rate) Deductible from taxable salary Taxable at a 10% (20% for amounts exceeding Euro 40,000) Taxable at 15% wht New rules apply for payments made as of However, the new rules shall not apply on lump sum amounts or annuities corresponding to premiums paid by employees until

6 Business income 6 Tax rates LEGAL ENTITIES KEEPING DOUBLE ENTRY BOOKS OTHER ENTREPRENEURS INCOME BRACKET TAX RATE n/a 26% Euro 0-50,000 26% Excess 33% Deductibility of business expenses All expenses are tax deductible, as long as they: Serve the business purposes of the enterprise Correspond to an actual transaction Have been appropriately recorded in the fiscal books and are supported by appropriate documents New rule presented as aiming at certainty by substituting the - previously existing - detailed list of tax deductible expenses with a catch-all provision supplemented by limited list of exemptions. However, what serves the business purposes of the enterprise still likely to cause uncertainties in practice Tax losses 5-year tax loss carry forward rule remains applicable Restrictions on tax loss carry forwards in case of change by more than 33% in direct or indirect holding of an enterprise s capital, shares or voting rights Enterprises bear the burden of proving that change of control serves business purposes, thus fall outside the scope of the loss carry-forward prohibition Some non-deductible expenses Loan interest, other than interest on loans by banks, exceeding specific statistical thresholds set by the Bank of Greece Any payment exceeding Euro 500, if not performed through banks Hospitality, conference organization and entertainment expenses exceeding certain thresholds

7 Business income 7 Bad debts Under the new rule, bad debt provisions are no longer formed on the basis of fixed coefficients (with the exception of banks, financial leasing and factoring companies) Instead, provisions are formed on the basis of the actual outstanding receivables Bad debt provisions are tax deductible at a rate ranging from 50% to 100%, depending on the value of the receivable and the length of default period Tax deductibility is subject to the enterprise having taken appropriate action to ensure collection The new rules are valid for bad debt provisions formed in fiscal years starting as of 1 January For bad debt provisions formed in fiscal years the provisions of the previous income tax code shall remain applicable Depreciations Rules on depreciation follow the model introduced by law 4110/2013, which cut down the long list of depreciation rates into a few basic categories Categories include intangibles, depreciated at 10% and buildings, depreciated at 4% By derogation to the main rule, depreciation of intangibles may now be performed on the basis of their contractual duration Depreciation may be performed by the lessee in a financial leasing (under conditions) The write-off of receivables that will become outstanding from 1 January 2014 is subject to the taking of all legal actions. In any event, the interaction of the regime applicable until 31 December 2013 and the new rules raises questions

8 Business income 8 New earnings-stripping rules Net deductible interest is limited to 25% of EBITDA (under Greek accounting principles and the relevant tax adjustments) Net interest: the amount by which interest expenses exceed interest revenues Limitation does not apply to business taxpayers that are not part of a group of companies and the net interest does not exceed EUR 1 million per year Interest expenses disallowed can be carried forward to the following 5 fiscal years Credit institutions are exempt from such rules Transitional rules for untaxed profits reserves Non taxed profits reserves appearing on the last balance sheet of legal entities having closed before are taxed (i) at 15% if distributed or capitalized up to 31 December 2013 and (ii) at 19% if distributed or capitalized after such date In case no such distribution or capitalization takes place, reserves are to be offset against losses carried forward arising during the last five years Non taxed profits reserves are those formed out of profits in respect of which income tax was being effectively deferred based on rules of the former income tax code e.g. interest on bank deposits earned before a certain date As of it is not allowed to maintain reserve accounts in respect of non taxed profits Unclear whether rule refers only to the reserves of the former income tax code or reserves formed under other regimes (e.g. investment incentives)

9 Income from rentals, dividends, interest or royalties 9 Tax rates TYPE OF INCOME Rentals Dividends Interest Royalties TAX RATE 11% up to Euro 12,000 33% for excess amounts 10% withholding tax 15% withholding tax 20% withholding tax OECD inspired definitions Dividends: New definition, based on the OECD Model Tax Convention but including similar payments. Uncertain whether branch profits fall within the definition scope Interest: New definition, based on the OECD Model Tax Convention but not excluding penalty charges Royalties: Revised definition, based on the OECD Model Tax Convention along with the observations and reservation made by Greece on software-related payments For individuals, above tax rates are final. Also, a tax exemption is granted in respect of interest on Greek State bonds and Treasury bills

10 Income from rentals, dividends, interest or royalties 10 WHT exemption on intercompany payments Exemption covers: - Dividends distributed to qualifying companies covered by the scope of the Parent-Subsidiary Directive - Royalties and interest remitted to qualifying entities covered by the scope of the Interest Royalties Directive or Merger Directive (rule seems to be conflicting) Required minimum holding for 24 months: - In case of dividends, 10% in the distributing entity s capital, shares, voting rights or profits rights - In case of interest and royalties, 10% directly in the remitting entity s capital, shares or voting rights No explicit limitation as to the types of entities making the distributions/payments Possible to apply WHT exemption before lapse of minimum required holding period of 24 months, upon providing cash guarantee equal to the amount of the tax exemption Intercompany dividends participation exemption regime Scope covers dividends earned by any Greek resident legal entity or branch and distributed by any entity except those in non-cooperating jurisdictions Conflicting rules as regards the definition of non-cooperating jurisdictions Previous regime applicable only in respect of EU subsidiaries and limited types of Greek recipient companies (such as AEs and EPEs) Required minimum holding in the distributing entity s capital, shares or voting rights 10% (previously only in the capital) Costs related to participations in respect of which dividend participation exemption regime applies are not tax deductible Possible to receive tax exempt distribution before lapse of minimum required holding period of 24 months, upon providing cash guarantee equal to the amount of the tax exemption

11 Income from transfer of capital assets 11 Transfer of real estate Scope of rule covers transfers of real estate by non-business performing individuals 15% withholding tax imposed on capital gain i.e. difference between acquisition cost and actual sales price Capital gain is gradually de-inflated depending on property holding period; maximum de-inflation rate is 0.61, for holding period exceeding 25 years Special tax loss carry forward rules for non business taxpayers: capital losses are carried forward indefinitely to be set-off against future real estate capital gains New rule applies on transfer taking place from , irrespective of the date of acquisition of the property (as is currently the case) The engagement within a period of two years into three transactions concerning real estate is deemed to constitute a business activity. Relevant profit is then taxed at a marginal rate of 33% Transfer of other assets Scope covers non-business performing individuals transferring: - Shares (listed and non-listed) - Holdings in partnerships - Bonds (public or private) - Treasury bills - Derivatives - Business concerns 15% withholding tax imposed on capital gain Special tax loss carry forward rules for non business taxpayers: capital losses are indefinitely carried forward to be set-off against future capital gains from similar transactions Deemed calculation of transfer value is abolished; capital gain is equal to actual sale price reduced by acquisition cost Tax prepayment at the time of transfer is no longer required Transfers of business and transfers of non-listed shares performed until remain subject to the 20% and 5% prepayment tax regime, respectively The engagement within a period of six months into three similar transactions is deemed to constitute a business activity. Relevant profit is then taxed at a marginal rate of 33%

12 Combatting potential tax abuse 12 Controlled Foreign Corporation ( CFC ) rule Undistributed profits earned by a CFC are added to the taxable profits of the shareholder, under the following conditions: Shareholder directly or indirectly controls the foreign corporation CFC is tax resident in a non-cooperative jurisdiction or in a jurisdiction with a preferential tax regime More than 30% of the income earned by the CFC is classified as passive income (interest, royalties, dividends etc.) CFCs established in EU member states are outside the scope of the rule, provided profits have not been artificially diverted thereto, for tax evasion purposes General Anti-Abuse Rule ( GAAR ) A GAAR is introduced for the first time, as part of the measures to combat tax evasion (rule is part of Law 4174/2013) The rule allows tax authorities to disregard artificial arrangements set up for tax evasion purposes Upon assessing artificial arrangements tax authorities should: - Refer to the substance and business purpose of the arrangement, or lack thereof, and - Compare the tax burden triggered in the context of the potentially artificial arrangement, to the tax burden that would arise, in the absence of such arrangement Payments to non-cooperative or preferential tax regimes Restrictions on tax deductibility of payments to entities established in non-cooperative tax jurisdictions or preferential tax regimes remain applicable Definition of preferential tax regime becomes stricter, referring to states applying a tax rate that is lower than 50% of the tax rate applicable in Greece. Preferential tax regimes are to be defined in administration guidelines by the tax authorities New definition effective for payments made during fiscal years starting from

13 Combatting potential tax abuse 13 Extension of imputed income sources The new rules retain imputation of taxable income on the basis of specified expenses (unless taxpayers justify expenses by reported income). Scope enlarged to include the following expenses: Set-up or acquisition of an enterprise Purchase of shares Injection of capital Transfer pricing Critical shareholding rate triggering TP obligations drops to 33% Business valuation methods acceptable in case of business restructurings TP documentation requirements to be governed by newly proposed Code of Tax Procedures Deadline for submission of TP Information Memorandum extended to , for fiscal years ended on The new rule falls within the scope of measures adopted for the tackling of tax evasion, by incentivizing the reporting of income in the annual individual income tax return Intra-group restructurings (e.g. termination of local activities, conversion of business model, transfer of business assets etc.) are explicitly required to be documented under TP rules

14 Tax deferral for corporate restructurings 14 Scope of new rules Scope covers: - transfer of assets, - exchange of shares, - merger, - division, - partial division and - transfer of seat of SE (Societas Europea) and SCE (European Cooperative Society) to other EU member states Existing laws providing tax incentives for local restructurings (Laws 1297 and 2166) are not repealed Cross-border restructurings with companies established and resident in EU jurisdictions previously regulated under the legislation transposing the EU Merger Directive covered; It appears possible to opt to undertake certain forms of purely local restructurings, such as transfers of branches of activity, under the new rules; restrictions apply to the transfer of shares acquired as a result of the transfer Domestic partial divisions, whereby branches of activity are transferred to another company in exchange for shares transferred to the shareholders of the transferring company (instead of the transferring company itself) are for the first time provided for in local tax legislation - but not covered by corporate law Tax deferral regime Tax regime based on the rules of the EU Merger Directive The general principle, with variations depending on the type of restructuring, is that tax is effectively deferred for qualifying restructurings which do not give rise, upon transfer, to the taxation of capital gains Capital gains are defined as the difference between the real values of the assets and liabilities transferred and their accounting values Exemptions apply also for shareholders involved in qualifying restructurings, usually without a possibility to step up the values of the shares received under the operation Possibility to carry over tax losses, and tax exempt provisions and reserves The general anti-abuse provision of the EU Merger is stated in the relevant rules

15 For further information, please contact us directly ZEPOS & YANNOPOULOS E. W. T F , Katehaki & Kifissias Ave., , Athens, Greece Established in 1893, Zepos & Yannopoulos is one of the leading and largest law firms in Greece providing comprehensive legal, tax and accounting services to companies conducting business in Greece. Zepos & Yannopoulos is proud to be the Greek member of the TAXAND global organisation of leading tax advisory firms. Now comprising of independent tax advisory firms in nearly 50 countries, TAXAND has more than 400 tax partners and 2,000 tax advisors delivering actionable advice, responsively, to the global marketplace. For more information, please visit In addition to offering quality legal, tax and accounting advice, Zepos & Yannopoulos assists its international clients in capturing the intricacies of the Greek business environment and practice. Our approach is direct and client driven. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without prior permission. Application for permission for other use of copyright material including permission to reproduce extracts in other published works shall be made to the publishers. Full acknowledgment of author, publisher and source must be given. Nothing in this newsletter shall be construed as legal advice. The newsletter is necessarily generalised. Professional advice should therefore be sought before any action is undertaken based on this newsletter.