CEE Tax Notes. Working cross-border* *connectedthinking. Country News. Issue No. 7/2 First Quarter Electronic Update

Transcription

1 CEE Tax Notes Working cross-border* Issue No. 7/2 First Quarter Electronic Update Country News Albania Azerbaijan Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania Macedonia Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Ukraine Uzbekistan *connectedthinking

2 PricewaterhouseCoopers Tax Contacts for CEE: CEE Tax and Legal Services Leader Russia (Moscow) Steven Snaith Tel: Fax: steven.snaith@ru.pwc.com CEE Tax and Legal Services Sales and Business Development Leader Hungary (Budapest) Martin Scott Tel: Fax: martin.z.scott@hu.pwc.com CEE Tax Notes Editor Hungary (Budapest) Tibor Torok Tel: Fax: tibor.torok@hu.pwc.com Albania (Tirana) C/O Rene Bijvoet (Serbia) Loreta Peci Tel: Fax: loreta.peci@al.pwc.com Azerbaijan (Baku) C/O Courtney Fowler (Kazakhstan) Movlan Pashayev Tel: Fax: movlan.pashayev@az.pwc.com Bosnia and Herzegovina (Sarajevo) C/O Ron Barden (Ukraine) Mark Davidson Tel: Fax: mark.davidson@ba.pwc.com Bulgaria (Sofia) Irina Tsvetkova Tel: Fax: irina.tsvetkova@bg.pwc.com Central Asia Cluster Kazakhstan (Almaty) Courtney Fowler Tel: Fax: courtney.fowler@kz.pwc.com Croatia (Zagreb) Iain McGuire Tel: Fax: iain.mcguire@hr.pwc.com Czech Republic (Prague) Stephen Booth Tel: Fax: stephen.booth@cz.pwc.com Estonia (Tallinn) Aare Kurist Tel: Fax: aare.kurist@ee.pwc.com Georgia (Tbilisi) C/O Courtney Fowler (Kazakhstan) Matthew Tallarovic Tel: Fax: matthew.tallarovic@ge.pwc.com Hungary (Budapest) Russell Lambert Tel: Fax: russell.w.lambert@hu.pwc.com

3 Editor s foreword The first three months of the year are usually busy in terms of the legislative work. This year the Governments have added several clarifications to the 1 January 2007 changes. In addition to these clarifications, proposed tax changes and tax reforms are also presented in the country chapters. Bosnia and Herzegovina describes the development in the VAT reverse-charge mechanism, tax incentives are discussed in Croatia, Czech Republic, Georgia, Latvia and Russia. Bulgaria, Estonia, Lithuania and Ukraine have concluded new Double Tax Treaties with countries outside our region. We are glad to report that Montenegro will honour all the Double Tax Treaties signed by the former Yugoslavia and the State Union. The Uzbek Government has also made significant steps to encourage foreign investors to invest in Clean Development Mechanism projects in Uzbekistan. Please note that recently our region was renamed to CEE, and therefore we use the CEE Tax Notes as a title for our publication in the future. Please also note that this publication is designed solely for information purposes. The descriptions of rules and regulations are given in brief and general terms only and should not be regarded as a substitute for professional advice. PricewaterhouseCoopers 1

4 Contents Albania Azerbaijan Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia Georgia Hungary Kazakhstan Latvia Lithuania Macedonia Moldova Montenegro Poland Romania Russia Serbia Slovakia Slovenia Ukraine Uzbekistan PricewaterhouseCoopers 2

5 Albania New changes on the minimum salary level of social and health contributions calculations In Albania, social security and health contributions are charged on a sliding scale related to a set minimum salary range. The Council of Ministers issued a new decision on 24 February 2007 changing this minimum salary range from ALL 14,000 ALL 65,700 (approx. EUR 113 EUR 532) to ALL 18,200 ALL 64,815 (approx. EUR 147 EUR 525). The minimum salary level applicable will depend on the industry sector and the category of employee (e.g., manager, qualified workers, unqualified workers). This law has caused extensive discussion amongst interested parties as to how the categories will be determined and how an entity s employees will be classified in the categories set out in the newly-issued decision. PricewaterhouseCoopers 3

6 Azerbaijan Social Insurance Liability of Foreigner Employees in Azerbaijan In the last two years, the Azerbaijan social security system and legislation have been subject to some significant reforms. One of the important aspects of the reforms was to bring a large community of foreign employees working in Azerbaijan into the social security net. Before 1 January 2006, foreign employees and their employers were not required to pay any social insurance contributions (SIC), unlike national staff. The changes made in the Social Insurance Law, driven by the State Social Insurance Fund (SIF), have made foreign employees equally liable as nationals to pay SIC. Currently, the employers of foreign employees are liable to pay 22% and the foreign employees 3% of gross salary. Although the SIF has officially announced that foreign employees paying SIC will be eligible to receive a pension from the Azerbaijan public funds after retirement, a number of conditions and bureaucratic barriers have been imposed. These will probably make the pension entitlement of foreign employees unattractive to pursue. As this requirement is relatively new, a number of unclear issues remain with regards to the application of SIC to foreign employees. So far the SIF has not been able to issue more detailed instructions as to how SIC would apply to foreign employees. Given the broad language of the law, it is possible for the SIF to interpret such unclear issues to their own favour, in particular given the absence of an effective appeal system for disputes. It is perhaps not surprising that following the adoption of the new requirements, the SIF sent audit notices to many companies with foreign staff and has started obtaining information about the number of expatriate employees and their salaries from the local tax authorities. At this moment, probably the most important issue is what constitutes income subject to SIC. The law broadly defines it as all income from Azerbaijan sources (except income explicitly exempt from SIC). The law does not further define what Azerbaijan source is, but it is likely that the SIF will adopt the same meaning that is in the tax law, i.e., income from employment in Azerbaijan. There has also been some controversy as to whether mandatory SIC must apply to foreign employees working for subcontractors under oil and gas production sharing agreements (PSAs). This issue was subject to lengthy disputes between the SIF and oil companies. As of 1 January 2007, the law was amended to exempt subcontractors foreign employees from mandatory SIC (although the SIF still claims that the year 2006 is open and should be subject to SIC). PricewaterhouseCoopers 4 It is inevitable that in 2007 and beyond we will see more developments in the regulations concerning the application of SIC to foreigners and more aggressive social insurance audits in practice. Corporate taxation Corporate tax The Ministry of Taxes has approved the new profit tax form and the reporting instructions for it. Double Tax Treaties The Double Tax Treaty between Azerbaijan and Finland signed on 29 November 2005 took effect on 1 January Investment incentives The President of the Azerbaijan Republic has issued a decree on special economic zones. This instructed the Cabinet of Ministers to prepare the draft text for a law on Special Economic Zones, draft regulations on and suggestions for favourable tax and customs regimes and foreign currency. The Ministry of Economic Development has been assigned to implement the state policy on the establishment and activity of special zones. Indirect taxation Excise duties The Cabinet of Ministers has introduced new excise rates for oil products manufactured and sold in Azerbaijan. The new excise rates are effective from 8 January Individual taxation Personal income tax The Ministry of Taxes has approved a new withholding tax report form for employment income. Social security The President of the Azerbaijan Republic issued a Decree concerning additional measures for improving the social protection of the population. The decree states the amounts of various social insurance allowances, e.g., allowances for age, disability.

7 Pensions The President of the Azerbaijan Republic increased the basic employment-related pension from AZN 40 (approx. EUR 35) to AZN 50 (approx. EUR 44) as of 1 February Legal and other developments Labour code Below follows some of main changes introduced to the Labour Code in 2007: If a national holiday falls in a vacation period, the holiday will not count as vacation time; Employees must be paid for unused vacation; and Staff reduction and dismissal on the basis of lack of professional skills may only be carried out with the approval of the company s trade union. Some foreign companies in Azerbaijan have recently been subject to inspections by the Ministry of Labour and Social Protection of the Population for compliance with work permit requirements. These inspections appear to ensue from recent statements made by various Azerbaijan Governmental bodies on the need to tighten work permit and labour control. The President of the Azerbaijan Republic passed a Decree increasing the minimum salary from AZN 40 (approx. EUR 35) to AZN 50 (approx. EUR 44) with effect from 1 February Other A new list of activities requiring special permits (licenses) has been issued and now includes various types of construction work. For some of the activities on the new list, the licence duty was increased. Azerbaijan PricewaterhouseCoopers 5

8 Bosnia and Herzegovina Reverse-charge mechanism Pursuant to the Bosnian VAT Act, in addition to the standard definition of a VAT payer, a person liable to pay VAT is a recipient of services purchased in furtherance of business purposes, if the provider of the services, not based in Bosnia and Herzegovina (BiH), has not appointed a tax representative. The Indirect Tax Authorities published an instruction in 2006 on the submission of VAT returns by recipients of services from persons not based in BiH and by contractors under the application of a special scheme for construction work in which domestic recipients of services provided by foreign companies are liable for the VAT due on the supply, rather than the supplier. The instruction stated that recipients of services, i.e., registered VAT payers, are obliged to submit the below together with a VAT return: The VAT payer is entitled to deduct the input VAT if the following conditions are met: an invoice has to be issued by a person established in a foreign country; the taxpayer (i.e., the service-recipient) has to calculate the amount of VAT on the invoice received; and the VAT has to be reported as part of the amount of output tax shown in the taxpayer s VAT return. Consequently, VAT payers that use the services of persons established in foreign countries and who are obliged to calculate VAT on those services, are allowed to include that VAT as both output VAT and input VAT in the same VAT return without making any cash payment. Thus from a non-reverse-charge system, Bosnia and Herzegovina has changed to a full reverse-charge mechanism. a report on the amount of input VAT paid on services purchased from a person not based in BiH, and deducted against total VAT for that tax period; and copies of payment slips for payments for VAT on services received from persons not based in BiH. In practice, this meant that when a registered VAT payer received a foreign invoice without VAT from a foreign legal entity for specific types of services listed in the Place of Supply rules, the domestic registered VAT payer had to calculate the VAT at the 17% rate. This VAT had to be paid in cash. The VAT payer had to submit the report and copies of the payment slips proving that the VAT on services provided by foreign companies had been paid with the VAT return for that period. Only the VAT on foreign invoices that had been calculated and paid before the VAT return was submitted could be included as an input VAT deduction for a given month. The major disadvantage of this approach was that businesses that were already in a net receivable position, i.e., which had previously incurred more input VAT than output VAT, were not able to offset this credit against the VAT to be settled relating to the above-mentioned foreign invoices. Starting from 5 February 2007, a new Rulebook on amendments of the VAT Rulebook came into force. According to this new Rulebook, a VAT payer using the services of a person established in a foreign country and therefore is obliged to calculate, report and pay VAT on the services received is also entitled to deduct the VAT calculated as input VAT. PricewaterhouseCoopers 6

9 Bulgaria Recent VAT changes Changes in the VAT Act On 13 February 2007, at the request of a group of members of Parliament, the Constitutional Court initiated a case to decide whether part of the 2007 State Budget Act, including a section which amended the VAT Act, was in breach of the constitution. The main changes to the VAT Act, which came into force on 1 January 2007, are related to: The definition of the place of supply of services in relation to the intra-community transport of goods; The rules on the date of the chargeable event for periodic and continuous supplies remain the same as in the repealed VAT Act; Abolition of the obligation to self-revise the return in which a refund claim is made for the VAT paid on excise goods that have been destroyed under administrative control under the Excise Duties and Tax Warehouses Act; and Supplies of goods and services related to construction, industrial, household and dangerous waste, as well as its extraction and processing. Changes in the Regulations for Application of the VAT Act Amendments to the Regulations on the Application of the VAT Act have been announced. Some of the main amendments are: The types of document required to exercise the right to VAT credits in cases of deemed intra-community acquisitions and acquisitions related to the actual receipt of goods; Recharges of services at cost between an entity and its branch established in another Member State are explicitly excluded from the scope of VAT; The tax base in currency exchange operations is defined; and A licence under the Energy Act is required to exempt the import of electricity or natural gas from VAT. The validity of permits for VAT incentives for big investment projects, issued in accordance with the VAT Act, is explicitly confirmed. The following amendments were introduced to the Regulations on the Application of the VAT Act: Expansion of the scope for rules on international transport; Changes in the treatment of forwarding, courier and postal services; Changes in the rules on documenting the annual adjustment of VAT credit; and Definition of the format of the VAT ID number for individuals other than sole traders. Pending changes The Council of Ministers has submitted draft amendments to the VAT Act and the Tax and Social Insurance Procedures Code to the National Assembly, which propose the implementation of: Longer tax audit periods; Bank guarantees for the timely refund of VAT; The tax authorities having the right to refuse VAT registration if certain related parties have unpaid VAT obligations; and The abolition of the tax administration s obligation to pay interest on the amount of VAT claimed as a refund and confirmed by a tax audit. Corporate taxation Double Tax Treaties In 2007, Bulgaria signed a Double Tax Treaty with the USA. The treaty provides exemption from withholding tax on dividends if they are paid to pension funds; 5% withholding tax if the shareholding exceeds 10%; and up to 10% in other cases. The maximum withholding tax on royalties is 5%. The withholding tax on interest is zero for interest payable to banks or on loans guaranteed or extended by public bodies, and up to 5% in other cases (10% in specific cases). Technical services fees are exempt from withholding tax. Gains from sales of shares are exempt unless the shares are in real estate ownership companies (with respect to Bulgaria) or if the holding period is less than 12 months. Profits realised by a US Branch of a Bulgarian company are exempt from taxation in Bulgaria. Underlying tax credit is available for profits distributed to US shareholders. The treaty is expected to come into force on 1 January PricewaterhouseCoopers 7

10 Croatia The new Investment Incentives Act On 1 January 2007, the new Investment Incentives Act was introduced. Amongst other, it included the following items: Investment incentives are usually organised as corporate tax credits. This means that tax rates can be reduced for up to 10 years if certain conditions are met. General incentives apply for profits earned by investors if these result from new investments with profiles as illustrated in the table below: Investment Tax rate Necessary Period amount decrease to employ Up to 10 50% 10 years EUR 1.5 million employees EUR 1.5 million 30 65% 10 years to EUR 4 million employees EUR 4 million 50 85% 10 years to EUR 8 million employees More than % 10 years EUR 8 million employees Tax benefits cannot exceed the investment amount. Employment benefits Non-refundable cash subsidies of up to 20% of justified costs related to the creation of workplaces (with a maximum subsidy of EUR 3,000) will be granted to companies that guarantee employment in areas where the unemployment rate exceeds 10%. The subsidy rate will depend on the unemployment rate in the area where the investment is made. Incentives for significant project investments Non-refundable cash subsidies of up to 5% of justified costs related to investment in significant projects (with a maximum subsidy of EUR 1 million) can be granted to companies that meet certain conditions. A significant project investment is defined as a major economic activity (such as the construction of a new plant or industrial facility), starting a new economic activity or a new technological development with an investment in assets exceeding EUR 15 million. At least 100 workplaces must have been created in the first year of the investment project. Indirect taxation Customs duties The Custom Law Amendments Act and the Regulation Implementing the Customs Act were introduced on 1 January The changes are part of the continuous process of the harmonization of the Croatian Custom legislation with EU Customs legislation, especially regarding electronic data exchange, customs procedure simplification and changes in Croatian customs transit procedure for the purpose of harmonization with The Implementation of the Community Customs Code and Common Community Transit System. This creates the basis for the future use of the electronic regulation of transit procedures (NCTS-New Computer Transit System), which is common in transit procedures between EU and EFTA countries. PricewaterhouseCoopers 8

11 Czech Republic Legislative developments in the Czech Republic Proposed changes to the Act on Investment Incentives The Czech parliament is currently discussing a proposed amendment to the Act on Investment Incentives which would implement new state aid rules adopted by the European Commission with effect from 1 January If approved in its current form, the amendment will introduce the following changes: The minimum level of investment required to receive state support would be reduced from the current level of up to CZK 200 million (approx. EUR 7.4 million) to CZK 100 million (approx. EUR 3.7 million), made within three years. At least CZK 50 million (approx. EUR 1.8 million) should be covered by the investor s own equity. This investment level will be the same throughout the Czech Republic. Only the cost of new machinery (produced no more than five years prior to acquisition by the company and not depreciated by the previous owner) can be included in the calculation of the minimum investment level and eligible costs. Intangible assets are eligible up to 50% of the value of tangible eligible costs. Only land, buildings and machinery located in the Czech Republic can be included in the minimum investment level and the calculation of eligible costs. Office equipment, furniture or other assets located abroad cannot be included. Machinery should represent at least 60% of the investment in tangible and intangible assets. It is expected that the current rule regarding high-tech machinery will be cancelled. Work on the investment project can start after confirmation is received from CzechInvest that the applicant is able to meet the general conditions for receiving an investment incentive. The assessment process of applications for incentives will be simplified. Investment incentives granted before the amendments come into effect will remain valid under the conditions under which they were granted. New decree with comments on the Income Tax Act The Ministry of Finance has issued new guidelines setting out its interpretations of several provisions of the Income Taxes Act. Although ministerial guidelines are not binding, Tax Offices generally assess tax in accordance with the Ministry s recommendations. In the event of a tax audit, many taxpayers have found it valuable to follow the tax treatment as described in guidelines. PricewaterhouseCoopers 9 The new decree replaces earlier guidelines and includes additional recommendations for the tax treatment of several activities not covered in the earlier decree. The new guidelines also incorporate the conclusions of the Coordination Committee of the Chamber of Tax Advisors as well as court rulings and decisions issued up to The new guidelines address areas of personal income tax, corporate income tax, and certain general income tax provisions applying to both. While focusing on income tax legislation, the guidelines also have certain VAT implications. Changes to the Labour Code relating to employee benefits are in effect The new Labour Code in effect from 1 January 2007 introduced significant changes concerning the option of providing various benefits to employees and the related tax implications of such benefits. Certain benefits that were previously treated as tax non-deductible for employers can now be treated as tax-deductible costs (e.g., loyalty bonuses, travel expenses over the statutory limit, other bonuses). However, this does not necessarily result in a more favourable situation overall for employers, as the conditions for the obligatory payment of personal income tax on income from dependent activity and social security and health insurance contributions relating to employee benefits were changed also (e.g., certain benefits-in-kind). The new rules affect salaries and benefits paid for January 2007 onwards, and thus we suggest that companies review their employee benefit policies as soon as possible to ensure that they remain tax-effective. Board members may be subject to health and social security contributions The Supreme Administrative Court has recently upheld an earlier ruling regarding the obligation, in certain circumstances, to pay Czech social insurance contributions on income paid to members of a company s board of directors, even though board members are not specifically listed as insured persons in Czech social security legislation. According to the court, the obligation to pay social security contributions arises in cases when an individual serves as a member of a board of directors in connection with his/her employment relationship. This can occur if the company s statutes stipulate that a particular board-member function can only be performed by a person in a specific employee position, or if Czech legislation stipulates this requirement, e.g., the Act on Banks. It is likely that the health insurance authorities will also require health insurance contributions for the individuals affected.

12 Estonia New Double Tax Treaty and VAT changes Double Tax Treaty between Estonia and Luxembourg The Double Tax Treaty between the Grand Duchy of Luxembourg and the Republic of Estonia was signed in Tallinn on 23 May 2006 and will become effective from 1 January The treaty is the first income tax agreement concluded between the two countries. With some divergences, the treaty generally follows the OECD model convention. For example, the treaty allows the source state to apply limited force of attraction in attributing profits to permanent establishments. The treaty sets a 5% maximum withholding tax rate on dividends if the beneficial owner of the dividends is a company (not partnership) directly holding at least 25% of the capital in the distributing company. A 15% withholding tax rate applies to other dividends. The treaty sets a 10% maximum withholding tax rate on interest. Certain interest, such as bank interest, is exempt. The treaty sets 10% and 5% withholding tax rates on royalties. The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment. It should be noted that, in many cases, withholding tax rates under Estonian domestic laws are more favourable than treaty rates. Under the treaty, Estonia will use the ordinary credit method to eliminate double taxation on income or capital that may be taxed in the other state. For dividends, the credit will also include the appropriate portion of tax paid on the underlying profits of the company paying the dividends, if the recipient company owns at least 10% of the voting shares in the company distributing the dividend. Luxembourg will generally use the exemption with progression and ordinary credit methods to eliminate double taxation. VAT changes affecting importers registered for VAT purposes in Estonia The Estonian Parliament has recently adopted changes to the Estonian VAT Act. Starting from 1 January 2008, importers registered for VAT purposes in Estonia will be able to account for VAT on imported goods, including capital goods, in their VAT returns. In order to qualify to use this VAT accounting scheme, the following requirements must be met by the importer before it submits the first customs declaration under the scheme: the importer has been registered as a VAT payer for at least 12 consecutive months; supplies taxable at 0% VAT represent at least 50% of the total supplies made by the importer during the last 12 months; the importer has been filing tax returns only by electronic means during the last 12 months; the importer has no overdue tax returns by the date of the transaction; and the importer has not had any unsettled tax liabilities during last 12 months and continues not to do so. In the case of imports of capital goods, the first three conditions are not obligatory but the tax authorities may require businesses to provide additional security. Businesses intending to use the opportunity must inform the tax authorities in writing. Following the first use of the scheme, the tax authorities will carry out monthly checks to ensure that the importer satisfies the above-mentioned criteria. PricewaterhouseCoopers 10

13 Georgia Customs duties in Georgia Customs tax (customs duty is referred to as customs tax in Georgia) is assessed on the declared customs value of imported goods, and is now regulated by the Georgian tax code. This covers goods which are not subject to zero rate customs tax (Georgia introduced reduced and zero customs tax rates from 1 September 2006). These include, for example, agricultural products, alcohol and construction materials. Importing these goods leads to import tax of up to 12% (some agricultural products are taxed at 5%). The Customs tax and customs administration fees are due at the time goods are imported, i.e., before customs clearance is obtained from the authorities. The customs value of imported goods includes the shipping and insurance charges incurred before the goods enter Georgian customs. The following goods are exempt from customs tax: goods for export; goods for re-export; goods in transit; goods intended for the official use of diplomatic representatives in Georgia; goods intended for oil and gas operations under the Law on oil and gas ; and imports of tobacco products and raw materials (except for the Trabzon type) until 1 January Corporate taxation Corporate tax Georgian tax legislation provides an incentive for individuals/legal entities engaged in agricultural production. Specifically, if the gross income of such individuals/legal entities does not exceed GEL 100,000 (approx. EUR 44,000), it is exempt from income/profit tax. PricewaterhouseCoopers 11

14 Hungary Minimum tax declared unconstitutional The provisions regulating the minimum tax payable on the expected income of companies were included in the current Act on Corporate Tax and Dividend Tax (CDTA). After several subsequent legislative amendments, the regulation came into force as of 1 January Following the introduction of the minimum tax concept, a number of petitions were lodged with the Constitutional Court, seeking the repeal of the statutory provisions on this new tax category. The Court discussed the issue on several occasions and finally ruled for the repeal of the provisions concerned at its session of February The petitions claimed that the provisions on minimum tax violated the principles of tax equity and the democratic rule of law and represented unjustified discrimination. The petitioners argued that loss-making companies were being treated as tax evaders without first being presumed innocent, and the new tax was to be used as a quasi-sanction, potentially disrupting such companies business operations and eliminating them as taxpayers. According to the commentary to the ruling, corporate tax is an income tax levied on the profits of corporate taxpayers, and legislators, when drafting the provisions on this tax, were required to meet the requirements of constitutionality set out in the Constitution and previous rulings of the Constitutional Court concerning tax equity. The Court ruled that the minimum tax failed to meet these requirements. The Constitutional Court found that the petitions were well founded and, with the dissenting opinion of two of the judges, repealed all of the statutory provisions on the minimum tax. Corporate taxation Corporate tax From 1 September 2006, a new type of profit tax, called Special tax, is levied at a rate of 4% on entities that are subject to corporate tax. Special tax is levied on the pre-tax profit reported in the financial statements, as adjusted by specific tax base modifying items but no tax incentives and loss carried forward can be deducted from the amount of the tax payable. The special tax base can be reduced by the part of income above acquisition cost, accounted by including repurchased own shareholdings, own shares, and internally converted investor units. The Special tax base may be reduced by the direct costs of research and development. These new provisions might also be applied in determining the surtax obligation for the tax year of Indirect taxation Customs duties The Export Control System (ECS) was introduced in Hungary on 1 March 2007 and the system will be PricewaterhouseCoopers 12 implemented in all Member States by 1 July The purpose of the ECS project is to enable customs offices, other governmental organizations and economic operators of the European Union involved in export procedures to exchange electronic messages in order to computerize the administrative flow of the operation. Until all Member States have joined the ECS, transitional arrangements will operate. During the transitional period, the third copy of a SAD or an Export Accompanying Document (EAD) can be used to certify that goods have permanently exited the territory of the Community. When the system is fully implemented, electronic export declarations will be accepted at all customs offices and SADs will be replaced by EADs. Authorized exporters will have the right to arrange customs clearances, including printing out the EADs at their own offices, after they have registered with the Customs Authority. Excise duties The amendment to the legislation clarifies that the production of goods that are not subject to a tax payment obligation and that have an alcohol content of over 1.2% (e.g., medicines, chocolates with alcohol content, perfumes), shall not be classified as an activity that may solely be conducted in a tax warehouse. Hungary is restricting the quantity of cigarettes that can be imported by private individuals arriving from Romania and Bulgaria until 31 December Environmental protection product fee A special exemption application can be filed by 30 June of the relevant year if the previous application for product fee exemption was rejected due to failure to observe the submission deadline, despite complying with the prescribed criteria for form and content. Individual taxation Social security All pensioners who have employment income became subject to the employee s 8.5% pension contribution as of 1 April This contribution entitles them to an increased pension after 365 insurance days. The rate of the rise is 0.4% of the monthly average base of the contribution. Additionally, as previously, all employed pensioners have to pay 4% health care contributions which entitle them to receive health care benefits. From 1 April 2007, an individual s close relatives (with the exception of children under age of 18) who are not entitled to social security services in their own right are liable to pay contributions that entitle them to itemised health care services. The contribution rate is 9% of the current minimum wage.

15 Kazakhstan Unified Registration System to be introduced Currently, legal entities and individuals in Kazakhstan have several different registration documents (obligations). For example, in addition to a national Identity Card, individuals will also have separate registration for tax purposes (a Tax Registration Number) and for pension obligations (a Social Identification Code). This causes inconveniences both for document holders and for entities using the data contained in the documents (e.g., it is necessary to fill in different data in various registers). Parliament has recently adopted a law that addresses this problem. The Law on National Registers of Identification Numbers, dated 12 January 2007, provides for the introduction of a unified Individual Identification Number (IIN) for individuals and a unified Business Identification Number (BIN) for legal entities, branches and representative offices. The BIN and IIN will be used for tax, customs, bank, licensing and statistical purposes etc. The procedure for obtaining BINs and IINs opens in August All entities must obtain BINs and IINs by August Indirect taxation VAT The list of leased fixed assets that can be imported into Kazakhstan exempt of import VAT has been updated to include various kinds of railroad carriages, (e.g., passenger, tanker, freight). Other taxes Subsurface use taxes On 24 January 2007, the Kazakhstan Government introduced unified rules for determining the base rate of signature bonuses (a special type of tax) for subsurface-use contracts. The base rates will be determined according to the reserves of a particular mineral deposit and its economic value. Legal and other developments Foreign currency regime Following the introduction of the new law on currency control, new currency control rules have been adopted effective from 1 January The rules are of a clarifying nature and do not affect the principles of currency control as set out in the previous legislation. Environmental law A new Ecology Code has been introduced effective from 23 January The Ecology Code consolidates the separate Acts that govern the protection of the environment, including the Law on Ecology Expertise, the Law on Protection of the Environment and the Law on Protection of the Atmosphere. Amongst other, the Code requires certain types of licenses to be re-issued during the year from the date the Code came into force (e.g., license for environment design, ecology expertise). Licensing A new law on licensing has been adopted effective from August The Law reduces the number of activities subject to licensing and introduces a one window ( one-stop-shop ) principle for obtaining a license. PricewaterhouseCoopers 13

16 Latvia Cross border group relief in Latvia About a year ago, European companies were eagerly awaiting the outcome of the Marks & Spencer case in the European Court of Justice (ECJ). The case was principally concerned with whether the parent company in a group of companies might use its foreign subsidiary s tax losses. The ECJ ruled in favour of the taxpayer, albeit with some provisos. In view of this ruling, the Latvian Ministry of Finance has incorporated similar group relief provisions into the Corporate Income Tax (CIT) Act. Conditions for cross border relief If a Latvian company wishes to claim a foreign company s tax losses, the following conditions must be met: The foreign company must be registered in a country with which Latvia has a tax treaty or in the EU/EEA; The foreign company must belong to a qualifying tax group under Latvian law, i.e.,: the parent company must directly or indirectly hold a 90% share in its subsidiaries; group membership must continue throughout the tax period; the tax periods of the companies seeking the tax relief must end on the same date; and the foreign company must recalculate its taxable income according to Latvian CIT requirements. The foreign company must have no tax arrears in its country of incorporation; The foreign company must be not be exempt from foreign CIT, nor eligible for a reduced rate or any other CIT relief; and The Latvian company must receive confirmation from the foreign tax authorities that: the foreign company is a member of the group; the tax losses were made in the tax period in which the group relief will be used; and the tax losses cannot be offset in subsequent or previous tax periods or used by another taxpayer in the foreign country. Latvian CIT provisions According to the ECJ ruling in the Marks & Spencer case, the parent company may use its subsidiary s tax losses if: the foreign subsidiary cannot use the losses in its country of residence; and the foreign subsidiary cannot transfer its tax losses to another group company in its country of residence. The key difference in Latvian law is that group relief is available to, for example, a Latvian fellow subsidiary and a subsidiary s subsidiary as well as to the parent company. Theoretically, this provision is very favourable for Latvian companies with related parties in other countries because the latter qualify as group companies that may use tax losses. Unfortunately, this provision may only apply in rare cases, i.e., when tax laws prevent a foreign company from transferring tax losses in its country of residence. Unlike the ECJ case, Latvian CIT law states that a Latvian company within a group may use losses made by a foreign member in the current year. The tax laws of nearly all EU/EEA countries contain very extensive group relief provisions and, along with Latvian CIT law, specify a period (five to ten years) within which qualifying tax losses may be used. The CIT Act permits Latvian companies to use foreign tax losses incurred in the current tax period only. Thus, a tax loss that a foreign company wishes to transfer to a Latvian company at the end of the above period (five to ten years) may not be used under Latvian CIT law. Each case should be judged on its own merits: Latvian companies will be able to invoke the relevant sections of the CIT law in very rare and special cases, subject to making preliminary enquiries into this matter. Corporate taxation Investment incentives The Taxation of Free Ports and Special Economic Zones Act has been amended with effect from 1 January Among other things, the amendments clarify state aid intensity levels and industries that are ineligible under EU law. Locating a business in a special economic zone (SEZ) or in a free port has therefore lost some of its former attraction from a direct tax perspective. On 21 December 2005, the European Commission passed the Guidelines on National Regional Aid for As a result of aligning the Taxation of Free Ports and Special Economic Zones Act with these guidelines, companies in the following industries will no longer be eligible for corporate income tax relief: transport; steel; man-made fibre production; agriculture; fishery; coal; and shipbuilding. Before 1 January 2007, aid intensity for Special Economic Zone companies or licensed companies did not exceed 50% of the total accumulated investment for large companies and 65% for small and medium companies, according to the definitions in EC Regulation 70/2001. From 1 January 2007, aid intensity is also capped by size, but the allocation is more detailed: 50% (large), 60% (medium) and 70% (small). Agricultural produce processors and retailers are governed by separate aid intensity rules. PricewaterhouseCoopers 14

17 A new rule has been introduced for large investment projects involving projected investment costs exceeding the LVL equivalent of EUR 50 million (approx. LVL 35 million). For these projects, the Cabinet of Ministers will decide on maximum percentages that a company s total accumulated direct tax relief in a tax period may reach in relation to its total accumulated investment: up to 50% for an investment project of up to EUR 50 million; up to 25% for that part of a project which is in the EUR million range; and up to 17% for that part of a project which exceeds EUR 100 million. If an investment project s costs exceed EUR 100 million and total direct tax relief exceeds EUR million, then implementing the project requires the European Commission s prior approval. Indirect taxation Natural resources There are amendments to the Natural Resources Tax (NRT) Act from 1 January 2007 specifying new taxable items and rates and a new procedure that applies when claiming natural resources tax exemption for waste packing. The NRT Act specifies new taxable items coal, coke and lignite which are taxable on their extraction. If documents accompanying these products state their heat value (GJ/t), the rate will be LVL 0.11 per GJ/t (approx. EUR 0.16), but if the heat value is not stated, the rate will be LVL 3 per tonne (approx. EUR 4.27). New rates have been set for accumulator batteries and accumulator banks from 1 January The Act rates this group per unit of weight, not as a percentage of the commodity price, as was the case previously. From 1 April 2007, NRT will be levied on organic solvents containing volatile organic compounds. Rates will range from LVL 0.01 (approx. EUR 0.014) to LVL 0.05 (approx. EUR 0.071) per kg and exemptions will also be available. The Electricity Tax Act came into force on 1 January 2007, with the result that electricity supplied to endusers and classified as 2716 in the EU Combined Nomenclature has become taxable at a rate of LVL 0.71 per MWh (approx. EUR 1.01). The tax is payable by organizations defined in the Electricity Market Act (including electricity producers, distributors and retailers) which supply electricity to end-users, and by autonomous producers defined in the law. The NRT Act provides 100% exemption (80% before 1 January 2007) if a company implements a voluntary waste packing management scheme. A waste packing management scheme means that either the company itself sets up and implements a waste management programme or it enters into a contract with a waste management company to manage waste packing on its behalf. This exemption has its restrictions, as companies may only invest in projects concerned with improving the environment. The amount of the exemption may be used to pay for a waste manager s services. If a company delegates its NRT obligations to a waste manager, then the manager must report to its contractors on how the programme is being implemented. Individual taxation Personal income tax Health, accident and life insurance premiums totalling LVL 300, approx. EUR 427 (previously LVL 180, approx. EUR 256) a year will not be subject to personal income tax in This limit now also applies to national social insurance contributions. In future, exemptions of up to 10% of gross qualifying salary will be available for endowment insurance premiums and contributions that an employer pays on behalf of employees to insurance companies and pension funds registered not only in the EU but also in the EEA (i.e., Iceland, Liechtenstein and Norway). Other taxes Other Amendments to the Taxes and Duties Act concerning penalties came into force on 1 January Previously, the penalty was 100% of the understated tax, irrespective of the level of understatement and the severity of the violation. The Act now prescribes the following penalty levels: If the tax charge for the period under review has been understated by up to 15% of the tax charge, there is a possible penalty of 30% of the total tax liability that should have been reported; if the understatement is more than 15% of the tax charge, there is a possible penalty of 50% of the total tax liability that should have been reported. If the revenue authorities find that the taxpayer has previously understated a tax charge, there is a possible penalty of 100% of the total tax liability that should have been reported. If a taxpayer that has already committed a repeat offence commits one or more similar offences within three years, there is a possible penalty of 150% of the tax that should have been reported for each of these subsequent offences. Latvia PricewaterhouseCoopers 15

18 Lithuania Tax changes in Lithuania Amendments to the Law on VAT On 1 January 2007 a consignment stock simplification became available which enables foreign suppliers to avoid VAT registration in Lithuania. According to the new Government Order No. 39 which came into force on 19 January 2007, under certain conditions the tax authorities are entitled to re-establish the taxable value of goods or services for VAT purposes. Increase of personal allowances From 1 January 2007, the basic tax-free personal allowance has increased from LTL 290 (approx. EUR 84) to LTL 320 (approx. EUR 93) per month. Insured income has also increased from LTL 1,212 (approx. EUR 351) to LTL 1,356 (approx. EUR 393), which affects retired persons and individuals with disabilities, and also increases the maternity allowance ceiling. Corporate taxation Double Tax Treaties Treaties with Bulgaria, Israel and Luxembourg became effective from 1 January PricewaterhouseCoopers 16

19 Macedonia Micro-companies in Macedonia A new definition of a micro-company for tax purposes was introduced with the latest changes in the Corporate Income Tax Law. Micro-companies will be taxed an annual lump sum on their annual revenues. The annual lump sum will be calculated on the basis of a micro-company s total revenues in the previous calendar year, as follows: for total revenues of up to the MKD equivalent of EUR 25,000, the lump sum will be the MKD equivalent of EUR 300; and for total revenues exceeding the MKD equivalent of EUR 25,000 but less than EUR 50,000, the lump sum will be the MKD equivalent of EUR 700. A micro-company is defined as a domestic legal entity that meets the following conditions for the previous calendar year: the entity has carried out economic activities, except banking, financial or insurance activities, or games of chance and entertainment games; it had up to nine employees; the overall revenues earned by the entity from any source do not exceed the MKD equivalent of EUR 50,000; the revenues earned from one buyer or person related to the buyer do not exceed 80% of total revenues; and all the participation rights in the micro-company are owned by no more than two natural persons. Corporate taxation Corporate tax Under the recent changes in the Corporate Income Tax Law, depreciation calculated on tangible and intangible assets cannot be included as expenditures in the tax balance for the period over which the assets are fully depreciated if such assets qualify for tax exemption because they were purchased from reinvested profit. Another new feature is that for banks and savings institutions, the tax base is fully decreased by the amount allocated as a statutory reserve for covering potential losses. This does not apply to insurance services, which tax base is decreased by up to 75% of the statutory reserve allocated for covering potential risks. Withholding tax Pursuant to the latest changes in the Corporate Income Tax Law, the withholding tax is not recognized as an expense for a tax purposes. Subsequently, it should be added back at the end of the year in the annual tax balance statement. PricewaterhouseCoopers 17 Legal and other developments Environmental law New changes and amendments have been introduced, providing new regulations on Environmental Protection Reports and the persons obliged to prepare them, the gathering and processing of information related to environmental protection, the list of environmental protection measures and cross-border environmental impacts. In addition, there are also changes in the section on licensing. The section of the Environmental Protection Law on fees has also partly changed. There are new regulations for cases when the fee is returned or when a company is exempt from paying the fee. In addition, there have been changes to the regulations on the fee for plastic products and packaging made of plastic mass, and the fee for the production of energy from fossil fuels. The new regulations were introduced in the section of the Environmental Protection Law that deals with the authorised bodies, inspection and control. The new amendments have widened the scope of activities of the State Environmental Protection Inspectorate, which now include approval for imports of new technology, checking that protection standards have been implemented, checking emissions of toxic substances, checking product packaging, checking waste treatment, checking exhaust gases etc. Infringements of this law will lead to increased fines and other penalties and sanctions such as suspension of manufacturing activity, full or partial closure of factories, confiscation of equipment or products which do not meet the criteria of this law etc. The State Environmental Protection Inspectorate will issue a decision with an explanation and the penalty for each infringement. Additionally, new fees for energy production from fossil fuels have been introduced. Consumer protection The Law on market inspection generally regulates the principles, organization and authorization of the market inspectorate and the inspection procedure. Other Company registration has been shortened to three working days in the changes to the One Stop Shop Law. A new Law on Technological and Industrial Zones was promulgated and replaces the former Free Economic Zone Law. The fee for obtaining an Attorney-at-law licence form the Macedonian bar has increased from EUR 1,000 to EUR 2,000.

20 Moldova Progress in the Moldavian legislation The Law on the organization and carrying out of tourist activity in the Republic of Moldova has been adopted. The Law sets out the principles of state policy on tourism, the organization and coordination of tourist activity and entrepreneurial activity, forms of tourism, the quality requirements for tourist services and the creation of national tourism areas. Additionally, compulsory travel insurance for tourists has been introduced. Insurance expenses are to be included in the price of tourist packages. The Law came into force on 2 February The Moldovan Government has adopted a strategy on the reform of the state regulatory framework for entrepreneurial activity and a plan for the implementation of the strategy. The strategy establishes the basis for improving the regulatory framework. This will be based primarily on the following components: a state policy regulating entrepreneurial activity; a stable public institutional system capable of supervising and coordinating the improvement of the entrepreneurial regulatory framework; and methods for evaluating and implementing new regulations. Additionally, the Government Decision provides that for every measure or group of measures within the entrepreneurial regulatory framework, guillotine laws will be adopted to facilitate the implementation of the reform. The Moldovan Government has adopted regulations on the use of apostilles in compliance with the convention on the annulment of the requirement for foreign official documents to be apostilled twice in order to be legally valid ( supra-legalised ). The use of single apostilles and their official recognition came into effect on 16 March (This is the date when the convention on the annulment of the supra-legalisation requirement of foreign official documents comes into force). PricewaterhouseCoopers 18

21 Montenegro News development in Montenegro Confirmation of the Double Tax Treaties The Montenegrin Ministry of Finance has confirmed that the new independent state will honour all the treaties signed by the former Yugoslavia and the State Union. Unification of the social security contribution regulation According to the Ministry of Finance agenda for 2007, the system of payment and collection of social security insurance contributions is to be unified by a single Law. Currently, separate laws regulate pension and disability insurance, health insurance and unemployment insurance. Draft Law on Customs Tariffs In April 2007, the Parliament of Montenegro adopted amendments to the Law on Customs Tariffs, which will bring about the implementation of a harmonized system in PricewaterhouseCoopers 19

22 Poland Taking advantage of economic growth In 2006 the Polish economy grew by more than 6%. Moreover, according to official and unofficial forecasts Poland is likely to repeat or even exceed that result in The Minister of Finance, Mrs Zyta Gilowska, has suggested that Poland should take advantage of this situation by cutting the social security contribution rates. In Poland, a high social security burden is one of the most significant causes of unemployment (it has fallen lately, but still stands high at 15%). Currently, the employee s share of the social security is 18.71% of gross salary, while the employer s share is in the range of 19.71% %. The Minister of Finance proposed that the employee s share should be cut by three percentage points from 1 July A further reduction would become effective from 1 January 2008; as a result the employee s contribution rate would be 13.71% of gross salary (five percentage points less than today), while the employer s contribution rate would be in the range of 17.71% % (2 percentage points less than today). The reactions to this plan have been quite sceptical. Economists have criticized it mainly because it would be financed from economic growth rather than spending cuts. The general public has also been reluctant to show enthusiasm, as a similar rate reduction plan was announced and then withdrawn in We hope to be able to report positively on this issue in a subsequent edition of CEE Tax Notes. Another important legislative initiative relates to VAT. Parliament has started work on the draft amendments to the VAT Law, which includes several advantageous solutions. One of them is the introduction of call-off warehouses, which would facilitate imports from the EU countries (i.e., transactions that are referred to in the VAT legislation as intra-community acquisitions of goods ). Another idea is to remove the 30% VAT penalty, which currently applies to taxpayers that have understated their VAT liability (the penalty is calculated on the difference between assessed liability and the liability declared). The draft amendments also include some controversial provisions, which may potentially impede the deductibility of input VAT in a number of situations. Furthermore, the draft widens the range of taxpayers so that managers and management board members with no employment contracts, for example, might be obliged to register for VAT. PricewaterhouseCoopers 20

23 Romania Leasing The harmonized VAT and customs legislation has introduced significant changes to the statistical and VAT reporting requirements, as well as the relevant customs regulations. Since the Accession of Romania to the EU ( Accession ), these changes have made an immediate impact on leasing operations carried out in Romania. As the Treaty of Accession ( Treaty ) did not contain specific provisions concerning cross-border operations commenced before Accession and due to peculiarities of the relevant Romanian legislation, companies with leasing operations faced many questions in relation to the indirect tax base. In order to address the questions raised by Romanian leasing companies, the Ministry of Public Finance issued an order stipulating the conditions under which leasing operations commenced before 1 January 2007 should be finalised after the Accession (1 January 2007). The order contains specific provisions in relation to the following: closing of leasing agreements in respect of goods with Community customs status; tax base for customs purposes; and mechanism for paying the related import VAT. Certain clarifications regarding the assessment of a permanent establishment are introduced (e.g., place of business, e-commerce) in accordance with the OECD Guidelines Withholding tax Dividends paid by a Romanian company to another Romanian company are subject to a 10% withholding tax, unless they qualify for exemption under the conditions set out by the Parent-Subsidiary Directive (e.g., 15% shareholding, 10% from 2009, and a minimum holding period of two years). Domestic legislation also follows the interpretation of the ECJ in cases Denkavit, VITIC Amsterdam and Voormeer regarding withholding tax applicable in case of a dividend, interest or royalties payment. In order to apply the withholding tax relief, the two-year holding period requirement must be satisfied at the date of the payment. Otherwise, the Romanian company will have to pay the withholding tax (if any) until the two-year holding period requirement is met. The Romanian company making the payment may request a refund of tax paid on behalf of a non-resident at the end of the two holding years. Corporate taxation Corporate tax Starting 1 January 2007, the un-depreciated accounting revaluations are taken into account for purposes of tax depreciation and taxable capital gains upon the sale of the asset. The revaluation reserve will then be taxed at the moment of utilisation (e.g., through increase of share capital, distribution of dividends, and offsetting losses). The revenues earned and expenses incurred in relation to transactions with derivatives are included into the tax base for profit tax purposes. The Romanian legislation follows the interpretation of the ECJ (e.g., Denkavit International BV, VITIC Amsterdam BV and Voormeer BV) in what constitutes a minimum holding period as provided by the Parent-Subsidiary Directive. Even though dividends from EU companies are subject to profit tax if received before the end of a two-year holding period, the taxpayer may re-compute its profit tax liability for the year in which the dividend was received and submit an amended profit tax return in the year the minimum holding period requirement is met. PricewaterhouseCoopers 21 Indirect taxation VAT Simplified VAT provisions will apply to certain construction-assembly work, including the following: construction and repair services of all types of buildings; electrical, sanitary installation and insulation works; finishing works (e.g., carpentry, painting, and flooring/inlaying). A new reporting period of three months during a semester (six months) can be applied in certain situations. Customs duties Starting 1 January 2007, a new criterion for exemption from the requirement to provide a bond as a guarantee for the payment of import duties ( import duties bond ) is enforced. Under the new regulations, the customs authorities may grant an exemption from the import duties bond for certain goods, such as goods placed under the Inward Processing Relief (suspension system), certain pharmaceutical products, organic chemicals, and mineral products placed under a bonded warehouse regime. The exemption from the

24 requirement to guarantee the payment of customs duties and VAT granted by the customs authorities before the Accession under the previous regulations will remain valid until the discharge of the duty-suspension customs regimes for which they were granted. Pursuant to the Treaty, Romanian companies are required to remove at their own expense any stock of agricultural products in excess of the average stock for previous years as determined by government decree. The deadline for reporting the surplus stock of sugar, sugar products and agricultural products (i.e., meat, processed meat, milk and dairy products, margarine, orange juice) was set for 15 March Conditions under which cross-border leasing operations commenced before the Accession can be discharged after 1 January 2007 have been established by an order of the Ministry of Public Finance and include the following: Leasing operations can maintain the customs regime / preferences (temporary admission with a total relief or import with exoneration from import duties) under which they were placed, if in view of the Accession the deadline for finalising the customs procedures is extended to the expiry date of the contract; For leased goods with Community customs status, no customs duties or compensatory interest amounts are due upon termination of the leasing operations by way of releasing the goods into a free circulation in Romania; For leased goods without Community customs status released for free circulation after the Accession date, customs duties are due at the rates stated in the initial customs declaration and computed on the residual value established under the leasing agreement, which cannot be lower than 20% of the original value. In addition, for goods which were subject to cross-border leasing, compensatory interest for the period starting from the Accession date becomes due; Persons registered for VAT purposes in Romania will not actually pay import VAT at customs, but will account for VAT in a monthly VAT return. VAT shall apply on the residual value; Excise duties, if any, will be payable according to the relevant legal provisions at the moment when the leasing contract was initiated (e.g., excise duties are computed at the entry value of the goods for leasing contracts initiated after 1 April 2005). Environmental tax In January 2007, the regulations regarding packaging and waste packaging were amended. In particular, the recycling targets for packaging materials for the period until 2013 were re-considered. Also, under certain conditions, companies can disregard wood packaging introduced to the market when computing the recycling target. Individual taxation Personal income tax If the buyer of shares in a non-listed or limited liability company is a foreign company, and the seller is a Romanian resident individual, the buyer has the obligation to report and pay the capital gains tax due by appointing a fiscal representative or agent in Romania. As of 1 January 2007, the withholding tax on interest income derived from term deposits in Romania no longer applies to EU residents (provided the EU residence is proved), irrespective of whether the deposits are made before or after 1 January Income from prizes will also include income generated as a result of promoting products or services through advertising. Income from gambling is defined as income obtained by participants from gambling activities carried out by any legal entity duly authorised to engage in such gambling activities. Romanian companies which benefit from the work carried out by expatriates from EU/SEE companies on a secondment basis should notify the Territorial Labour Inspectorate (ITM) and the Office for Labour Force Migration. In the event of an ITM inspection, these Romanian companies should also produce supporting documentation, consisting of the agreement with the EU/EEA home employer, the secondment letter, and evidence that the provisions of the Romanian Labour Code are being observed. Labour Code The National Collective Bargaining Agreement ( NCBA ) for the years has been published. New provisions include the following: Further details on the procedure for termination of employment on the grounds of lack of qualifications and capabilities have been included in the NCBA; The minimum indicative rates have been increased according to the employee s qualification, which results in a gross minimum salary between RON 440, approximately EUR 130 (for unqualified employees) and RON 880, approximately EUR 260 (for positions requiring a university degree); Romania PricewaterhouseCoopers 22

25 The NCBA may be renegotiated on an annual basis, at least in respect of the clauses concerning remuneration, occupational health and safety, professional training, benefits granted and the list of industry sectors in which collective bargaining agreements are to be concluded. The following EU Directives have been transposed into Romanian legislation: Act 467/2006 on employee reporting and consulting (transposing EU Directive 2002/14/CE); and Act 217/2006 on the establishment and functioning of Works Councils (transposing EU Directive 94/45/CE). Environmental law Further steps in the adoption of the EU regulations have been made by passing new regulations transposing the following EU regulations: Directive 96/62/EC of 27 September 1996 on ambient air quality assessment and management; Directive 1999/30/EC of 22 April 1999 relating to limit values for sulphur dioxide, nitrogen dioxide and oxides of nitrogen, particulate matter and lead in ambient air; Directive 2000/69/EC of 16 November 2000 relating to limit values for benzene and carbon monoxide in ambient air; Directive 2002/3/EC of 12 February 2002 relating to ozone in ambient air; Directive 2000/60/EC of 23 October 2000 establishing a framework for Community action in the field of water policy. In addition, new regulations on air quality and noise emission limits have been adopted. Romanian authorities will have to keep the European Commission informed on certain environment issues. Romania PricewaterhouseCoopers 23

26 Russia Recent changes in tax legislation Law No. 268-FZ of 30 December 2006 came into force from the beginning of The new law introduces some significant changes to the Russian tax system: It provides for the opportunity to deduct the cost of land plots for profits tax purposes. It obliges taxpayers with more than 100 employees to submit tax returns in electronic form (in the transitional period of 2007 the requirement is applicable to taxpayers with more than 250 employees). It provides for some benefits to individual taxpayers who sold shares before 31 December The other important action was the introduction of a list of tourist-recreation areas (special economic areas with favourable tax regimes) by the government on 3 February Corporate taxation Corporate tax From 2007 the cost of land plots purchased from state or municipal authorities and payments for the right to conclude a lease agreement for land plots from state or municipal authorities can be deducted for profits tax purposes. The cost of a land plot can be amortized evenly over the period defined by the taxpayer (but not less than five years). Or the taxpayer can deduct the cost from up to 30% of the profits tax base for the preceding reporting period until the full cost has been deducted. The deduction may be claimed after the date on which documents for state registration of land plot rights are submitted. The income from the sale of a land plot is defined as the difference between the sale price and residual value of the land plot. The loss on the sale can be amortized evenly during the remaining (unused) period of amortization. The new rules are applicable for taxpayers who conclude agreements on purchase of land plots or rights to lease during the period of 1 January 2007 to 31 December Investment incentives The Law On Special Economic Areas introduces tourist-recreation areas designated for the development and effective use of Russian tourist resources. In February 2007 a list of seven tourist-recreation areas was introduced by seven resolutions of the Russian government. These areas are located in: Maiminsky and Chemalsky regions of the Republic of Altai; Pribaykalsky region of the Republic of Buryatia; Altai region of Altai kray; Krasnodar kray; Irkutsk region; Zelenograd region of Kaliningrad territory; and Cities of Essentuki, Zheleznovodsk, Kislovodsk, Pyatigorsk, and Lermontov; Mineralovodsk region; and Predgorny region of Stavropol kray. Customs duties New Commodity Nomenclature of Foreign Economic Activity and a new Customs Tariff took effect from 1 January The reason for the amendments to these documents is the modification of the Harmonised System by the World Customs Organisation, upon which Russia has based its Commodity Nomenclature. New forms of Cargo Customs Declarations and Transit Declarations came into effect from 1 January In connection with changes in customs legislation on the methods of determining customs value, new forms of Customs Value Declarations and Adjustments to the Customs Value came into effect from 1 January The Russian government extended the validity of the 0% rate of import customs duty for certain types of technological equipment (approx. 700 commodity positions) until 30 June Excise duties Export duty on crude oil was reduced from USD to USD per ton and is applicable for February and March Individual taxation Personal income tax Individual investors will likely benefit from the Law published on 31 December which states that individuals who held securities for more than three years and sold them before 2007 have an unconditional right to claim the property deduction (i.e., may be exempt from taxation with respect to all proceeds from such transactions). Under previous legislation, the property deduction was, somewhat counter-intuitively, available only for taxpayers who were not able to provide documentary evidence of their expenses. Thus, PricewaterhouseCoopers 24

27 taxpayers who sold their shares in 2006 may have an advantage under the new ruling. Those who failed to get the property deduction in previous years may apply for a refund. It should be noted, however, that a refund claim should be made within three years of the tax payment. The benefit is short-lived, though, as from 2007 only actual expenses may be deductible from income from the sale of securities with no property deduction being available. According to the law mentioned above, during the period of March to December 2007 individuals may make so-called declaration payment with respect to understated income received before The declaration payment shall be made on the basis of a 13% rate. Individuals that make this payment shall be considered compliant with tax legislation. Legal and other developments Foreign currency regime From 1 January 2007 legislators have abolished the requirement to make payments in roubles only for transactions involving Russian domestic securities, if the parties to the transaction are a Russian resident and a non-resident. Therefore, as of the above date such payments may be carried out both in Russian roubles and in foreign currency. Major changes have affected the procedure for opening foreign bank accounts. Until 1 January 2007, in order to open a bank account at a bank located in an FATF (Financial Action Task Force) or OECD non-member state, a Russian resident was required to preliminarily register the bank account with the Russian tax authorities. From 1 January 2007, this requirement has been abolished. Residents may now open banks accounts at any foreign bank upon subsequent notification of the Russian tax authorities. From 1 January 2007 the requirement for Russian residents to convert a portion of their foreign currency earnings into roubles was abolished. While the new rules have abolished most of the currency control restrictions, certain other requirements still remain valid. Set forth below is a list of some currency control requirements that are still applicable and which should be taken into account when performing currency transactions in Russia: Russian companies are required to collect all currency earnings from foreign trade transactions in their bank accounts in Russia ( repatriation of currency earnings ). Russian residents which are legal entities are required to formalize deal passports with Russian banks in connection with foreign trade transactions and loan agreements with non-residents. Currency transactions between Russian residents are prohibited (with some exceptions). Russia PricewaterhouseCoopers 25

28 Serbia CEFTA As of 1 January 2007 CEFTA consists of the following parties: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Montenegro, Romania, Serbia and UNMIK Kosovo. Till date only Macedonia and Croatia have signed a Stabilization and Association Agreement with the EU. A regional Free Trade Agreement (FTA), which was signed on 19 December 2006 in Bucharest under the CEFTA umbrella, should create a single market in this region, enable diagonal accumulation of the origin of goods, unify rules of arbitration and increase the level of intra-regional sales. This FTA should replace a network of 32 bilateral FTAs currently in force between the listed parties. Additionally, it should also be the first step for all the parties concerned in their accession to the Pan-Euro-Med system of origin. One of the most important benefits that a regional FTA will bring to this market is diagonal accumulation of origin and abolishment of the no drawback rule in the trade between parties. Effectively, this means that flow of goods, originating in FTA countries for the purpose of processing and final consumption, will be enabled without payment of customs duties in the countries of import. For example, semi-completed products originating in Albania will be imported in Serbia duty free, partially processed, and further exported to Croatia duty free. However, certain imperfections of bilateral FTAs, which should be replaced by CEFTA, have been transferred to this regional FTA. This relates mostly to the lists of sensitive products which remain subject to duties. These lists mainly encompass agricultural products and will have bilateral effect. It should be noted that prior to ratification, the regional FTA will have no effect. Signatory parties agreed that CEFTA should be ratified locally by the end of June Effectively, this date represents a deferred deadline for resolving the remaining problems (Serbia wishes to protect tobacco investors by imposing high duty rates on imports of tobacco from Croatia. Similarly, Bosnia will impose high duty rates on meat and dairy products originating in Serbia and Croatia). Consequently, the process still needs to be monitored closely. Before ratification, bilateral FTAs are fully applicable. Individual taxation Personal income tax By 15 March 2007 taxpayers were liable to pay annual personal income tax for Individuals required to submit annual returns were Serbian tax residents whose worldwide net income was higher than: Serbian citizen: RSD 1,142,820 (three times the average annual salary approx. EUR 14,197); and Non-Serbian citizen: RSD 1,904,700 (five times the average annual salary approx. EUR 23,661). Personal deductions and allowances that applied to both Serbian and foreign citizens for the purposes of determining annual personal income tax were: In the case of the taxpayer: RSD 152,376 (40% of the average annual salary approx. EUR 1,893); and In the case of dependent family members: RSD 57,141 (15% of the average annual salary per dependent approx. EUR 710). Other taxes Property taxes With effect from 1 January 2007, the Law on Financing Local Authorities establishes fiscal decentralisation in which larger budgetary funds will be approved to poorer municipalities at the expense of the richer ones. According to the Law, property taxes are the source of income for local authorities, which will individually set the tax rates up to the threshold regulated by the proposed amendments to the Property Tax Law. Legal and other developments Foreign currency regime National Bank of Serbia (NBS) adopted a Decision on the terms and conditions under which Serbian residents, both legal and physical persons, may be allowed to hold foreign currency on a bank account abroad. The Decision pertains to residents that are seeking professional improvement or education in a foreign country. In addition, with permission from the NBS, physical persons could open a bank account abroad in order to pay for accommodation and health care PricewaterhouseCoopers 26

29 services, as well as to gain settlements following judicial verdicts. Legal entities are also allowed to open bank accounts abroad after obtaining the NBS s consent for the following purposes: for conducting of construction works abroad; financing of branches; put down guaranteed deposits; conduct research; and run certain credit transactions with foreign countries. New Securities Law The new Securities Law sets out that only professional investors can participate in a closed issue of shares in public joint stock companies and that the Serbian Government shall regulate the manners and criteria used for determination of professional investors. Finally, in February the Decision on the manner in which professional investors status will be determined and more specific criteria were adopted by the Serbian Government. The request for determination of the status of a professional investor is to be submitted to the Securities Exchange Commission (SEC). Financial institutions (banks, insurance companies, etc.) and other legal entities, when submitting request for the determination of the status of a professional investor, should meet following criteria: have assets in excess of EUR two million according to the latest annual financial report; have capital in excess of EUR 200,000; perform business activities in the financial market for a period of at least 12 months prior to submitting the request to the SEC; and have performed minimum 10 transactions every three months during the most recent year. The value of transactions should exceed EUR 50,000 over a three-month period. In addition, the SEC shall also grant the status of professional investor to other legal entities for a period of one year and limited to one investment, provided that the following criteria are met: have assets in excess of EUR 5 million according to the latest annual financial report; have capital in excess of EUR 500,000; and over a period of three years, have undertaken a business activity identical to the business activity of the company which securities it is purchasing. Additional approval of the SEC, in this later case, is needed for any additional investment of other legal entities. Serbia PricewaterhouseCoopers 27

30 Slovakia New amendments to the Labour Code and the Commercial Code A new amendment to the Slovak Labour Code was prepared and is in the process of being discussed by Parliament. Whilst there are likely to be further changes, some of the key proposed amendments are: Employment activities will be more clearly defined. This could lead to some individuals currently working as contractors being reclassified as employees. Up to now, the Slovak authorities have not paid a great deal of attention to this issue. However, this looks likely to change, and individuals who now work as contractors but are, in substance, carrying out the role of employees may become entitled to the same protection under the Labour Code as applies to employees. This could also lead to changes in the way these individuals are treated for tax and social security purposes; The maximum amount of compensation payable by an employee for damages he caused should increase from three times to four times the average monthly salary; The possibility to conclude an agreement on labour activity for a maximum of ten hours a week should be re-introduced; Additional remuneration for working in an environment harmful to human health should be 20% of the Slovak minimum salary; Rules covering working at home and telecommuting are being introduced; The distribution of working hours should be further regulated. This could reduce the amount of overtime an employee is permitted to work over certain periods; and The minimum salary of employees whose remuneration is not agreed in a collective agreement should be at least a specified minimum monthly salary for the degree of difficulty of the work. A new amendment to the Slovak Commercial Code was also approved by Parliament. Under this amendment, the share capital of a limited liability company and of a cooperative can be stated and paid in euros, rather than only in Slovak crowns. For a limited liability company, the minimum share capital is EUR 5,000; for a cooperative, it is EUR 1,250. PricewaterhouseCoopers 28

31 Slovenia Interest on inter-company loans Up to 2007, interest on inter-company loans between related entities was defined as: the interest rate on treasury bills in the secondary market, for loans of up to one year inclusive; the interest rate on state bonds in the secondary market, for loans over one year; and the interest rate on German government bonds, for all cross-border loans (BUND). However, amendments to the transfer pricing provisions in the new legislation show a trend towards implementing transfer pricing practice from other European countries, such as the Netherlands. Accordingly, a reference interest rate is the sum of the variable part of an interest rate and a fixed mark-up, expressed in basis points. One basis point is equal to 1/100th of 1%. The variable part of the interest rate is defined according to the official values of interest rates on the first day of the current month at which banks offer loans to other banks with a maturity of 12 months, or other suitable maturity, e.g., three months (EURIBOR, LIBOR-USD, LIBOR-JPY, LIBOR-GBP, or LIBOR-CHF). The mark-up consists of two parts: one related to the maturity of the loan; and the other related to the credit rating of a borrower that receives a loan. The following mark-ups are determined for particular maturity period: Up to 1 year 0 basis points; Up to 5 years 3 basis points; Up to 10 years 5 basis points; and More than 10 years 6 basis points. The mark-up depends on the credit rating of a borrower that receives a loan from a related party or gives a loan to a related party. Credit ratings assigned by the credit rating agency Standard & Poor s, or some other agency whose credit ratings can be converted to Standard & Poor s, are as follows: from AAA to A- - 5 basis points; from BBB+ to B basis points; under B basis points; and if a tax payer does not have a credit rating 100 basis points. PricewaterhouseCoopers 29

32 Ukraine Ukraine and Cyprus to conclude new tax treaty On 21 February 2007, the Cabinet of Ministers of Ukraine authorised the Ministry of Finance to sign a new tax treaty with Cyprus. According to the official explanation provided by the Cabinet of Ministers, the existing treaty encourages tax avoidance and the outflow of capital from Ukraine to Cyprus. The existing treaty was inherited from the USSR and exempts dividends, interest and royalties from withholding tax. The new treaty introduces withholding taxes at the following rates: 5% on dividends if the beneficial owner is a Cypriot company that directly owns at least 25% of the Ukrainian company. Otherwise, a rate of 15% will apply to dividends; 10% on interest; and 10% on royalties. It is possible that the new treaty will come into force on 1 January next year. Corporate taxation Corporate tax From 1 January 2007, companies deriving more than 90% of their income from dividends are no longer required to pay the 25% advance corporate tax when they make dividend payments. Withholding tax From 1 January 2007, the tax on payments to non-resident insurers or re-insurers that are not included in the official list of qualifying companies has increased from 3% to 12%. The tax is charged on the Ukrainian entity that pays the foreign insurer or re-insurer. Indirect taxation Customs duties From 1 January 2007, the annual license fees for the production, export and import of spirits were reduced from UAH 25,000 (approx. EUR 3,800), UAH 85,000 (approx. EUR 13,000) and UAH 170,000 (EUR 26,000) respectively to UAH 780 (EUR 120). However, the excise duty rates on alcohol and tobacco were increased by between 25% and 30%. The annual license fees for the wholesale of spirits were also increased from UAH 85,000 (approx. EUR 13,000) to UAH 500,000 (approx. EUR 76,200). PricewaterhouseCoopers 30 Individual taxation Personal income tax From 1 January 2007, the personal income tax rate increased from 13% to 15% (from 26% to 30% for non-residents). In addition, several measures broadened the personal income tax base: Revenues from the sale of real estate (including incomplete developments) is now subject to tax at either 0%, 1% or 5%, depending on the nature of the real estate and the number of real estate sales undertaken by the same taxpayer during the calendar year. The tax is based on either the price indicated in the sale agreement or the property s value calculated by the authorised state authority, whichever is the higher. The tax has to be paid before the sale agreement is notarised. If the deal is not executed, the tax paid will be refunded to the taxpayer through the taxpayer s annual tax return. Gross revenue from the sale of movable property is subject to tax at the standard rate (15%). As an exception, one sale per calendar year of a car, motorcycle, yacht or boat with an engine will be subject to a lower 1% rate, provided the seller pays the state (stamp) duty before the sale agreement is notarised. The state duty is 1% for sales to a spouse, parent or child, and 5% in other cases. Income received as an inheritance or gift is subject to tax at the following rates: 0% if received from a spouse, son or daughter, parent, parent-in-law, or a spouse s children; 5% if received from resident testators other than those stated above; 15% if received from a non-resident testator, irrespective of the relationship with the testator. Social security From 1 January 2007, the employer s pension fund contribution increased from 32.3% to 33.2%, while employer s social security fund contributions decreased from 2.9% to 1.5%. Contributions are capped on the basis of a maximum income of 15 minimum wages (UAH 7,875, approx. EUR 1,200 for the first quarter of 2007; UAH 8,025, approx. EUR 1,220 for the second and third quarter of 2007; and UAH 8,220, approx. EUR 1,250 for the fourth quarter of 2007). Legal and other developments Pension fund charges over currency purchase From 1 January 2007, the pension fund charge on sales and purchases of foreign currency through a bank was reduced from 1.3% to 1%.

33 Uzbekistan Clean Development Mechanism projects Uzbekistan is a party to various bilateral and multilateral international environmental protection agreements, including the Kyoto Protocol to the United Nations Framework Convention on Climate Change. Under this Protocol, Uzbekistan qualifies for carbon credits which can be earned for the reduction of carbon gas emissions as a result of special ecology and energy economy projects. These carbon credits can be sold to countries with excessive carbon gas emissions. Following a President s Resolution enacted in December 2006, a series of measures were developed by the Uzbek Cabinet of Ministers in early 2007 aimed at reducing carbon gas emissions, including attraction of foreign investment and modern technologies. There is a standard procedure for companies to develop and implement Clean Development Mechanism (CDM) projects, involving the submission of a project application with a detailed description/study of the project, and technical documentation at a later stage (if the application is accepted). The application is to be considered by the special CDM committee at the Uzbek Cabinet of Ministers. According to the President s Resolution, foreign companies making direct investment in the CDM projects would be exempt from paying Uzbek corporate income tax in respect of revenues they receive from such projects. PricewaterhouseCoopers 31