BILATERAL IFA MEETING GERMANY NETHERLANDS

Transcription

1 BILATERAL IFA MEETING GERMANY NETHERLANDS Recent developments in Germany and The Netherlands 20 April 2012 Robert van den Tillaart

2 Agenda 1. Dutch response to recent ECJ cases Deutsche Shell. National Grid Indus. Papillon. 2. Dutch dividend withholding tax in conflict with EU law? 3. Recent PE-developments. 4. Anti abuse legislation for intermediate holding companies. 5. Dutch answer to the European trend of R&D incentives. 6. Horizontal monitoring. 7. Depreciation of intra group loans. 8. Interest deduction: the never ending story? 2

3 Deutsche Shell claim ECJ, 28/2/2008, C-293/06 Deutsche Shell case: (ECJ, 28/2/2008, C-293/06) Before conversion Deutsche Shell Italian PE After conversion Deutsche Shell S O L D Italian subsidiary Repayments in D-Marks Final repayment results in FX loss Relevant facts German company (Deutsche Shell) with an Italian PE. In 1974, Deutsche Shell (D-Mark denominated company) granted contribution capital to Italian PE. This capital is repaid over time (repayments in Italian Lires re-calculated in D-Marks). In 1992, Italian PE assets were transferred to an Italian legal entity and Deutsche Shell immediately sold shares. Gain, before conversion of Lires into D-marks, is used to repay remaining contribution capital of PE. Deutsche Shell realized an exchange rate loss upon the repayment of contribution capital of PE. Neither Germany nor Italy allowed a tax deduction of this exchange rate loss. 3

4 Deutsche Shell claim ECJ, 28/2/2008, C-293/06 Deutsche Shell case: (ECJ, 28/2/2008, C-293/06) Before conversion Deutsche Shell Italian PE After conversion Deutsche Shell S O L D Italian subsidiary Repayments in D-Marks Final repayment results in FX loss ECJ ECJ decided that it is in breach with the freedom of establishment that Deutsche Shell cannot deduct exchange rate loss in Germany. Conflict with EU law cannot be justified, because: ECJ deems it not relevant that Germany also does not tax an exchange rate profit. German tax law increases the economic risk for a German company to start a business in an other EU jurisdiction with an other currency. Incorrect allocation of taxation rights between Germany and Italy. Above also implies that the exchange rate loss does not need to be balanced with PE income exemption in Germany under the German Italy tax treaty. ECJ assumed that exchange rate loss is a real economic loss. To be defined by German court. 4

5 Deutsche Shell claim ECJ, 28/2/2008, C-293/06 Deutsche Shell case: (ECJ, 28/2/2008, C-293/06) Before conversion Deutsche Shell Italian PE After conversion Deutsche Shell S O L D Italian subsidiary Repayments in D-Marks Final repayment results in FX loss German reaction to Deutsche Shell: BMF issued resp. Guidance on 11/23/2009: Decision only applicable with regard to EU/EWRmember-states. Any FX loss only deductible when PE is finally terminated. No specific changes in German tax law. 2a EStG generally deals with losses from third countries, but restricted to third-countries (ie Non-EU-Member- States). 2a Abs. 3 EStG dealt with losses from PE exempt under existing treaties but was abolished in

6 Deutsche Shell claim Deduction of FX losses on shares? Simplified structure: Facts example: Holding BV subscribes for 1.000/ equity in UK sub. Holding BV (NL) Today the value amounts to Holding BV accounts for a FX loss on UK shares of 300. FX loss is not recognized in UK accounts. UK Relevant Dutch tax law Art. 13 Wet Vpb. Results on shares from qualifying participations are not taxed. Art. 13d Wet Vpb. Losses on shares are tax deductible in case of a final liquidation of the subsidiary. Examples of statutory restrictions: FX loss needs to be adjusted with dividends received during the last 5/10years. Business of UK sub is continued by another group company. 6

7 Deutsche Shell claim Deduction of FX losses on shares? Conclusion based on current law FX loss may be tax deductible in case of a liquidation if additional requirements are fulfilled. Risk of no deduction of FX loss neither in the UK nor the Netherlands. Questions after Deutsche Shell What is the impact of Deutsche Shell on FX losses on shares in EU/EER subsidiaries? Dutch tax law disallows the deduction of FX losses regarding both domestic and foreign subsidiaries. No violation of EU law? Dutch tax already provides for deduction of FX losses on shares (art. 13d Wet Vpb liquidation losses). Deduction of FX losses limited to final FX losses only? In line with Marks & Spencer. 7

8 Deutsche Shell claim Deduction of FX losses on shares? 8 April pm: introduction of phantom law: New law which will only become effective in case the Dutch Supreme Court rules that FX losses on shares are tax deductible. Legislator does not accept an inbalance between no taxation of FX gains and deduction of FX losses on shares. New law: taxation of FX gains on (any) shares realized after 8 April pm in case the tax payer effectively claims the deduction of FX loss on (any) shares. Taxation of FX gains not limited to the FX loss deducted. Triple retroactive effect of law: Retroactive effect till 8 April pm. It is not relevant to what extent the FX gain can be allocated to the period before 8 April FX gains on shares also become taxable if FX loss is claimed before 8 April Taxation of FX gains on shares limited to (EU/EER?) shares for which the deduction of a FX loss would also be possible based on the outcome of the upcoming court cases. 8

9 Deutsche Shell claim Deduction of FX losses on shares? German treatment of FX losses on dividends and gains Dividends: Dividends are exempt under 8b Abs. 1 KStG for corporate shareholders and partially exempt (40%) under 3 Nr. 40 EStG for individual shareholders as far as the shareholding qualifies as business asset. Under most treaties exemption method applicable for qualifying dividends. BFH (11/7/2001, I R 3/01) held that neither the treaty exemption nor a local exemption apply to FX effects: any FX gain or loss is a result of the taxpayer holding the dividend receivable and therefore a separate event from earning the dividends (ie booking the receivable). Gains: Exempt under 8b Abs. 2 KStG for corporate shareholders (fully) for corporate shareholders and 3 Nr. 40 EStG (partially) for individual shareholders (see above). No corresponding treaty exemption because of Art. 13 Abs. 5 MC. BFH (12/22/2010, I R 58/10) held that any FX effects resulting from the sale of shares share the qualification of the gain out of the underlying transaction. 9

10 National Grid Indus case Exit taxation for companies National Grid Indus case: (ECJ, 29/11/2011, C-371/10) Relevant facts UK company issues in 1996 a group loan to a Dutch group company. BV (NL/UK) UK In 2000 BV becomes a UK tax resident. Due to FX differences the group receivable includes an unrealized FX gain in NL company law is based on the incorporation theory and not the real seat theory. Dutch tax law Art. 15c Wet Vpb. Assets and liabilities of companies which are no longer regarded a Dutch tax resident based on a tax treaty are deemed to be sold against fair market value (before the transfer of the effective place of management). 10

11 National Grid Indus case Exit taxation for companies ECJ Direct taxation of hidden reserves is not applicable to companies moving effective place of business within the Netherlands. Direct taxation of unrealized hidden reserves is in breach with the freedom of establishment and results in a liquidity disadvantage. Hidden reserves present at the moment of emigrating may ultimately be taxed by the State of Origin (NL). State of Origin should grant the company the choice between: Immediate taxation to avoid administrative issues. Postponement of taxation until actual realization of the hidden reserves. Additional interest may be levied as well as guarantees may be asked for! Contrary to previous ECJ decission (N-case) no obligation for deduction for subsequent decrease in value of hidden reserves after move of residency. No connection to whether or not a step up in basis is granted by the new jurisdiction.taxation of FX gains is also allowed in case the new jurisdiction does not recognize the FX gain. 11

12 National Grid Indus case Exit taxation for companies Response by Dutch legislator (Decree 14 December 2011) Choice to pay tax on unrealized hidden reserves and goodwill immediately or postponement till moment of actual realization. In case of postponement of taxation till actual realization: Accrual of interest. Guarantees are required. Annual declaration. New law will follow. Differences with individuals (N-case / Lasteyrie du Saillant) Guarantees are not allowed. Subsequent decrease in value of hidden reserves need to be taken into account. No levy of interest on delayed taxation. No taxation after 10 years. 12

13 National Grid Indus case Exit taxation for companies Conclusions Substantial differences in the Dutch tax treatment of individuals and companies! Especially the levy of interest on delayed payment seems contrary to the statement that immediate taxation results in a liquidity disadvantage. Countries with company law applying the actual seat theory are less restricted on applying exit taxation due to the liquidation of the emigrating company. 13

14 National Grid Indus case Exit taxation for companies Germany s response So far no new legislation (not even drafted). Statements by Ministry of Finance indicate that Germany will aks for both: interest on the deferred tax and a guarantee securing the deferred tax (if not sufficient business assets remain in Germany). With regard to the high interest rate of 6% p.a. And given the current market rates the requirements will come close to making it economically impossible to select the deferral option. 14

15 Papillon case Discriminatory tax rules on fiscal unities Papillon case: (ECJ, 27/11/2008, C-418/07) Relevant facts French parent NL French company can submit consolidated tax return for French companies in which it holds at least 95% of the shares. French Rules require an unbroken chain of companies subject to tax in France. French parent company aspired fiscal unity treatment with French subs even though it held 2nd tier subs through Dutch company. French subs Papillon request for French fiscal unity treatment 15

16 Papillon case Discriminatory tax rules on fiscal unities Papillon case: (ECJ, 27/11/2008, C-418/07) ECJ French parent ECJ decided that French restriction conflicts with freedom of establishment. NL Conflict with EU law cannot be justified, because of: Incorrect allocation of taxation rights between different jurisdictions. Risk for double use of losses. Abuse of law. Practical implementation issues. French subs Papillon request for French fiscal unity treatment 16

17 Papillon case Discriminatory tax rules on fiscal unities Papillon case: Papillon case also offers arguments to challenge restriction that Dutch fiscal unity is only possible for fellow subs with Dutch parent. Dutch parent EU/EER parent EU/EER Dutch subs Dutch subs Dutch subs Papillon request for NL fiscal unity treatment 17

18 Papillon case Discriminatory tax rules on fiscal unities Lower court decissions Rechtbank Den Haag 30/12/2011 (AWB 11/1084): denies pure Papillon fiscal unity between Dutch parent and indirect Dutch subsidiary owned by EU intermediate holding company. Conflict with EU law cannot be justified, because of: Incorrect allocation of taxation rights between different jurisdictions. Risk for double use of losses within the Netherlands. However conflict with EU law can be justified, because of: Risk for double use of losses in different member states. Abuse of law. Rechtbank Haarlem 25/01/2011 (AWB 08/7950): denies Papillon fiscal unity between two Dutch sister companies with common EU parent. No violation of EU law (no discrimination). 18

19 Papillon case Discriminatory tax rules on fiscal unities European Commission infringement procedure 16/6/2011: The European Commission has formally requested The Netherlands to amend its tax legislation on fiscal unities. The Commission considers that current Dutch legislation on fiscal unities is contrary to the freedom of establishment provided in Articles 49 and 54 of the Treaty on the Functioning of the European Union and Articles 31 and 34 of the European Economic Area Agreement. Letter 17 April 2012: The Netherlands will not amend its legislation. Next step: in the absence of a satisfactory response within two months, the Commission may refer The Netherlands to the ECJ. 19

20 Papillon case Discriminatory tax rules on fiscal unities Papillon and Germany German Grouping regime allows for foreign intermediate holdings direct or indirect ownership of >50% is required. But Grouping is only possible if a Profit&Loss transfer agreement is concluded between the German parent and ist German subsidiary this might be in conflict with corporate law of the intermediary Non-German-Holding. German Grouping regime does not allow for a grouping of German subsidiaries of a Non- German Parent. European Commission announced a possible infrigement procedure against Germany on 4/12/2012 targeting the limitation of the German Grouping to German legal entities. Different aspect: Grouping under BFH 2/9/2011 discrimination under a treaty provision which reflects Art. 24 V OECD Model Convention. 20

21 Dividend withholding tax conflict with free movement of capital? Dutch Court of Appeal Den Bosch 9/3/2012 (11/0054) 15% wht? Investment Fund (Fin) NL Relevant facts: Open end tax exempt investment fund resident in Finland. Investment fund received Dutch dividends subject to NL dividend withholding tax. No credit/refund of NL dividend withholding tax. Dutch tax law Art. 10, par. 1/2 Wet div. bel. provides for refund of withholding tax for non-resident EU entities which fulfill the Dutch requirements for Dutch corporate income tax exemption. The Finnish investment fund did not fullfil the Dutch criteria: no refund. 21

22 Dividend withholding tax conflict with free movement of capital? Dutch Court of Appeals Den Bosch 9/3/2012 (11/0054) 15% wht? Investment Fund (Fin) NL Court The investment fund is objectively comparable with Dutch resident tax exempt companies who are entitled to a full refund of withholding tax. It is not relevant that the investment fund is tax exempt on different grounds. General objective is avoidance of economic double taxation. Breach with the free movement of capital. Conflict with EU law cannot be justified, because: Coherent tax system. Incorrect allocation of taxation rights and reciprocity between the Netherlands and Finland. The Netherlands must idemnify statutory interest. Next step: Supreme Court / ECJ 22

23 PE developments Decree dated 15 January 2011 Old (case) law Allocation of debt via historical link. Allocation of capital and debt (AOA) Based on capital allocation approach rather than arm s length d:e. Allocation of capital based on pro rata of the assets taken into account differences in risk profile. Total assets -/- allocated capital = external debt allocation. Allocation of pro rata part of the total interest expenses rather than historical method (tracing approach). In case of double taxation: mutual agreement procedure. Uncertain: application under old treaties? PE profit allocation - dependent agent PE In case dependent agent is remunerated on an arm s length basis: no profit allocation to the deemed PE. 23

24 PE developments 2012: new exemption method Old law PE losses immediately tax deductible from Dutch profits subject to recapture obligation. Avoidance of double taxation calculated on per country basis. Subject to tax requirement for PE in non-treaty country. Issues according to legislator Recapture obligation many times postponed forever. Administrative burden. Need to avoid differences between tax treatment of PE and subsidiary. (tax budget). 24

25 PE developments 2012: new exemption method 2012 law PE losses no longer immediately tax deductible but exempt. No change in calculation method PE-profit. Exempt PE profit calculated in local currency resulting in taxable translation FX-result. No immediate exit taxation in case of transfer of assets to the PE. No longer subject to tax requirement for (active) PE in non-treaty country (unless international shipping or air transport). Switch over clause (credit method). No exemption for low-taxed (<10%) passive (>50%) PE similar to Dutch participation exemption unless: Exemption required under the treaty; or In case of real estate. Deduction of final PE losses after PE ceased its activities. Recapture in case of new activities within 3 years. 25

26 Anti abuse legislation Intermediate holding companies Canada Canada 0% wht 5% wht 5% wht LuxCo / Co-op NL NL 0% wht Anti abuse law: 1. Beneficial ownership rules / anti dividend stripping rules (art. 4, par. 7 Wet div. bel.). 2. New 2012: change foreign tax payer rules (art. 17, par. 3b/5 Wet Vpb). 3. New 2012: Co-op anti abuse law (art. 1, par. 7 Wet div. bel.). 26

27 Anti abuse legislation Intermediate holding companies Foreign taxpayer rules Foreign rules apply, in case (cumulative): 1. The foreign entity holds an interest of 5% or more in a Dutch company; and 2. The interest is not held as part of an active business (i.e. merely held as passive investment with no active involvement or link between active businesses); and 3. New 2012: one of the main purposes of the foreign entity is to avoid NL income tax or NL dividend withholding tax of an individual or another entity (ECJ case Cadburry Schweppes: wholly artificial arrangements ). Opinion: both criteria 2 and 3 are about substance. Tax rate: 25% or 15% in case of avoidance of NL dividend withholding tax. Taxation of NL dividends and capital gains. 27

28 Anti abuse legislation Intermediate holding companies Foreign tax liability Examples: Passive investment structure: Passive investment structure: Canada individuals 0% wht Assumption: 0% wht 5% wht LuxCo 15% wht/ 25% income tax LuxCo 0% wht 0% wht NL NL Consequences: NL law: 15% tax (avoidance of 5% NL wht) NL/Lu tax treaty: 2.5% P/S Directive not applicable abuse of law? Consequences: NL law: 25% (avoidance of 25% income tax) NL/Lu tax treaty: 2.5% P/S Directive not applicable abuse of law? 28

29 Anti abuse legislation Intermediate holding companies Dutch Cooperatives (Co-ops) Old rules: Co-op not subject to dividend withholding tax. New rules (2012): Co-op subject to 15% dividend withholding tax in case one of the following abuse situations is deemed to exist (tested for each Co-op member separately): 1. Passive investment structure: One of the main purposes of establishing the Co-op is to avoid NL dividend withholding tax or foreign tax (ECJ case Cadbury Schweppes: wholly artificial arrangements ); and The membership rights cannot be allocated to an active business (i.e. merely held as passive investment with no active involvement or link between active businesses). Opinion: both criteria deal with substance 29

30 Anti abuse legislation Intermediate holding companies 2. Active investment structure: One of the main purposes of establishing the Co-op is to avoid NL dividend withholding tax. The membership rights can be allocated to an active business. Dividend withholding tax claim limited to the dividendwithholding tax claim present at the moment Co-op becomes the shareholder of NL BV (i.e. retained earnings, hidden reserves and goodwill present at BV-level). 30

31 Anti abuse legislation Intermediate holding companies Dutch Cooperatives (Co-ops) Examples: Passive investment structure: Canada Active investment structure: Canada 0% wht 0% wht X% wht / foreign tax liability Co-op 5% wht Co-op 0% wht 0% wht? NL Consequences: Co-op level: 15% NL wht (avoidance of foreign tax). NL-Can tax treaty: 5% wht. Consequences: Dividendstripping at NL level? OR Co-op level: 15% NL wht (avoidance of 5% NL wht; limited to claim at NL-level). NL-Can tax treaty: 5% wht. 31

32 German Tax Law New Anti-Treaty/Directive Shopping provision ( 50 d Abs. 3 EStG) Implemented after European Commission criticized Germany for non-conformity of previous 50d Abs. 3 EStG ( ): at least 10% of gross income needed to be generated by own business activity. New 50d Abs. 3 EStG (coordinated with EC): No WHT relief if shareholders of Holding wouldn t qualifiy for similar benefits if they owned the shares directly and Holding does not fulfill certain prerequisites: gross income of Holding are generated by own business activity or there are economic or other reasons regarding the interposition of the Holding in respect of the other income and the Holding is participating in business or Holding is registered at a stock exchange. Accompanying BMF circular

33 R&D / innovation incentives Holland promotion: R&D incentives 1. Innovation box: 5% tax rate for R&D income. 2. Free depreciation for development costs of intangible assets. 3. Wage tax facility. 4. New 2012: 40% additional depreciation/deduction for R&D investments/expenses. 33

34 R&D / innovation incentives The 5% innovation box 5% effective tax rate (80% reduction of taxable income). Entry tickets: A patent/ip (octrooi) or plant breeder s right (kwekersrecht); or An R&D certificate for innovative work(s&o verklaring). For example business profits/royalties/capital gains attributable to: Own invention. Self-development or improvement of production methods / software / product. Not: brands, trademarks and similar assets. Not: purchased R&D assets (eligible for 140% depreciation). Losses may be deducted against 25% tax rate first. Recapture obligation applies. Practical points: Many types of business include innovation. No limitation to official R&D centers only! Timing of administrative procedures/applications is important. Advance tax ruling on allocation of profit is efficient (cost plus / residual profit split method). 34

35 R&D / innovation incentives Free depreciation for development costs of intangible assets Own development of intangible assets. Depreciation at once ultimately when the asset is ready for use. Wage tax facility Rebate for R&D related payroll costs (R&D certificate required). 42% reduction for first 110,000. Above 110,000: 14% reduction. Maximum reduction: 14M. Practical: timely application R&D certificate. 35

36 R&D / innovation incentives New 2012: 40% additional depreciation/deduction for R&D investments/expenses Deduction/depreciation of 140% of qualifying expenses or investments resulting in 10% reduction of net after tax cost (25% 15%). Again R&D certificate required. Additional deduction for R&D investments >1mio spread over 5 year period (20% per annum). R&D must must be carried out by the tax payer itself. Related to innovative technology. Examples: Testing materials / prototypes. R&D equipment / technical tools / ICT tools. R&D buildings and parts. Excluded costs: Salary costs (allready elegible for wage tax facility). Costs for outsourced work. Debt-financing. Depreciation. Land. Second hand assets. Practical: timely application R&D certificate. 36

37 Horizontal monitoring Main features: Agreement with the Dutch tax authorities to have an open working relationship based on mutual understanding, trust and transparency. Supported by C-level (tone at the top). Applies to all Dutch taxes. Requires a (sufficient?) tax control framework, regular system checks, timely compliance. Uncertain tax positions need to be shared upfront with the Dutch tax authorities resulting in regular open discussions with the Dutch tax authorities. Agree to disagree. Quick turnaround at the level of the Dutch tax authorities resulting in up to date and accurate tax positions. Less tax audits (unless due to ad random pre selection?). No obligation to participate in the horizontal monitoring program. 37

38 Depreciation of intra group loans Group loan or deemed capital contribution Depreciation of a group loan receivable is not possible in case the loan qualifies as: Deemed capital contribution; or Non-business motivated loan (new). Deemed capital contribution (case law; BNB 1988/217 and BNB 1998/2008) 1. The loan is a sham. 2. It is clear from the outset that the loan will not be repaid in full; or 3. The loan gives the holder an effective interest in the business of the borrower (hybrid loans). 38

39 Depreciation of intra group loans New: non-business motivated group loan (case law) Supreme Court decissions 9/5/2008 (BNB 2008/191) and 25/11/2011 (BNB 2012/37, BNB 2012/38 and BNB 2012/78). Consequence: No tax deductible depreciation of the nominal amount possible. However: arm s length interest remains taxable. Non-business motivated loans: Aside from interest % the loan is not possible with a third party under similar lending conditions and circumstances. If interest % is not arm s length: non business motivated loan in case adjustment of the agreed fixed interest to arm s length % results in a profit linked interest. Practical: the agreed lending conditions are important. Especially, the level of security provided by the borrower to the lender. Other: repayment schedule, written agreement etc. 39

40 Depreciation of intra group loans New: non-business motivated group loan (case law) The interest rate on non business motivated loans needs to be adjusted to an interest rate acceptable to a third party lender as if the actual lender acts as a guarantor, under otherwise similar lending conditions. No pro rata approach; to the extent a similar loan would have been possible. Business motivated loans can become non-business motivated. For example in case the lender does not take the appropriate measures in case the financial position of the borrower changes. The non-deductible depreciated loan amount increases the cost price of the subsidiary available for deduction at the moment of liquidation of the subsidiary/borrower (additional conditions need to be fulfilled). 40

41 Interest deduction: the never ending story? 2012: new rules for acquisition loans and fiscal unity Political aim to limited the possibilities of deducting interest expenses from the profit of target NL companies purchased by private equity ( grasshoppers ). NL parent Acquisition loans from group companies and third parties NL subs Fiscal unity 41

42 Interest deduction: the never ending story? 2012: new rules for acquisition loans and fiscal unity 2012 new rules for acquisition loans and fiscal unity (art. 15ad Wet Vpb): No limitation of interest expenses in case sufficient taxable base at the level of acquiring company/fiscal unity + 1mio (i.e. excluding profit from debt financed fiscal unity subsidiaries acquired after 14 November 2011 and foreign PE s). No limitation in case interest on acquisition loans below 1mio per annum. No limitation to the extent on average the d:e per individual share deal is below 40% equity and max. 60% debt in the year of the acquisition. Ratio lowered in 7years by 5% per year to 75% equity and max. 25% debt. Rules apply to both group loans and third party loans. Rules apply to all debt-financed fiscal unity companies acquired after 14 November 2011(overall method). Carry forward rules for non-deductible interest. In addition to already existing rules for group interest: Base erosion rules (10a Wet Vpb), low arm s length group loans (10b Wet Vpb) and thin cap rules (art. 10d Wet Vpb). 42

43 Interest deduction: the never ending story? 2013: new rules for Bosal interest Expectations for new rules?: NL parent Loans from group companies and third parties No general rules disallowing deduction of Bosal interest. Interest limitation for abuse only (i.e. intra group acquisition of a subsidiary financed with bank debt). NL subs NL subs Fiscal unity 43

44 Robert van den Tillaart Partner T: M: E: 2012 KPMG Meijburg & Co, Tax Lawyers is an association of limited liability companies under Netherlands law and is a member of KPMG International Cooperative, ("KPMG International"), a Swiss entity. All rights reserved.