INVESTMENT AID IN EUROPE MARCH 2014 POLICY UPDATE

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1 INVESTMENT AID IN EUROPE MARCH 2014 POLICY UPDATE H I C K E Y & A S S O C I AT E S SITE SELECTION, INCENTIVES AND WORKFORCE SOLUTIONS

2 INTRODUCTION As the world recovers from the economic downturn, businesses in Europe have found a dynamic environment of policies dealing with economic development and investment aid. In the following report, Hickey & Associates discusses a number of these specific policies throughout the European Union, including an update on the Regional Aid guidelines set to come into effect on 1 July About Hickey and Associates Hickey & Associates, LLC, is a global site selection, public incentive advisory and workforce solutions company. The Firm specializes in market location, site selection and public/private partnerships with active projects in the Americas, Asia, Europe and Africa. Utilizing state-of-the-art tools and techniques, H&A assists businesses in determining the best location to expand, relocate or consolidate anywhere in the world. Our experts are based in key strategic markets to maximize your business goals with enhanced local knowledge and client service. For nearly 30 years, H&A has been assisting companies to locate, finance and operate their business. H&A London Office +44 (0) th Floor, Rex House, 4-12 Regent Street LONDON SW1Y 4PE

3 EUROPEAN UNION INVESTMENT AID UPDATE NEW REGIONAL AID GUIDELINES Following a comprehensive review of the policies dictating investment aid, the European Commission (EC) approved a new set of guidelines for Regional Aid in These new guidelines will come into effect on 1 July 2014 for all European Union (EU) Member States. In brief, below are key policies set forth in the revised Regional Aid guidelines: The overall share of EU population in affected regions increases from 46,1% to 47,2%. Simplified and improved process for certain projects. More aid measures will be exempted from additional scrutiny. Smaller aid amounts with limited administrative burden. Extra attention on large aid measures, including a further in-depth assessment focusing on the following: Incentive effect; Proportionality; Contribution to Regional Development; and, Effects on Competition. Revised investment aid intensities for certain regions. Unchanged for the least developed regions of EU. For other assisted regions, slightly lowered by five (5) points. Anti-Relocation language strengthened for projects receiving aid consideration. Increased levels of transparency and accountability. Member States must publish aid measures on central website, and maintain posting for at least ten (10) years. Regional Aid Coverage by EU Member State % Pop. in a % Pop. in PD c % Pop. in NPD c Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden UK

4 Bulgaria President Rosen Prevneliev used his veto power for the third time in November 2012 to strike down amendments to the Investment Encouragement Act. These amendments would allow a foreigner to receive Bulgarian citizenship if they had been a permanent resident for over a year and had invested over BGN 1 million in a Bulgarian company. President Prevneliev believed that the requirements to receive permanent residency were too complicated and would actually pose additional obstacles to foreign investors. include the City of Vukovar, Central Croatia, Eastern Croatia, and the coastline. Denmark Cyprus Several new tax incentives went into effect in the second half of 2012 in Cyprus and businesses began to realize these benefits. A big push has been made to increase the ownership of Intellectual Property (IP) in Cyprus and now 80% of any income generated from IP owned by a Cypriot resident company will be exempt from income tax is also the last year to acquire machinery or property that may be eligible for accelerated depreciation for tax purposes. Depreciation of 20% per year, increased from 10%, may still be claimed and industrial buildings and hotels can accelerate their depreciation at 7% per year as opposed to 4%. The ultimate beneficiary must be Cyprus resident shareholders. Denmark s energy policy targets a 100 percent renewable portfolio by no later than 2020, which includes transportation. To help facilitate this goal, Denmark announced in July of 2013 a pool of DKK 500 million per year, until 2020, to help subsidize energy optimization projects. The possible subsidy is 45%-65% of investment costs. The support per project may not exceed EUR 7.5 million and no other operating support may be received for the project. Czech Republic Finland In December of 2012, the Finnish Parliament passed a new tax incentive for business angels. A private investor may now deduct 50% of investments made in the share capital of the qualifying company from his or her annual capital income, ending in Eligible investors must be a Finnish natural person and a resident for tax purposes. The investment must be less than 50% of the share capital in the target company. The incentive is capped at EUR 75,000 per investor. France Businesses in the Czech Republic began to take advantage of a new investment promotion scheme that was signed into law in July of Now corporations can enjoy up to 10 years of corporate income tax relief, up from a previous maximum of 5 years. Expansion operations in the Czech Republic may also qualify for ten year partial tax relief. Businesses may also receive CZK 200,000 per created job, training grants of up to 45%, and a 5% grant towards strategic investment projects. Investment criteria depends on the type of business, but only manufacturing, technology and business support industries are supported under this program. Croatia Corporate Profit Taxes (CPT s) are rising to 15% from either 5% or 10% in some of Croatia s tax-free zones. These zones France s new Innovation Tax Credit for Small and Medium Sized Enterprises (SME s) went into effect January 1, This is an R&D incentive for downstream activities, such as investing in a pilot plant or building a prototype. Any type of entity may qualify, regardless of nationality or business sector, and the tax credit rate is 20% with the amount of qualifying expenses capped at EUR 400,000. Germany Under new law, tiered RETT blocker structures are now disregarded and any indirect economic ownership acquisition of 95% or more in a German real estate owning company is subjected to RETT. The new provision applies to all transfers occurring on or after 7 June Under new rules, the insurance premium allowable to the German operations is subject to German IPT, regardless

5 whether the insurer is a resident of the EU/EEA. The rate of German IPT is 19% on the tax basis will see the beginning of a new funding period for incentives that will last through Programs will include those existing and potentially new ones to be added. Most recently, Germany had 26.3 billion in funding for incentives at its disposal until the end of Greece Ireland With a newly proposed law, Irish tax resident companies would be subject to Irish corporation tax on their worldwide profits wherever arising. Profits from a trade are taxed at 12.5%. The primary test of corporate residence in Ireland is the location of central management and control. Existing Irish incorporated companies which are currently outside the scope of Irish corporation tax due to central management and control being maintained outside Ireland should consider the impact of the rules proposed effective 1 January Italy On 14 January 2013, Hong Kong and Italy signed a comprehensive avoidance of double-taxation agreement (CDTA). The CDTA contains several favorable provisions which are expected to boost closer economic and trade ties between Hong Kong and Italy. The CIT rate for Limited Liability Companies, Private Companies, Greek branches of foreign companies, and nonprofit legal entities increases from 20% to 26% as of financial year 2014 (fiscal year 2013). The Creation of a Development Friendly Environment for Strategic and Private Investments initiative by the Ministry for Development, Competitiveness, Infrastructure, Transport and Networks, aims at modernizing and improving the institutional framework for private investments, subject to investment laws. Provisions have been introduced regarding that aim to accelerate the disbursement procedures of existing grants and enhancing transparency and auditing procedures. Hungary Enterprises that carry out their activities in the entrepreneurial zones, as set forth by a recent decree, may utilize development tax allowances based on their investments. In accordance with tax law changes published at the end of 2012, if such enterprises increase their headcount, they may also utilize tax allowances relating to the social contribution tax and the training fund contribution. This decree also includes the opportunity to utilize direct state subsidies. For companies that transfer their effective place of management to Hungary, taxpayers that qualify as tax residents as a result of the transfer will have the opportunity to determine depreciation based on the market value of their assets effective on the date upon which residency is obtained. This means that Hungarian tax law provides for a tax-free step up in basis upon the migration of a company to Hungary. In February 2013, the Italian Supreme Court rejected the appeal of an Italian company concerning the transfer pricing applied to the payment of royalties to its US parent for the license of software. The Supreme Court upheld the position of the tax inspectors who denied the application of a 30 percent royalty paid by an Italian company to its US parent and instead recognized only a 7 percent royalty. A new final exit tax decree provides that, as an alternative to an immediate levy, Italian companies shifting their tax residence to EU or other qualifying countries may elect to defer exit taxation to the moment of actual realization or to pay the tax due through ten annual installments. Luxembourg As largely anticipated, the new Luxembourg Government has announced VAT rates will be increased in order to compensate for the future loss of VAT revenues derived from e-commerce, with a commitment to keep the standard rate (of currently 15%) the lowest within the European Union (EU). The Government is also expected to introduce the concept of notional interest, allowing companies, under certain conditions and within specific limits, to deduct a deemed interest expense calculated on the amount of their capital. Malta In May 2013, the Maltese Government published an act aimed to enhance the participation exemption so as to now apply to branch profits. In addition, conditions for the application of the participation exemption have been improved. Netherlands Since 2012, the Netherlands has allowed an income tax deduction for R&D. In 2013, this deduction was at 54% of

6 qualifying costs and expenses, but it has been increased to 60% for At a corporate income tax rate of 25% in the Netherlands, the net tax benefit is 15%, as opposed to 13.5% under the 2013 deduction. Following a decrease in business capital expenditure, the Dutch also allowed to businesses, on a one-off basis, to depreciate up to 50% of their spending on capital assets in the second half of 2013, with an expiration of 31 December. Before, annual depreciation could not exceed 20% of the acquisition price. Portugal of creating new employment, and consultancy, unless the company was a first time investor, in which case the maximum was EUR 1,500,000. It is not certain if this program will be refunded in Spain In February of 2013, a Royal Decree-Law established a hiring tax incentive that will not expire until unemployment is below 15% (it is currently at 26.7%). If a company, with a workforce up to nine employees, hires an unemployed person under the age of 30 they are exempted from paying Social Security contributions for a year. For Spanish citizens, Spain introduced a 20 percent tax credit for investments in start-ups involving shareholding. The company may not have more than EUR 400,000 equity on the first day of the year in which the taxpayer acquires the shareholding. Also introduced is a new tax credit, similar to the reinvestment tax credit available for corporations, targeted towards individuals carrying out business activities. If they invest their profits in goods related to a business activity, they are able to take 10% of the investment as a tax credit. United Kingdom For the second half of 2013, Portugal gave a corporate income tax credit for 20% of an investment made in the country, with the potential to reduce a company s tax rate to 7.5%. This investment promotion regime expired 31 December, but paved the way for further discussions on their corporate income tax law. Some of the proposed changes are a reduction of the corporate income tax rate, an extension on the carryforward of tax losses, and a taxation exemption for dividends received by Portuguese entities, regardless of source. Romania The Romanian government is taking steps to cut incentives granted for investments in renewable energy as the cost of renewable energy equipment has fallen. Romania issues green certificates, which can be traded on the open-market, to wind and solar energy producers, and is planning on reducing the number issued. The government has already deferred the issuance of some tickets for three and a half years. They are expected to approve final rules in the beginning of Slovenia Slovenia ran a successful grant program in 2013 targeted at foreign investors who created a minimum of between 5 and 25 jobs and invested between EUR 500,000 and EUR 1,000,000 in the country (dependent on industry). Slovenia would grant up to EUR 1,000,000 for property, plant, equipment, costs The United Kingdom is trying to get local governments onboard with the development of shale gas. Now local councils will keep 100% of the local tax they levy on sites that employ hydraulic fracking to extract shale gas. The government also announced the Future Fifty program, an accelerator of sorts for businesses that have a high potential for growth. The program includes tailored support on exports and new market expansion, mentors from leading organizations, advice on immigration issues, and promotion overseas. Only businesses that have been trading for at least 24 months with revenue growth of at least 100% year over year will be considered.