Group Taxation: Use of Cross Border Losses in Tax Planning Base Case for Discussion

Transcription

1 Group Taxation: Use of Cross Border Losses in Tax Planning Base Case for Discussion US Group holds a profitable subsidiary in your jurisdiction ("Company A") and a loss making subsidiary in another European jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of Company A or on the level of US Group?

2 Group Taxation: Use of Cross Border Losses in Tax Planning Base Case for Discussion US Parent Company A (profitable) Company B (loss making) Case Study 1: Use of Cross Border Losses in Finland US Group holds a profitable subsidiary in Finland("Company A") and a loss making subsidiary in another European jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of Company A? What requirements and technical issues need to be observed in the various alternatives?

3 Case Study 1: Use of Cross Border Losses in Finland Options Transfer of Company B to Company A and forming a cross border consolidated group in Finland? Cross border merger? Making the business of Company B a branch of Company A? Use Company B as a finance company? Any other ideas? Forming of Cross-Border Group Intra-Group loss consolidation in Finland based on group contribution Deductible for the paying group company Taxable for the receiving group company Transfer of value Typically in cash or as receivable for the receiving company from the paying company Parent sub / sub parent / sub sub

4 Forming of Cross-Border Group Companies have to be Finnish Finnish PE s of foreign companies may qualify Two Finnish subsidiaries of a foreign parent company may qualify (DTC nondiscrimination rules) In 2007, Oy AA (C-231/05): Limitation to Finnish companies is acceptable Group contribution paid to foreign group company not deductible in Finland Outcome different from Marks & Spencer II (2005) Forming of Cross-Border Group Also the situation in Oy AA differed from Marks & Spencer: Not to cover final losses Group contribution from Finnish sub to UK parent Broad interpretation of Oy AA in Finland After Oy AA, deduction denied e.g. in a case where foreign company s losses were very likely to become final Group contribution to be paid by a Finnish subsidiary to a UK subsidiary No referral to ECJ re group contribution after Oy AA

5 Forming of Gross-Border Group Future impact of Swedish developments? Very similar group contribution regime New Swedish rules: cross-border group contribution may be deductible if given to cover final losses Requirement i.a. that given by parent to direct subsidiary No public Finnish cases in parent-to-sub, final losses situation Indications from non-public practice? Forming of Gross-Border Group Loss consolidation using group contribution from A to B not feasible Currently probably not even in case of final losses, but this position could be criticized Future developments Impact of the Swedish interpretation? 2011 referral of Finnish merger loss consolidation case to ECJ indication of change?

6 Cross-Border Merger Merging group company s losses may generally remain deductible by the receiving group company Only losses calculated according to Finnish tax laws The merging company has to be Finnish Or losses incurred in a PE in Finland Cross-Border Merger 2011 referral to ECJ (C-123/11) Merger of loss-making Swedish sub to Finnish parent Conditions for deductibility would have been fulfilled if the sub had been Finnish Operations in Sweden discontinued no PE left in Sweden Hence, losses become final Is the limitation to Finnish companies acceptable?

7 Cross-Border Merger Questions referred (C-123/11): Do Article 49 TFEU and Article 54 TFEU require that the acquiring company is entitled to deduct in its taxation losses incurred in previous years by a company merging with it, which has resided in another Member State where it has incurred the losses in connection with business activities, when the acquiring company will not have a fixed place of business in the resident state of the acquired company and when, under national legislation, the acquiring company is entitled to deduct the losses of an acquired company, if the acquired company was Finnish or if the losses had been incurred in a fixed place of business located in this state? If the answer to the first question is affirmative, do Article 49 TFEU and Article 54 TFEU have a bearing on whether the loss to be deducted is calculated in accordance with the tax legislation of the acquiring company's state of residence, or should the losses consolidated in the acquired company's state of residence be considered as the deductible losses? Cross-Border Merger Ruling may have a broader effect on loss consolidation rules Recflection e.g. to group contribution rules? A merger of B to A currently not utilizable in the case of A and B In future, subject to the ECJ ruling, crossborder loss consolidation by means of mergers may become possible in Finland

8 B Converted to Branch of A Profit / loss of a branch calculated as a part of the Finnish company Converting B to branch of A should allow consolidation of B s future losses Existing losses not consolidated in a transfer of business Not even if all parties Finnish Branch structure could work re future losses Existing losses could not be consolidated Finance Company Finnish authorities attitude toward thin capitalization has been fairly liberal Currently no specific thin-cap rules Rather high debt/equity ratios have been accepted if valid business reasons existed New thin-cap rules under preparation New rules likely implemented in near future The structure of the new rules still open

9 Finance Company Interest-related transfer pricing cases increasing General anti-avoidance provision Broadly applicable Solid business rationale necessary Losses and Change of Ownership Deduction right generally lost in case of change of majority ownership However, a permission to utilize losses may be granted, i.a., if Weighty reasons to grant the permission Illegal state aid? Permissions granted based on tax authorities discretion E.g. regional employment considerations qualify as weighty reasons Referred to ECJ (C-6/12)

10 Losses and Change of Ownership Questions referred in C-6/12 In the context of an authorisation procedure, such as that in Paragraph 122(3) of the Law on income tax, must the criterion of selectivity in Article 107(1) TFEU be interpreted as precluding the authorisation of the deduction of losses in the case of changes of ownership if the procedure referred to in the last sentence of Article 108(3) TFEU is not observed? In the interpretation of the criterion of selectivity, in particular in order to determine the reference group, is it necessary to take into account the general rule on the deductibility of established losses in Paragraphs 117 and 118 of the on income tax or the provisions concerning changes of ownership? If the criterion of selectivity in Article 107 TFEU is a priori regarded as being fulfilled, may the system resulting from Paragraph 122(3) of the Law on income tax be regarded as justified by the fact that it is a mechanism inherent in the tax system itself which is necessary for example in order to prevent tax evasion? When assessing possible justification and whether the system is a mechanism inherent in the tax system, what importance must be given to the extent of the discretion of the tax authorities? Is it necessary, as regards the mechanism inherent in the tax system itself, that the body applying the law has no discretion and that the conditions for the application of the derogation are set out precisely in the legislation? Case Study 2: Use of Cross Border Losses in the Netherlands US Group holds a profitable subsidiary in the Netherlands ("Company A") and a loss making subsidiary in another European jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of Company A? What requirements and technical issues need to be observed in the various alternatives?

11 Case Study 2: Use of Cross Border Losses the Netherlands Options Transfer of Company B to Company A and forming a cross border consolidated group in the Netherlands? Cross border merger? Making the business of Company B a branch of Company A? Use Company B as a finance company? Any other ideas? Case Study 2: Use of Cross Border Losses the Netherlands Cross border consolidated group not allowed under NL principles Provision for defined loss if liquidation subsidiary US Parent Company A (profitable) Liquidation distribution Company B (loss making)

12 Cross border merger: New rules on avoidance of double taxation pe-losses Only business in NL would decrease Dutch taxable profit No recognition existing losses Making branch of Netherlands company: New rules on avoidance of double taxation pe-losses Case Study 2: Use of Cross Border Losses the Netherlands Use Company B as financing company: Financing should be at arm s length Limitation on interest deduction if certain tainted transactions Thin cap provisions Other ideas: Transfer of assets to Company A (step up/depreciation)

13 Case Study 3: Use of Cross Border Losses in Germany US Group holds a profitable subsidiary in Germany ("Company A") and a loss making subsidiary in another European jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of Company A? What requirements and technical issues need to be observed in the various alternatives? Case Study 3: Use of Cross Border Losses Germany Options Transfer of Company B to Company A and forming a cross border consolidated group in Germany? Cross border merger? Making the business of Company B a branch of Company A? Use Company B as a finance company? Any other ideas?

14 Case Study 3: Use of Cross Border Losses Germany Option 1: cross border tax group no fiscal unity possible with foreign entities proposal for a EU-CCCTB has not been agreed on by Member States Bilateral project (Greenbook of February 2012)between France and Germany does not include X-border tax group (yet) Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger General remarks: Cross border merger possible between corporations within the EU Merger plan and documents to be prepared in accordance with the RU-Merger-Directive and the respective national laws Critical issue from a German perspective: Participation of workforce on board level

15 Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger Technical issues: Limitation of retroactive period depends on laws of the merging company's jurisdiction (outbound merger: 8 months) Final balance of company B according to German GAAP needed Note: Under German tax rules, outbound merger may be carried out at any value between book and fair value: losses may be used effectively (but subject to minimum taxation rules) Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger Remaining permanent establishment Sec. 2a German ITA: per-country limitation for the set-off of losses Exemption 1: losses resulting from "active" business in a foreign PE Exemption 2: losses from PE in another Member State

16 Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger Remaining permanent establishment (P): most tax treaties (incl. France, Finland and Netherlands) provide exemption method for PE profits Therefore, losses may not be set off from German profits either Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger Remaining permanent establishment Use of Final losses? only, if no abstract possibility of using losses in PE state If yes: deduction possible in Germany

17 Case Study 3: Use of Cross Border Losses Germany Option 2: cross border merger no remaining permanent establishment Transfer of function: most likely taxation of hidden reserves Possibility to set off losses in other MS? Case Study 3: Use of Cross Border Losses Germany Option 3: Making B a branch of A Outcome will be the same as in Option 2: Company B will become Permanent Establishment of company A, profits and losses would be exempt from German tax (except for countries with credit method)

18 Case Study 3: Use of Cross Border Losses Germany Option 4: using B as a finance company US Parent contribution of capital Company A (profitable) loan interest Company B (loss making) Case Study 3: Use of Cross Border Losses Germany Option 4: using B as a finance company (P 1) possibility to set off losses in the jurisdiction of company B? (P 2) interest must comply with transfer pricing standards (P 3) interest barrier in Germany must be observed (threshold: 3 million)

19 Case Study 3: Use of Cross Border Losses Germany Option 4: using B as a finance company Example: Net interest balance of company A before option 4 is zero Arm's length interest rate shall be 5 % 3 million of interest may be paid to company B without having to comply with interest barrier restrictions B would need 60 million cash from group company Case Study 3: Use of Cross Border Losses Germany Option 4: using B as a finance company Result: German withholding tax on interest payment ( %) But: exemption certificate may be obtained, if loan is not secured by German real property Company B may use tax losses of up to 3 million p.a. Tax advantage for A: approx p.a. Return for group company: approx %

20 Case Study 3: Use of Cross Border Losses Germany Other options? Other options of using cross border losses are difficult to accomplish (e.g.: transfer of intangible assets or relocation of management functions to company B will always trigger exit taxation in Germany) In the future, CCCTB may provide intraeuropean group taxation Case Study 4: Use of Cross Border Losses in France US Group holds a profitable subsidiary in France ("Company A") and a loss making subsidiary in another European jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of Company A? What requirements and technical issues need to be observed in the various alternatives?

21 Group Taxation: Use of Cross Border Losses in Tax Planning Base Case for Discussion US Parent Company A (profitable) France Company B (loss making) EU Case Study 4: Use of Cross Border Losses in France Options Transfer of Company B to Company A and forming a cross border consolidated group in France? Cross border merger? Making the business of Company B a branch of Company A? Use Company B as a finance company? Any other ideas?

22 Case Study 4: Use of Cross Border Losses in France Introduction France has a territorial system of corporate income taxation ( CIT ): French or non-french companies are subject to French CIT on income derived from any business carried out in France Therefore: No French CIT is imposed on business income derived by a French company from a foreign branch; Foreign source losses derived by a French company are not deductible in France Case Study 4: Use of Cross Border Losses in France Option 1 Transfer of Company B to Company A and forming a cross border consolidated group in France? Worldwide consolidated tax regime: optional regime repealed in 2011 Tax consolidation is only available among French companies and French PEs of non- French companies

23 Case Study 4: Use of Cross Border Losses in France Option 2 Cross border merger of Company B into Company A? (1/2) Company A would have a PE in State B as a result of the merger Losses realized by Company A in State B would not be deductible in France under the territorial system Case Study 4: Use of Cross Border Losses in France Option 2 Cross border merger of Company B into Company A? (2/2) Company B s losses cannot be transferred to Company A upon a cross border merger However, if Company B s losses are lost in State B as a result of the merger, such losses may be deductible in France based on the reasoning of the ECJ in the Marks & Spencer decision (to be confirmed)

24 Case Study 4: Use of Cross Border Losses in France Option 3 Making the business of Company B a branch of Company A? Same as merger : losses recognized by the branch would not be deductible against Company A s profits realized in France Case Study 4: Use of Cross Border Losses in France Option 4 Use Company B as a finance company? Financing should be at arm s length French thin cap provisions would be applicable to interest paid by Company A to Company B (60:40 debt equity ratio or 25% interest cover)

25 Case Study 4: Use of Cross Border Losses in France Other options If Company B has a debt towards Company A, Company A could forgive this debt Under certain conditions, Company B would recognize a loss in France to the extent of the amount of the waiver of debt Conditions for deductibility with respect to crossborder waivers of debt are the same as those applicable to waivers of debt to a French subsidiary, despite the territorial system. Case Study 4: Use of Cross Border Losses in France Other options (cont d) Condition 1 : The decision to grant and/or cancel a loan enables the French operations to receive directly an economic benefit, whether commercial or financial (French Supreme Court, February 11, 1994, Les Editions J.-C. Lattès)

26 Case Study 4: Use of Cross Border Losses in France Other options (cont d) Condition 2 : If the waiver of debt is driven by a commercial reason (for instance, Company B is the distributor of Company A s products), the debt waiver is fully deductible If the waiver of debt is driven by a financial reason (for instance, Company B is the subsidiary of Company A and is loss-making), debt waiver is deductible up to the amount of the negative net asset value of Company B Case Study 4: Use of Cross Border Losses in France Other options Debt waiver to a non-french branch : Even though there is no loan from a legal standpoint between the head office and the branch, the French Supreme Court accepted that a French company could deduct a debt waiver granted to a foreign branch Applicable only if there are business relationships between a French company and its foreign branch, not in case of pure financial relationships (French Supreme Court, May 16, 2003, Télécoise)

27 Case Study 5: Use of Cross Border Losses in USA US Group holds a loss making subsidiary in a EU jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of the US group? What requirements and technical issues need to be observed in the various alternatives? Case Study 5: Use of Cross Border Losses in USA US Group holds a loss making subsidiary in a EU jurisdiction ("Company B"). What options of restructuring are there to make use of Company B's losses on the level of the US group? What requirements and technical issues need to be observed in the various alternatives?

28 Group Taxation: Use of Cross Border Losses in Tax Planning Base Case for Discussion US Parent Company B (loss making) EU Case Study 5: Use of Cross Border Losses in USA Options Cross border consolidation of two corporations? Convert Company B into a branch? Use Company B as a finance company for US or international operations? Other options?

29 Case Study 5: Use of Cross Border Losses in USA Option 1 Cross border consolidated group in USA? Full tax consolidation is only available among US companies. Company B is a controlled foreign corporation of US Parent. Therefore, US Parent is generally taxed on Company B s Subpart F income on a current basis. Distributions paid by Company B are generally taxable to US Parent to the extent Company B has current or accumulated earnings and profits. Case Study 5: Use of Cross Border Losses in USA Option 1 Cross border consolidated group in USA? If Company B does not have current or accumulated earnings and profits as a result of its losses, US Parent would not be taxed on Company B s Subpart F income inclusions. However, exclusions resulting from the earnings and profits limitation would be recaptured in later years when Company B has earnings and profits in excess of Subpart F income. Lack of current or accumulated earnings and profits also generally allows for distributions to US Parent without immediate US taxation.

30 Case Study 5: Use of Cross Border Losses in USA Option 1 Cross border consolidated group in USA? If Company B s losses are related to Subpart F income-generating activities, subject to limitations, such losses could be used to offset future Subpart F income of Company B from the same qualified activity under the qualified deficit rule. Company B s losses that are related to Subpart F income-generating activities could also be used, subject to limitations, to offset Subpart F income from the same qualified activity of other controlled foreign corporations that are qualified chain members. In both the above cases, recapture is not required. Case Study 5: Use of Cross Border Losses in USA Option 2 Convert Company B into a branch by checking the box? US Parent cannot use the historic losses of Company B upon a conversion to offset US Parent s income. If Company B is insolvent for US tax purposes, the conversion, which may be effected by a check the box election if Company B is not a per se corporation, will result in either ordinary loss or capital loss. If the loss is ordinary, such loss generally may be used to offset the income of US Parent. If the loss is capital, the deductibility of capital losses may only be used to offset capital gains of US Parent.

31 Case Study 5: Use of Cross Border Losses in USA Option 2 Convert Company B into a branch by checking the box? Going forward, as a branch of the US Parent, the use by US Parent of new losses will be subject to the dual consolidated loss rules. Under the dual consolidated loss rules, subject to various exceptions, the losses of Company B cannot be used by offset the income of other members of US Parent s group or, absent an effective election otherwise, the US Parent itself. Case Study 5: Use of Cross Border Losses in USA Option 3 Use Company B as a finance company for US or international operations? Lending to US Parent (or guaranteeing debt of US Parent) would trigger Subpart F income generally to the extent of Company B s current or accumulated earnings and profits. In addition, US Parent s deduction could be limited by the earnings stripping rules. If Company B lends to a another foreign affiliate of US Parent, the foreign affiliate might be able to deduct the interest in its jurisdiction, while Company B shields the interest income from taxation in Company B s jurisdiction. However, similar results could be achieved through the use of other entities even if such entities do not have losses (e.g. through the use of Luxembourg finance companies). Furthermore, the interest earned on such loan could generate taxable Subpart F income to the US Parent.

32 Case Study 5: Use of Cross Border Losses in USA Option 4 Other options? If the worthless stock deduction is unavailable (because Company B is not insolvent), an actual sale of Company B can produce a capital loss. If US Parent wants to retain an interest in Company B, it could sell 21% or more of Company B (avoiding tax-free liquidation treatment), and check the box on Company B to be a partnership (assuming Company B is not a per se corporation), to produce a capital loss on its entire holdings. Sales to related parties must be analyzed carefully. The impact on US Parent s ability to use foreign tax credits should also be considered in analyzing various options. Thank You! Paul Doralt Firm: Dorda Brugger Jordis paul.doralt@dbj.at Lucie Vorlickova Firm: Vorlickova Partners office@vorlickova.com Lauri Lehmusoja Firm: Hannes Snellmann Attorneys Ltd lauri.lehmusoja@hannessnellman.com Sylvia Dikmans Firm: Houthoff Buruma s.dikmans@houthoff.com Wolf-Georg von Rechenberg Firm: CMS Hasche Sigle wolf-georg.vonrechenberg@cms-hs.com Nicolas de Boynes Firm: Sullivan & Cromwell deboynesn@sullcrom.com William Lu Firm: Latham & Watkins william.lu@lw.com