Situation before Tax Reform Act 2015/2016

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1 EMEA TAX NEWSLETTER Eighth Edition: Sept 2015 EMEA TAX NEWSLETTER Inside this issue: Welcome from Angelos Theodorou, EMEA Tax Committee Chairman Austrian Tax Reform Act 2015 Cyprus Tax Update 2 UK Research & Development UK Compulsory charge in England on single use carrier bags Welcome Dear Friends and Colleagues, This edition of our tax newsletter features articles across our region which includes tax updates and country specific topics such as the 2015 Austrian tax reform act, Cyprus new tax incentives package and updates in the UK on research and development expenditures, as well as the compulsory charge in England on single use carrier bags. I take this opportunity to remind you of our upcoming Annual EMEA Tax meeting which will take place later on this year on 30 th November at the Sheraton Amsterdam Airport Hotel. An exciting agenda has been put together and details on the meeting and other related information will be circulated by our executive office in the next coming days. I hope to see as many of you there as possible. As always, the tax committee is at the disposal of our members to offer guidance and assistance on any tax related matters as well as facilitate in connecting people to do mutual tax business together. Our contact details can be found on On again, many thanks to all our authors and all of whom have volunteered to contribute to the eighth edition of this newsletter as well as Tim Morris and Hayley Davies for putting it all together. Keep sharing tax news and send us your articles! Angelos Theodorou EMEA Tax Committee Chairman E: angelos.theodorou@euglobal.eu Austrian Tax Reform Act 2015 Changes in tax treatment of distributions at shareholder level On 7 July 2015 the Austrian Parliament approved the Tax Reform Act 2015/2016. A major change regards the abolishment of the current option regarding the tax treatment of distributions of retained earnings as repayment of equity or as current profit (dividends). Situation before Tax Reform Act 2015/2016 If sufficient equity and current profits were available, it was under the discretion of the shareholders to treat a distribution as repayment of equity or as dividends for tax purposes. Whilst dividends are generally subject to withholding tax of 25% (increasing to 27.5% for individuals due to Tax Reform Act 2015/2016), a repayment of equity for tax purposes is not subject to withholding tax, but reduces the basis of the shares (i.e. the book value) at shareholder level. If the basis turns negative, the respective negative amount is subject to 25% Austrian capital gains tax (increasing to 27.5% for individuals due to Tax Reform Act 2015/2016; Double Tax Treaties and domestic law could provide for reductions or exemptions in both cases). The repayment of equity requires sufficient tax equity in the distributing company which is to be shown in a separate equity account for tax purposes. Restrictions due to Tax Reform Act 2015/2016 Firstly it is necessary to mention that tax consequences of dividends and repayments of equity remain the same. The Tax Reform Act 2015, however, restricts the tax treatment of distributions as repayment of equity. Primarily and in any cases of doubt a distribution is to be treated as dividend out of current profits for tax purpose. In addition to the current equity account, the distributing company has to keep evident any stepup in the course of restructurings and internal financing. The amount of internal financing is the aggregated sum of gains or losses of the financial statements under Austrian GAAP over the years which has to be kept evident in the equity account for tax purposes in future. Additionally to the equity account for tax purposes, the account for restructuring has to keep evident the difference resulting from tax neutral restructurings after 31 May 2015, for which market values (amount of step up from book to market values) are reflected in accordance with Austrian GAAP. For the tax treatment of distributions of retained earnings, the following ranking has to be met: A distribution is primarily to be treated as a dividend out of current profits. The distribution qualifies as a dividend as long as the distribution amount is covered

2 EMEA TAX NEWSLETTER Page 2 by the amount of internal financing (aggregated sum of gains and losses of financial statements as mentioned before) of the distributing company. Hidden profit distributions always have to be treated as dividends. An ordinary reduction of nominal capital, however, will always constitute a repayment of equity. In case of a negative level of internal financing and positive status of equity at the same time, the remaining amount of distribution not covered from the internal financing account is treated as repayment of equity. If the distribution is neither covered by the level of internal financing nor by the status of equity but there is a positive status in relation to the restructuring account at the same time, distribution is treated as repayment of equity. If all tax accounts have a negative status, distribution is treated as a dividend. These changes are applicable for financial years starting after 31 July For distributions of retained earnings after 31 July 2015 it is not yet clear whether the date of signing of the shareholder resolution, the date of actual distribution or the distribution of retained earnings gained after 31 July 2015 is relevant for the entry into new tax regime. Tax guidelines concerning this matter are expected to be published in autumn Any questions? Do not hesitate to call us! We keep you well informed. Maukner Lukas Artus Stiege T: E: l.maukner@artus.at Austrian Tax Reform Act 2015 (cont.) Cyprus Tax Update Mariah Nicolaou Euroglobal S.E.E. Audit Limited Nicosia T: E: maria.nicolaou@euglobal.eu During July 2015, the Cyprus House of Representatives approved a new package of tax incentives, in an attempt to improve the attractiveness of Cyprus to international investors. 1. Land Registry duty Land registry duties were reduced by 50% for transfers of real estate that take place before the 31 December For those who paid VAT on their house purchase, no transfer fees are payable. This new law is applicable to all properties purchased before the 2 December Fees on property transfers from parent to child have been abolished. 2. Capital Gains Tax The new tax incentive approved provides for no capital gains tax to be paid on properties sold that were acquired between the date of enactment of this law and 31 December Compared to the 20% capital gains tax that is customarily payable on disposal of properties, this law is intended to help boost the construction industry of Cyprus which has been suffering significantly with the economic crisis. 3. Special Defense Contribution tax (SDC) For the first time the concept of a non-domiciled individual has been introduced to Cyprus tax law. Up to now SDC was paid on the rule of whether a person was a Cyprus tax resident or not (183 days rule). However, with this new law if a person who is considered to be a Cyprus tax resident can prove that he is not domiciled in Cyprus, he will no longer be liable to SDC. This effectively means an exemption from the current tax rates of SDC which are 30% on bank deposit interest, 3% on rental income and 17% on dividends received from a Cyprus company. The intention of this new law is to attract High net worth individuals to relocate to Cyprus, which is very likely, when considering that the main source of income of such individuals would be dividends which will no longer be taxable under SDC for non-domiciled persons, and as always will not be taxed under income tax either. 4. Notional interest The most important and positive change in tax law is the introduction of the notional interest deduction on new equity. As of 1 January 2015 and for duration of 1 year, this notional interest deduction can be set off against any income generated by the company during the specific tax year. The notional interest deduction will be equal to the interest yield of the 10 year government bond yield of the country in which the new equity is invested increased by 3% (the minimum rate being the yield of the Cyprus 10 year government bond increased by 3%). The bond yield is the one applicable as of 31 December of the tax year preceding the relevant tax year. New equity is considered to be any newly issued share capital and share premium, provided that it is paid in full either in cash or in kind. It is important to note that the notional interest deduction cannot exceed 80% of the taxable income of the company and, it cannot be brought forward to reduce taxes of future years. In addition to these laws it is expected that other laws and amendments to Cyprus tax law will be approved during the following next few months, including taxes on foreign exchange differences (all gains and losses, realized and unrealized, to be exempt from tax), changes in the group loss relief rule (not to be limited to Cyprus companies), increase of annual allowances for capital expenditure, etc. All of the approved laws, as well as the upcoming law changes, enhance the position of Cyprus as an international business center.

3 EMEA TAX NEWSLETTER Page 3 United Kingdom Research and Development ( R&D )- are UK companies claiming enough? H M Revenue and Customs ( HMRC ) published in September 2015 an update in respect of the R &D scheme that has proved very advantageous to many UK companies albeit many companies still appear reticent to claim and/or unaware of the potential tax relief/cash refunds they may well be entitled to R & D tax credits are a tax relief designed to encourage greater R &D spending, leading in turn to greater investment in innovation. They work by reducing a company s tax bill by an amount equal to a percentage of the company s allowable R & D expenditure, and in certain circumstances can lead to a repayment of cash over and above the corporation tax that would otherwise be payable. A company can only claim R&D tax credits if it is liable to UK corporation tax. There are three schemes for claiming relief:- The Small or Medium-sized Enterprise ( SME ) Scheme; The Large Company Scheme; and Research and Development Expenditure Credits.( RDEC ) Key points to note from the HMRC publication are that:- Since the R&D tax credit schemes were launched in up until almost 120,000 claims have been made and more than 11.4 billion of tax relief claimed By the end of 2013/14,more than different companies had made claims under the SME scheme since it was introduced, and over 7,800 companies under the large scheme The total number of claims rose significantly in 2013/14 with the number of SME claims up 21% The total amount of R &D support claimed rose to 1.75bn in 2013/14 (an increase of 380m for the previous year) with the new RDEC scheme costing 580m The total R&D expenditure against which claims were made amounted to 14.3bn (an increase of 7% from the previous year) R&D claims are mainly concentrated amongst companies with a registered office in London, the South East or the East of England. The Manufacturing, Professional Scientific and Technical and information and Communication sectors continued to have the greatest volume of claims. Overall at UNW we continue to proactively advise many of our clients on their R&D claims linking in with HMRC Incentives unit as needs be. Invariable once clients understand the R&D qualifying criteria and the tax (and cash) advantages of making claims then R&D ranks high up in their business priorities. Surprisingly many companies continue to overlook the relief, particularly in the Midlands/North of England. If any additional information/insight is needed into how any UK company could benefit from this relief then please contact David Ward. David Ward UNW Newcastle T: +44 (0) E: davidward@unw.co.uk

4 EMEA TAX NEWSLETTER Page 4 United Kingdom Compulsory Charge on Single-use Carrier Bags in England From 5 October 2015, all retailers in England with more than 250 employees will be required to charge for single-use plastic carrier bags. Smaller retailers don t have to charge but can do so on a voluntary basis. Whether or not a shop will charge for bags depends on the size of the company that runs the shop and not on the size of an individual branch. Where a shop is run as a franchise, it depends on the number of people employed by the owner of the franchise. There will be some exceptions: Paper bags; Shops in transit places such as airports, or on board trains, planes or ships; and Bags only containing certain items such as unwrapped food, raw meat and fish, prescription medicines, uncovered blades, seeds, bulbs and flowers or live fish. This is not an HMRC measure. However there are implications for VAT, Corporation Tax and Income Tax. Whether or not a VAT registered supplier comes within the scope of the compulsory charge, any amount charged for a bag is tax inclusive at the standard rate of VAT. For example, where a VAT registered business charges 5 pence, the taxable amount with be 4.17 pence and the VAT 0.83 pence. Suppliers using a retail scheme should ensure that VAT is properly accounted through their scheme. For Corporation Tax and Income Tax, receipts from the compulsory charge on single-use carrier bags should be brought into account in calculating trading profits. The government expects the proceeds to fund good causes in England and retailers will be expected to report on the number of bags given out and where the proceeds have gone. At first glance, we suspect many retailers will overlook these reporting requirements and could be faced with unsuspected financial penalties. Relief may be available where the normal charitable donations/gift aid rules are met. The scheme, with similar already in place across Scotland, Wales and Northern Ireland is estimated to benefit the UK economy to the tune of about 780m with up to 730m being raised for good causes whilst seeing a 60m saving in litter clean-up costs with a carbon saving of approximately 13m. Currently there is no exception for biodegradable bags and a review is underway with a report due to be published before October For a full overview of the legislation and retailers responsibilities, follow this link: Any queries? Contact UNW: Mark Hetherington, VAT partner. Mark Hetherington UNW Newcastle T: +44 (0) E: markhetherington@unw.co.uk

5 Contributing firms to this edition Austria: Artus Cyprus: Euroglobal S.E.E. Audit Limited United Kingdom: UNW LLP News distribution Keep sharing information with us by sending completed articles to our EMEA Executive Office, Hayley Davies at by December 1, 2015 for inclusion in the next edition. Disclaimer This newsletter has been prepared by independent members of BKR International for internal distribution within the association. The information contained within does not represent advice from either BKR International or any of its member firms, and should not be treated as such. Any information in this newsletter is not to be relied upon as an alternative to seeking an appropriate qualified professional opinion. BKR International is a leading global association of independent accounting and business advisory firms representing the expertise of 160 member firms in over 350 offices and 75 countries around the world.