New Tax Measures. Table of Contents

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2 New Tax Measures The tax bill titled Restoration of Tax Justice and Countering Tax Evasion was ratified in total before Parliament yesterday, April 20th. This tax bill has already been the object of much discussion, and we have already issued several Tax Flashes. However, given the numerous modifications that have been made, just before ratification, a careful perusal of the final version of the tax bill is highly advisable. The main provisions of the bill are presented below. It should however be noted that due to the large volume of amendments, this presentation is not exhaustive. Table of Contents Ι. Income Taxation... 3 A. Corporate Income Taxation... 3 B. Individual Taxation ΙΙ. Taxation on Capital A. Inheritance Donation Tax B. Taxation of Real Estate Transfers C. Taxation of Real Estate D. Special Real Estate Tax E. Establishment of a Registry for Real Estate ΙΙI. Indirect Taxes ΙV. Books and Records Code V. Tax Audit Combating tax evasion Tax treatment of companies established in noncooperating states and states with preferential tax regimes VΙ. Other Provisions VΙΙ. Entry in force of the most important measures PricewaterhouseCoopers 2

3 Ι. Income Taxation A. Corporate Income Taxation Taxation of profits and dividends A system involving two separate corporate income tax rates for non-distributed and distributed profits of legal entities is introduced. Non-distributed profits are taxed at a tax rate of 24% for profits arising in the accounting period commencing on the 1/1/2010, reduced annually by 1 percentage point until it reaches 20% by Distributed profits are taxed at a tax rate of 40%. No further withholding tax is imposed on dividends (abolition of the existing 10% withholding tax). The new system applies to profits arising from balance sheets drafted from onwards. The imposition of the increased corporate income tax rate on legal entities has as a purpose to counter a possible exemption from the increased tax of distribution of profits that parent companies with registered seat in the EU or other countries that could ensure preferential taxation or even exemptions based on the Double Tax Treaties that Greece has concluded would enjoy. For this exact reason however, an issue of compliance of the provision in question with EC law may arise in the future, in case of distribution of profits to parent companies having their registered seat in a Member State of the EU. The tax of 40% on distributed profits of the legal entities does not exhaust the tax liabilities of beneficiary individuals. The dividend amount is further taxed as personal income based on the progressive tax scale applicable to individuals, with a credit being provided for the corporate tax paid by the distributing legal entities, based on a certificate issued by the latter in the name of the individual. Consequently, the total tax burden of individuals, beneficiaries of dividends, may reach up to 45%, due to the further taxation of dividend income based on the progressive tax scale applicable to individuals. This system is expected to create an administrative cost to companies issuing the relevant certificates, but also to the State due to the need of refunding tax to individual shareholders, whose income is taxed based on the progressive tax scale applicable to individuals at a tax rate lower than 40%. Moreover, although not explicitly mentioned, it may be concluded from the provision, that foreign dividends/profits are taxed based on the same progressive tax scale, but without the possibility of crediting the underlying corporate income tax paid abroad. Thereby, a new adverse differential treatment is introduced on dividends from companies of foreign states. The initiation of an infringement procedure by the European Commission because of this adverse differential treatment is probable, as with preexisting regimes which also included a different treatment of foreign companies, for which Greece has already been referred to the European Court of Justice. Taxation of 40% on distributed profits of the legal entities exhausts the tax liability in case the beneficiaries are legal entities. In case such legal entities proceed to the distribution of profits, in which dividends from other legal entities are included, the part of tax already paid for those dividends is deducted from the 40% tax imposed on distributed profits. In case of a large Greek group this would naturally involve a complicated calculation. Tax rate of 40% on distributed profits is also imposed in case of capitalization or distribution of profits of previous accounting periods. PricewaterhouseCoopers 3

4 An issue of whether such provision is contrary to the Greek Constitution due to a retroactive taxation of profits of previous accounting periods may be considered in this case. In any case, the distribution-capitalization of profits of previous accounting periods within 2010 is still taxed under the current regime (withholding tax of 10%). It should be noted that in contrast to the current regime, the aforementioned apply to profits distributed by Limited Liability Companies, but also to profits that a branch of a foreign company established in Greece remits to its head office abroad. Practical and accounting problems created in case of distributing dividends/profits of a Limited Liability Company by a Greek subsidiary to a Greek parent company, are intensified by the increase of the tax rate in case of distribution. In essence, these profits will have been taxed at a tax rate of 40% for the Greek parent company collecting them, irrespective of whether these are further distributed or not. In any case, the differentiation between non-distributed and distributed profits may create numerous practical problems to companies publishing their financial statements under IFRS, since a different base of calculating the distributed profits on the one hand (based on IFRS) and of taxable profits on the other hand, exists in these cases. Capital gains derived from the sale of shares listed on the Athens Stock Exchange Taxation at source at a tax rate of 10% - 20% of the capital gains that legal entities receive from the sale of shares listed on the Athens Stock Exchange in case of the sale of shares within three months - twelve months from their acquisition respectively (short-term transactions) (application for shares acquired from 1/1/2011). Thereafter, the capital gains derived from the sale of the relevant shares is booked in a special reserve account after the deduction of losses derived from similar transactions. In case of distribution or capitalization, capital gains are taxed at the tax rate of distributed profits by deducting the tax withheld. Due to the difficulty of determining the date of acquisition of the shares sold, in case the portfolio consists of shares acquired at different dates, it is specified that in case of gradual acquisition of shares, the average price of their acquisition is taken into account for determining the cost of acquisition of the sold shares. However, no similar guidance is provided in order to consider whether the 3/12 month period has elapsed when shares acquired in different periods of time are being sold. In case of a foreign legal entity investor without a permanent establishment in Greece, withholding tax of 10% - 20% exhausts the tax liability. It must be considered each time whether a basis for exemption of the foreign company from capital gains tax applies, based on an applicable a Double Tax Treaty. In case of application of taxation of capital gain, according to the aforementioned, the transaction duty of 0.15%, currently in force, shall not apply. The same applies to sales of shares listed on a foreign stock exchange or other internationally recognized exchange. Imposition of tax 1,5 in case of transfer of shares listed on the Athens Stock Exchange to a foreign Stock Exchange in which the shares of the same company are listed. The tax is PricewaterhouseCoopers 4

5 calculated based on the closing price of the share at the day of transfer. The tax of the present paragraph is not imposed in case the transfer is realized to a foreign stock exchange with which the Athens Stock Exchange has created a common electronic trading system and on the condition that the payment of a respective tax abroad applies. Taxation of Partnerships (OE and EE) etc. Amendment of the taxation of Partnerships (OE, EE) civil law societies, exercising an enterprise or profession, of civil profit and non-profit making companies, silent partnerships, as well as of joint ventures of par.2 of article 2 of the Books and Records Code, of which the accounting period commences on the 1 st January 2010 onwards. Specifically, the changes have as follows: The tax rate is increased to 25%. Profits corresponding to individuals, partners of OE or EE are continued to be taxed at 20%, following the deduction of their entrepreneurial fee, where this applies (50% on the participation percentage of the partner in question). Profit that is tax exempt or taxed at source with exhaustion, as well as dividends or profits from Greek companies are deducted from the taxable income. The exemption is not extended to profits derived from participations in companies of EU Member States, which may be considered as a prohibited discrimination. The aforementioned apply also to case of branches of foreign partnerships. In contrast to Societe Anonymes and Limited Liability Companies, the taxation of partnerships (OE, EE etc.) exhausts the tax liability of partners, namely the relevant profits are not included in the progressive tax scale applicable to individuals. Deductible expenses Important limitations are introduced to the deduction of expenses from the gross income of enterprises (article 31 of the Income Tax Code ITC ) paid to companies established in countries included in the catalogue of non cooperating states or states with preferential tax treatment (application for balance sheets drafted as of 31/12/2010 onwards). This amendment may have a significant practical impact, since the definition of states considered as having a preferential tax regime is especially broad and even vague- and may even include EU Member States (see below). Given that the provisions of articles 51A and 51 B of L. 2238/1994 as introduced by the bill, establish a rebuttable presumption only in case of transactions with companies established in states with a preferential tax regime and not in the case of transactions with companies established in countries included in the catalogue of non-cooperating states, there is a risk that several real expenses will end up not being deductible due to the realization of such real transactions with companies established in the aforementioned countries. The value of raw and ancillary materials and other goods (plus processing thereon) which is paid to an individual or legal entity, the role whereof consists exclusively of the invoicing of the transactions, while the delivery of goods or provision of services is conducted by a third party, are not deducted from the gross profits of companies. The practical consequences of this PricewaterhouseCoopers 5

6 provision require particular attention, in cases for example of multinational groups in which invoicing is centralized. Payroll expenses are not deducted in case they are not paid through professional bank accounts or checks paid through the same accounts. Limitation of the deduction of lease expenses paid to car rental companies and effective equalization to deduction in case of car leasing payments to leasing companies. The car expenses are now deducted by a percentage of 70% for motor vehicles up to cc and 35% for motor vehicles exceeding cc (application for balance sheets drafted as of 31/12/2010 onwards). Establishment of an obligation of the competent auditing authorities to inform the competent social security organization when establishing the non-payment of social security contributions. Up to today it was common practice not to refer such cases to the corresponding authorities, but simply not to recognize the relevant expense for deduction. In spite of the relevant discussions during the consultation of the tax bill, the payment of insurance contributions remains a condition for deducting the expense. Limitation and even abolition of the deductibility of certain donations and sponsorships. Amendment of the thin capitalization rules, providing: Extension of the exemption from the application of thin capitalization rules to banks, factoring companies, as well as special purpose vehicles of L. 3156/2003, and of L.3601/2007 (an exemption was already in force for leasing companies). Loan from third parties are still included in the debt-equity calculation if they have been guaranteed in any way by a related party. The meaning of loans includes bond loans held by affiliated companies. Abolition of the clause of non application of thin capitalization rules for loans that had been concluded up to the publication of L. 3775/2009 ( grandfathering clause) (i.e. until ) (application for profits of balance sheets drafted as of 31 December 2010 onwards). Consequently, for accounting periods closing up to and including , the thin capitalization restrictions apply, but only in relation to new loans, namely loans concluded after the Conversely, for all following accounting periods, the restrictions apply for all loans concluded with affiliated companies. The meaning of average of loans in relation to own capital of the company is however not sufficiently clarified. Prohibition of deducting interest of loans used for the purchase of shares in a legal entity or entity established in states of article 51 Α (non- cooperating or states with preferential tax regime), as well as of interest paid to these companies (application for balance sheet drafted as of 31/12/2010). The application of this provision may create problems, since it is not precluded that actual loan agreements are concluded or that shares or participations are acquired with the purpose of exercising business activities in those states, which may even be EU Member States. PricewaterhouseCoopers 6

7 Prohibition of deducting interest of loans for the purchase of shares in any type of company, to the degree that this participation is transferred within a two years period (application for balance sheet profits drafted as of 31/12/2010). This provision may cause a series of practical problems, for example circumstances of non deductibility of interest may arise in an accounting period following an accounting period in which the interest was deducted. Further increase of taxable profits of banks and insurance companies, by extending the non deductibility of expenses corresponding to tax free profits or profits taxed in a special way, applicable for other companies (article 31 par.8 of the ITC), even though a special way of determining the relevant profits applies for banks and insurance companies. Specifically for banks, 5% on the profits derived from dividends and profits from participations in other Greek companies is added to their taxable income as non-deductible item (for example dividends of Greek Societe Anonymes). (Application for balance sheets drafted as of 31/12/2010 onwards). Special issues on employment Income Taxation of bonuses (benefits in cash, on top of regular remunerations and overtime payments) paid to executives of credit institutions. Taxation is based on the general progressive tax scale applicable to individuals provided the total annual income of the executive does not exceed 60,000 Euros and the amount of the bonus does not exceed a percentage of 10% of the total annual regular remuneration. For amounts exceeding the above, taxation at source based on a progressive tax scale is introduced, as follows: Up to 20,000 >> 50% 20,001 40,000 >> 60% 40,001 60,000 >> 70% 60,001 80,000 >> 80% 80,001 and above >> 90% The exact application of the above de minimis threshold are not clearly defined. Such taxation applies up to accounting period The meaning of executives is not sufficiently clarified. Addition to the annual income of certain individuals (chairman or member of the board of directors, the managing or executive director, the administrator, manager, and executive) of an amount equal to the percentage of 15%, 25% and 30% of the manufacturing price of cars used by those individuals from 15,000 to 22,000 Euros, from 22,0001 to 30,0000 Euros and exceeding 30,000 Euros respectively, regardless of whether the cars are owned by the company or are leased. The aforementioned amounts are not apportioned between numerous individuals (application of the provisions retroactively from 1/1/2010). Amendment of the calculation method of the benefit from the exercise of stock options. The benefit is calculated as the difference between the fair market value at the date of exercising the stock option right, in contrast to the date of granting the stock option right that was PricewaterhouseCoopers 7

8 applicable up to now, and the strike price. Introduction of a provision by which the benefit is taxed also in case the stock option right is exercised at a time at which the beneficiary has left the company. This provision applies for rights exercised from the date of publication of the law in the Government s Gazette. Abolition of tax exemptions Abolition of exemptions from income tax granted to legal entities, except for exemptions provided by article 103 of the ITC, by Double Tax Treaties and those applicable to legal entities subject to a special regime. In essence there seem to be few exemptions subject to abolition with reference to the main volume of legal entities, namely Societe Anonymes and Limited Liability Companies. Introduction of withholding tax on the income derived from securities even when the beneficiary is the State, for example interest on deposits, dividends etc. Taxation at a tax rate of 20%, on net income received by various legal entities from the lease of construction sites or grounds from the 1 st January 2010 onwards, (Churches, Patriarchates, Holly Mountain, legal persons pursuing welfare purposes, welfare foundations etc.). Accounting determination Determination of taxable profits based on actually accounting P&L for various types of businesses that until now were taxed in a special way, such as companies of exploitation of buses integrated in the Greek Bus Operators (KTEL), taxi drivers, and truck drivers. Transfer pricing) The existing transfer pricing framework becomes stricter. More specifically: The condition that a (direct or indirect) tax avoidance should arise in order for a transfer pricing assessment to be made is abolished. Increase of the fine from 10% to 20% on transfer pricing adjustments, while such penalties are no longer subject to a reduction to 1/3 in case of an administrative settlement of the dispute. Explicit reference that the transfer pricing documentation rules extend to leases of movable or immovable property. Reduction of the minimum threshold requiring documentation from 200,000 Euros to 100,000 Euros annually. Introduction of penalties under tax law regarding the non timely submission, nonmaintenance or incomplete/improper maintenance of TP documentation. Penalty amounts to 20% of the transaction value. Deadline for submission of files is 30 days from request. The issue of overlap of two distinct legislative frameworks, namely between L.3728/2008 and ITC, is however not addressed. PricewaterhouseCoopers 8

9 Other issues on legal entities Refusal to refund to banks of the credit balance arising from the income tax return of the accounting period 2009 concerning withholding tax corresponding to bond interest. By this regulation an issue, which had caused disputes between banks and insurance companies and the state appears to be settled by way of a legislative amendment. The non refund of the relevant credit balance may however lead to excessive taxation of banks, whilst maintenance of the exhaustive taxation at source of the income in question causes distortion in the taxation of such companies. Increase from 25% to 40% of the withholding tax rate on interest paid to beneficiaries resident abroad, when they do not maintain a permanent establishment in Greece. Reinstatement of the deduction of 1.5% in case of a lump sum payment of income tax liability applicable also to tax returns filed in Introduction of an obligation to submit an annual clearance return for various withholding taxes where the taxpayer acts as the withholding agent. Obligation of withholding tax of 20% on every company maintaining double entry books or revenue expenses books and paying fees for the provision of services with receipts for expenses, in accordance with article 15 of the Books and Records Code. Deduction from the prepayment of income tax of tax paid during the transfer of a business, interests in various companies (OE, EE, Limited Liability Companies), Societe Anonymes shares etc. based on article 13 par. 1 and 2 of ITC. Auditors Auditing Firms Certificates Obligation of auditors and audit firms (registered in the Auditors Registrar of L.3693/2008) to issue annual certificates on the infringement or non infringement of tax legislation of the obligatorily audited Societe Anonymes / Limited Liability Companies. The certificates shall be notified, with the responsibility of the auditors or auditing firms, within one month to the Directorate of Audits of the Ministry of Finance, while any infringement of their obligations shall be prosecuted, in accordance with L.3693/2008. Particular attention is required during the determination of submitted data and information that must be audited and certified by auditors and auditing firms in the frame of the conducted audit of compliance or infringement with tax legislation. These crucial details shall be determined subsequently in cooperation with the Accounting Standards and Audit Commission (ELTE). To be noted however that the new law increases the scope of responsibilities of the accountant of the company signing the tax returns and imposes obligation for separate reporting on nondeductible expenses of the income tax return. Tax incentives Reduction by three percentage units of the tax rate of profits of legal entities, of which the turnover is reduced for two consecutive accounting periods, on the condition that the number of employees is not reduced in any of the three accounting periods (the law mentions 3 years PricewaterhouseCoopers 9

10 but probably it should read 2). Revocation of the granted benefit and imposition of further tax in case of reduction of personnel or increase of the turnover within the same period (in force for accounting period 2009). Exemption from income tax for three years of profits derived from the exercise of a personal commercial company or free lancers or partnership, in case the beneficiary is not more than 35 years old. Exception from the duty of mobile telephone subscribers of wireless internet connections concerning solely and exclusively data connections (entry into force from the publication of the bill in the Government Gazette). Exemption from income tax for three consecutive years for profits derived from the sale of products or the provision of services, employing internationally recognized patents, application for sales or services provided after the 1 st January 2010). Β. Individual Taxation New tax scale - receipts Adoption of a new progressive tax scale applicable for all individuals with more tax brackets and increase of the marginal tax rate, applicable for income earned as of Income Bracket (Euros) Tax Rate % Tax Bracket (Euros) Total Income (Euros) Total Tax (Euros) 12, , , , , ,440 22,000 2,160 4, ,040 26,000 3,200 6, ,920 32,000 5,120 8, ,880 40,000 8,000 20, ,600 60,000 15,600 40, , ,000 31,600 Exceeding 45 The new tax scale will lead to a tax relief for income up to 35,000 Euros and increase of the tax burden for income exceeding 40,000 Euros, and especially for income exceeding 100,000 Euros. Payroll tax withholdings based on the new tax scale shall enter in force from the date of publication in the Government Gazette onwards. Connection of the tax free amount to the collection of receipts, the minimum amount of which depends on the stated income (10% of the income if this amounts up to 12,000 Euros and 30% for amounts above such threshold). Higher tax reduction in case of presentment of further receipts up to the amount of 15,000 Euros. These amounts may be adapted based on the family status. PricewaterhouseCoopers 10

11 Abolition of taxation at source with exhaustion of liability Abolition of most cases of taxation at source of income. Taxation at source is however maintained in the following cases: Interest on bank deposits Interest on State bonds. Given the equalization of tax treatment of corporate bonds with State bonds, the tax treatment of corporate bonds seems also to remain unaffected. Capital gains arising from the transfer of a company (20%), participation percentages in a society or joint venture, shares of Partnerships (OE, EE) and Limited Liability Companies (20%) and shares of Societe Anonymes (5%) etc. Fees of members of the Board of Directors taxed at source at a tax rate of 35%. The provision further extends to remunerations that Limited Liability Companies pay to their members. The entrepreneurial fee is taxed based on the general provisions, independent of whether the beneficiary is resident in Greece or abroad (on the condition that the partnerships (OE) partners are in total liable based on the legislation of the Member State in which the partnership is established). Taxation at source for a series of income with simultaneous increase of the tax rate from 20% to 25%. Such cases are: Income derived from common spaces of buildings. Compensations or royalties paid to foreign entities and sports associations without a permanent establishment in Greece and that do not exercise a profession or enterprise in Greece. Compensations, royalties and fees paid for the compilation of studies and designs, scientific research, provision of scientific advice to foreign companies and organizations. Taxation at source of severance payment. Increase of the tax free bracket from 20,000 to 60,000 Euros and introduction of a progressive tax scale with tax rates of 10%, 20% and 30% for income exceeding 60,000 Euros, 100,000 Euros and 150,000 Euros respectively (entry into force from the date of publication in the Government Gazette). Imputed income Determination of minimum imputed income derived from the use factors of expenses and services, such as real estate, cars, pleasure boats, airplanes, swimming pools, tuition fees, housekeeping staff (more than one), chauffeurs, teachers and other personnel. Specifically, the way of determining the annual expenses of real estate (primary or secondary) is modified, and is no longer based on the imputed rental, but on the square meters of the property, while the expenses of cars will mainly be calculated based on the engine capacity of the car. The arising income based on the annual imputed expenses may be questioned, if providing proof of a smaller income based on actual evidence, such as force majeure, hospitalization etc. PricewaterhouseCoopers 11

12 The individual may question judicially the income arising based on the relevant provision not only by reason of the indicatively enumerated reasons, but for others as well (for example difficulties caused by the financial crisis). Expenses deductions and tax credits Abolition of certain tax deduction from the total income of the individual. Such deductions are replaced by tax credits for a percentage of those expenses, such as life, health and insurance premiums, donations of monetary sums to the State, local authorities, expenses of central air conditioning installations and installations replacing the use of petrol with natural gas or new natural gas facilities, purchase of solar panels, provision of legal advice (except of the attendance of lawyers at the signing of contracts). Expansion of the beneficiaries entitled to deduction of expenses from their total income. Specifically, residents of EU Member States receiving income in Greece by a percentage exceeding 90% are entitled to deductions, as an exception of the general rule providing that foreign residents receiving income from a source located in Greece are not entitled to such deductions. This measure is a response to action by the European Commission for reasons of equal treatment of EU Member State residents with residents of Greece. Retroactive abolition of the provision on the deduction of interest of loans granted for the acquisition of a primary or secondary residences up to 200 m² and up to the amount of 350,000 Euros granted in , reinstating the provisions on the deduction of interest by 20% for loans taken for the acquisition of primary residence. Abolition of the deduction of 40% of the expenses of repair and maintenance from income derived from real estate and of the deduction of the, exceeding the above, amount paid to certain professionals (plumbers, electricians, painters) for the repair and maintenance of construction sites. The receipts of relevant expenses shall be used for the coverage of the tax free amount. Deduction of monetary amounts paid to the Green Fund. Tax credit of 20% for individuals and deduction of 20% for legal entities, both applies to the amount of donations to the Account of Solidarity for the Repayment of Public Debt. Capital gains derived from the sale of shares listed on the Athens Stock Exchange Taxation based on the general provisions (i.e. based on the progressive tax scale applicable to individuals) of capital gains that individuals receive from the sale of shares listed on the Athens Stock Exchange within 12 months from their acquisitions (short term investment) (applicable for shares acquired as of 1/1/2011). Imposition of withholding tax under the terms mentioned above (Chapter I, A). The receipt of the income is considered to be the time of arrangement of the sale of the shares, without applying the price at which the sale has been realized. PricewaterhouseCoopers 12

13 Application of the provision in case of foreign residents, without prejudice to the Double Tax Treaties, exhausting their tax liability to the local withholding tax of 10% - 20% (see above under I.A.). This provision provides that taxation provisions apply in case a foreign company operates on behalf or under the immediate control of a Greek individual, in which case it appears that the income shall be considered as directly received by the individual in question. Where capital gains tax will be applied according to the aforementioned, the transaction duty of 0.15% currently in force shall not be imposed. The aorementioned applies for sales of shares listed on a foreign Stock Exchange or another internationally recognized trading institution. Taxation of Free Lancers Time of acquisition of the income of free lancers is considered to be the time at which the services are provided and not the time of collection of the entrepreneurial fees, with the exception of the services provided to the State and Legal Entities governed by Public Law. This measure will cause problems to free lancers with regard to the tax treatment of bad debt. Introduction of a right to carry forward for 5 years losses arising from freelancing professions. Abolition of special provisions on the deduction of maintenance and operation expenses of free lancers cars (provisions on companies will apply to free lancers as well). Determination of profits of architects, engineers and geologist researchers on studies based on their accounting books (in force from ). The tax rates per research category provided by the ITC apply only in case of out of books determination of their income by auditing authorities. Allocation of the income of football and basketball players, coaches and other athletes derived from the signing of contracts of transfers or renewals with football clubs or sports associations, equally between all years of their contract duration. Income derived from securities: Withholding Tax on interest on bond loans and interest paid by individuals abroad Imposition of a withholding tax of 10% on accrued interest upon the transfer of bonds (applicability for transfers of titles realized after one month following the publication of the law). Tax is withheld by the intermediate bank, if however the banks itself transfers the bond or interest coupon, the bank is obliged to pay the respective tax itself. Imposition of a withholding tax (40%) on interest paid by Greek individuals to foreign lenders, individuals or legal entities, exhausting the tax liability of the foreign beneficiary for this income (applicability for interest paid from the next day onwards of the publications of the present law in the Government Gazette). Extension of the establishment of a minimum imputed interest rate equal to the minimum interest rate in force on the Treasury Notes of three-month duration, at the time of concluding the loan for these loans. PricewaterhouseCoopers 13

14 By this provision a legislative gap in relation to loans granted to individuals by foreign lenders is sought to be covered. Abolition of tax exemptions Abolition of a series of tax exemptions on income derived from various specific cases (for example kiosks and canteens, cafeterias, barber shops etc. of public services developed by disabled individuals and by war victims, monetary prizes and scholarships from the State etc.). Submission of Tax Returns and payment of tax Obligatory electronic submission of income tax returns for all individuals exercising a business activity or profession and for individuals submitting their tax return through certified accountants (for income tax returns filed from the accounting period 2012 onwards). Reinstatement of the deduction of 1.5% in case of a lump sum payment of the income tax liability. PricewaterhouseCoopers 14

15 ΙΙ. Taxation on Capital A. Inheritance Donation Tax The new tax bill introduces a series of amendments to the Code of Taxation of Donations, Inheritances etc., including the repealing of exemptions, change in the time of taxation etc. The basic changes are summarized below: Abolition of the favorable taxation at source of some assets Reinstatement of tax scales of inheritance tax for all assets (i.e. real estate, shares, monetary amounts etc.) in every category and abolition of taxation at source applicable during the transfer of shares, interests in limited liability companies etc. as well as of monetary amounts. Introduction of taxation at source of monetary amounts received by reason of donation or parental grant at tax rates of 10%, 20% and 40% for beneficiaries subject to the Α, Β or C category respectively, without a tax free limit. An increase of tax may arise due to this abolition, since the up to today taxation at source was in many cases especially favorable, for example with regard to company shares. Amendments with regard to primary residence Amendment of the exemption from tax of first residence acquired by inheritance, in order to harmonize it with the purchase of first residence (for example the establishment of a maximum limit of exemption for residence, including the value of one parking space and a storage space, alteration of the way of calculating the coverage or not of housing needs, as well as specification as beneficiaries of the exemptions of Greeks and citizens of EU Member States. Establishment of a prohibition of transfer for a duration of 5 years prior to the acquisition of the first residence with parental grant from the beneficiary and his family of the usufruct, habitation or same ownership share or land fulfilling their housing needs (Similarly, for the transfer of bare ownership of land or a share in it). Abolition of exemptions Abolition of subjective exemptions from inheritance and donations tax, as well as of any other exemption provided for by a special law, with the exception of some exemptions justified for social and financial reasons or for reasons of international law. Overdue return of shares etc. of companies holding real estate In case of overdue inheritance, donation or parental grant tax return, concerning shares, participations or other company titles or titles of other legal entities or legal entities under the obligation of submitting a special tax on real estate, the tax is calculated on the value of the properties of those companies and not on the value of the transferred titles. PricewaterhouseCoopers 15

16 Therefore, tax is attempted to be imposed on the value of the property in cases in which transfers were made to companies with the scope of tax avoidance, but then the individualshareholder submitted a tax return on the special real estate law of 3%. B. Taxation of Real Estate Transfers Abolition of the Capital Gains Tax and of the Transaction Duty imposed on the transferred properties, which had been originally acquired after From now on, every transfer of real estate which is not subject to VAT shall be subject to Real Estate Transfer Tax. Simultaneous reduction of the tax rates of the Real Estate Transfer Tax to 8% for the part of to the value up to 20,000 Euros and at 10% for the exceeding value. Alteration of the conditions for exemption from Real Estate Transfer Tax of the acquisition of primary residences, since the decisive criterion is no longer its square meters, but the value of the property. At the same time, the circle of beneficiaries is expanded (for example individuals that have concluded an agreement of cohabitation two years prior to the acquisition, EU residents). C. Taxation of Real Estate Establishment from the year 2010 onwards of an annual real Estate Tax by abolishing the Real Estate Duty (ETAK). Imposition of Real Estate Tax on individuals at a progressive tax rate from 0.1% to 1% and establishment of a tax free amount of 400,000 Euros per owner. Specifically for years 2010, 2011 and 2012 on taxable real estate of individuals of a value exceeding 5,000,000 Euros, the tax rate is specified at a percentage of 2% for the value exceeding 5,000,000 Euros. In accordance with the new provisions, the taxable tax scale applicable to individuals is formed as follows: Tax bracket Tax Rate per tax bracket (%) Tax Amount per tax bracket Total Taxable Value Total Tax 400, , , , , , , , , , , , Exceeding 1.0 Introduction of a provision whereby the ownership of a property may be deemed to be attributed to an individual when such property is owned by a company controlled by such individual and the use of the company is for the purposes of circumventing taxation. The PricewaterhouseCoopers 16

17 determination of criteria based on which such anti-avoidance provision will be applied by the tax authorities remains to be seen in practice, as such type of provisions is uncommon under Greek tax law. Imposition of Real Estate Tax on legal entities with tax rates amounting to 6, 3 or 1 depending on their profit or non-profit making character and the use of the properties, while the tax rate remains reduced (0, 33 ) for self-used real estate of hotel enterprises, without applying the minimum limit of 1, 00 Euros/ square meters for the years 2010, 2011 and Effectively, the current regime on legal entities remains unchanged, with the exception of the case of leasing agreements of a property, for which the person liable to pay Real Estate Tax is from now on the owner of the property, namely the leasing company. Exemption from Real Estate Tax is provided for buildings under construction within three years from the issuance of the initial building permit, unless these have been leased or in any other way used, from the year 2011 onwards. The bill includes many more detailed applications of the new law, to a great degree corresponding to the older FMAP regime, while some amendments are introduced in relation to the submission of Form E9. D. Special Real Estate Tax Increase of the Special Real Estate tax rate from 3% to 15%. At the same time, some changes are introduced, leaning towards the direction of tightening the conditions for exemptions, and specifically: the scope of application of the special tax is extended to certain entities which are not companies, with a purpose to include cases, such as foreign trusts. Introduction of an additional condition for the exemption from special tax of individuals proceeding to disclosing the ultimate individual shareholders of a company: such disclosure will not be sufficient unless each such individuals maintains a tax registration number in Greece. Moreover, the law indicates that scrutiny as to whether the disclosed individuals are indeed the ultimate shareholders should be applied, without however providing further criteria on how such a case would be established. Establishment of an obligation of filing on an annual basis a tax return on the special real estate tax, irrespective of whether an exemption applies. Effectively, in case of a foreign legal entity not established in the EU, the exemption may be rendered impossible even if an individual is stated as a shareholder with a Tax Registration Number in Greece, since this claim of existence of an agreement of assistance for fraud and tax evasion between Greece and a third country, in which the legal entity has its registered office is added. As per the remaining provisions the main exempting provisions (perhaps with some small amendments) are not revoked- the increase of the tax rate however and the strict formulation of conditions for exemptions may lead to issues of imposing tax even in cases not included in the scope of the present law. With the provision of obligatory submission of an annual tax return even for exempt cases, this issue is rendered particularly imminent. PricewaterhouseCoopers 17

18 In this frame, granting of important exemptions and incentives is provided for the transfer of properties to individuals, within a grace period of six months from entry into force of the present law. E. Establishment of a Registry for Real Estate Establishment of the Registry for Real Estate, defined as the total of real estate owned by every individual or legal entity, consisting of property rights of full or bare ownership, usufruct or right of residence on real estate, as well as right of exclusive use of parking spaces, ancillary spaces and swimming pools located at a common space of the basement, roof or open space of construction site of the above properties on the 1 st January of every year. The year of establishment of the Registry is considered to be 2008, as arising out of the dataprocessing management of the Real Estate Declaration (Form Ε9) of the years 2005 to 2008 that had been filed by individuals or legal entities. Its update shall be transacted through the filed Real Estate Declaration. Its content is confidential (with limited exceptions serving specific purposes), while it is kept and permanently maintained by the Ministry of Finance. To be noted that in parallel with the existence of a Registry for Real Estate, a Registry for other Assets is established see below. PricewaterhouseCoopers 18

19 ΙΙΙ. Indirect Taxes Abolition of the VAT exemption on services of lawyers, notaries, free-lance land registrars and judicial clerks. Abolition of VAT exemption of services of writers, artists and interpreters of works of art. Imposition of VAT on artists with a reduced tax rate of 10%. Imposition of VAT on medical and hospital care and diagnosis services, only if provided by nursing homes, hospitals, diagnostic laboratories of private law, except in case of non-profit making organizations, subject to certain conditions (non distribution of profits, but their disposal for the maintenance or improvement of provided services, management of organizations by persons not having interest in the results of the activity, non distortion of competition). The differentiation in question and specifically the condition of non distortion of competition may constitute criteria not easy to be interpreted in practice Submission from 1/1/2011 to Greek VAT of services related only to access (for example tickets) to events of cultural, scientific, sports, educational character as well as commercial exhibitions taking place in Greece as well as organizational services and related to the above events services to individuals not subject to tax. Consequently as from 1/1/2011 the services relating to the organisation of the said events as well as ancillary services thereto that are provided to taxable persons shall be subject to the general (B2B) rule of article 14 par. 2 (a) of the VAT Code. The time the VAT liability is born in the case of supplies of services changes (at the time of issuance of the invoice or any other document equivalent to an invoice, at the time of collection of the advance payment before the intra-community supply of goods or the supply of services for which the recipient is accountable for VAT, at the time the installments have been agreed in case of periodically paid compensations, at year-end when the services continue to be provided beyond year-end). Return of VAT imposed on services of road assistance provided by insurance companies and by road assistance companies on the condition that the return does not entail unjust enrichment of the applicant and following his relevant application, in application of no C-19/06 decision of the ECJ. Alteration of the way of determining the taxable value of delivery of newspapers and magazines. The taxable value for the delivery of newspapers and magazines is considered to be the retail price. Specifically, press distribution agencies are not burdened by VAT at the delivery of newspapers and magazines, but have the right to exempt the input tax corresponding to the deliveries in question. Abolition of the right of partial payment of VAT (from 1/1/2011). Establishment of explicit provisions on the prescription period for VAT issues. In case of VAT refunds, a three year prescription period is established; prescription is suspended once a refund application has been submitted and until its satisfaction or justified rejection. This provision resolves a long standing issue of incoherent delimitation of the prescription period on issues of VAT refunds, which has caused numerous disputes up to today. PricewaterhouseCoopers 19

20 Introduction of a special tax on pleasure boats, except for professional ships, remaining in the Greek territory for a total time period exceeding sixty (60) days during the calendar year. PricewaterhouseCoopers 20

21 IV. Books and Records Code Effective abolition of the purchase book. Abolition of the obligation of monitoring the stock book of ancillary and packaging materials and of the obligation of keeping a stock book for companies processing goods of third parties. Further abolition of the obligation of keeping stock books for branches without separate accounting books (ensuring of course the provision of relevant data) and of other books of branches, where such obligation existed. From 1/1/2011 onwards, invoices for transactions exceeding 3,000 Euros between companies and between companies and the State will need to be transmitted electronically to the Ministry of Finance. In any case, an earlier submission of the summary list is provided for by article 20 of the Books and Records Code. From 1/1/2011 onwards every transaction between companies for values exceeding 3,000 Euros will need to be settled by way of bank deposits or checks settled through bank accounts. From 1/1/2011 onwards every transaction between individuals and companies for values exceeding 1,500 will not be regarded as legal, if such transactions are settled in cash. Such transactions should be settled by way of credit or cash cards or crossed checks, or bank wires deposits. Banks are not allowed to charge commissions thereon, The bill does not proceed to the announced abolition, even partial, of the Books and Records Code, nor may such an intention be inferred from any provision. In any case, this issue has been moved according to the Ministry of Finance to a later date. PricewaterhouseCoopers 21

22 V. Tax Audit - Combating tax evasion Tax treatment of companies established in non-cooperating states and states with preferential tax regimes Definition of Non-Cooperating States and States with Preferential Tax Regime Non-cooperating states are defined as states that on the 1 st January 2010 are not EU Member States and which, up to the aforementioned date, have not concluded agreements of administrative assistance in the tax sector with Greece or with twelve other states at least. Such States will be enumerated in an annual Ministerial Decision. An individual or legal entity, irrespective of its legal from, is considered as located in a preferential tax regime, even if its residence of registered office is located in an EU Member State, in case it is not subject to taxation in this state or is de facto not subject to taxation, or is subject to tax on income or capital at an amount which is lower than 50% of the tax that would have been due, in accordance with Greek tax legislation, if such entity were resident or were maintaining a permanent establishment in Greece. The difficulty of establishing in practice if the individual or legal entity, to which a payment was concluded, is located in a preferential tax regime and especially of the condition of being subject to a lower than 50% tax on income or capital, should be noted. The risk of considering a Member State of the EU as having a preferential tax regime, resulting in the imposition of restrictions in payments to persons established in those- which may create issues of compliance with European Law. Restrictions on triangular transactions with Non-Cooperating States and Preferential Tax Regimes The bill provides for an addition to gross profits of the Greek selling company of the amount of price difference arising from the sale of goods to a foreign legal entity or individual or legal entity having its registered seat or establishment in a state that is included in the catalogue of non-cooperating states or in a state with a preferential tax regime, when such goods are not transferred outside Greece and are resold by the intermediary company to another Greek company at a price higher that the price of the first transaction. Similarly, addition to the gross profits of the Greek selling company of the amount of price difference arising from the sale of goods to a foreign individual or legal entity or agent or subcontractor having its registered seat or establishment in a state that is included in the catalogue of non-cooperating states or in a state with a preferential tax regime, at a price lower than the price it sells the same products to a Greek of foreign company. Significant practical difficulties will be created in the aforementioned cases, due to the fact that Greek companies do not have the opportunity to prove that the relevant transactions are not fictional with entities established in non cooperating states, in order to bear the consequences of increase of their gross profits. PricewaterhouseCoopers 22