Tax newsletter. VMB Accountants & Tax Consultants 12 July 2012

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1 Tax newsletter VMB Accountants & Tax Consultants 12 July 2012 Contents Impact of the new Belgium thin capitalization rule Financial leasing: a supply of a good or a service for VAT? Be prepared for the new US FACTA rules New VAT treatment proposed for vouchers International tax highlights To keep in mind Impact of the new Belgium thin capitalisation rule Unlike most other jurisdictions, Belgium until recently did not have a general thin capitalization rule. As part of the Belgian tax reform however, a new thin capitalization rule has been introduced, as a result of which intercompany interest payments can become only partially taxdeductible. This new rule has entered into force on 1 July Thin capitalization rules prior to 1 July 2012 Prior to 1 July 2012, Belgium tax law contained two specific thin capitalization rules. These regulations are specific as they only apply to certain well-defined scenario s and hence do not have a general scope. These rules can be summarized as follows: According to a 1/1 thin capitalization rule, interest payments to a natural person that is either a shareholder or Director of the Belgium company are reclassified into dividend distributions to the extent the underlying interestgenerating debt exceeds the sum of the company s taxable reserves at the 1st day of the financial year and its paid-up capital at B/S date and/or to the extent the interest rate exceeds a fair market interest rate. Such reclassified interest is not tax-deductible for the debtor and always attracts 25% Belgium dividend withholding tax at the charge of the beneficiary. However, there is no impact whatsoever if the beneficiary of the interest is not a shareholder or Director of the Belgium company at hand. According to a 7/1 thin capitalization rule, interest payments made to a lowly taxed beneficiary are disallowed for Belgium corporate tax purposes to the extent that the tainted debt exceeds 7 times the sum of the Belgium company s taxable reserves at the 1st day of the financial year and its paid-up capital at B/S date. The impact of this anti-base erosion rule is thus that the interest is only partially tax-deductible. However, in practice, this anti-abuse rule came only into play when a Belgium company made interest payments to either a (former) Belgium Coordination Center or a tax haven beneficiary, e.g. based in Panama, Bermuda or the Bahamas New general 5/1 thin capitalization rule First of all, note that no changes have been made to the above-mentioned 1/1 thin capitalization rule. This rule remains applicable as before. As of 1 July 2012, the above-mentioned 7/1 thin capitalization rule however has been amended as follows: The 7/1 limit has been reduced to a 5/1 ratio, and ; The rule now applies to all intercompany interest payments, i.e. even when the beneficiary is not based in a tax haven jurisdiction. To avoid abuse, also a so-called antichannelling rule has been introduced: only the beneficial owner of the interest income has to apply the 5/1 thin capitalization test. Specifically, if an affiliate either provides a VMB Accountants & Tax Consultants cvba 1

2 3rd party (e.g. a bank) with the funds to be borrowed by a Belgium company or guarantees such lending operation and is exposed to the actual debtor s risk, then such affiliate is treated as the genuine lender for the purpose of the 5/1 limit. What is intercompany interest? To define intercompany interest Belgium tax law refers to the Belgium company law concept of a Group, i.e. lender and borrower are deemed to be part of the same Group if: The Belgium borrower has power of control over the lender, or vice versa; Both borrower and lender are part of a consortium; The Belgium Board of Directors is aware of the fact that both borrower and lender are under their control. As a general rule, control implies that one has a significant impact on the nomination of Directors and/or on the orientation of strategic decisions. Which intercompany financial transactions are out-of-scope? To avoid that the new 5/1 thin capitalization rule would affect intercompany loans of Groups of which the core business consists of financial transactions, certain companies have been excluded from this rule. This is e.g. the case for companies active in the banking, insurance, qualifying financial and real estate leasing transactions, factoring, etc. It is rumoured that other exceptions may still be added to this safe-harbour list. Example A Belgium company ( BelCo ) has borrowed EUR from its Dutch parent company. Assume the interest rate is 5% and meets open-market conditions. If the sum of BelCo s taxable reserves and paid-up capital equals EUR , all interest payments are tax-deductible since EUR is lower than EUR (or 5 x EUR ) ; If the sum of BelCo s taxable reserves and paid-up capital equals EUR , only 75% (or 5 x EUR / EUR ) of the total interest payments is tax-deductible. What do our neighbors do? As already mentioned, Belgium was one of the few countries that did not yet have a general thin capitalization rule. Indeed, to compare, please find hereafter a brief and simplified overview of some thin capitalization provisions laid down in the tax law of other jurisdictions: In The Netherlands, a general 3/1 thin capitalization rule is applicable: interest expenses are disallowed to the extent that intercompany debts exceed 3 times the borrowing Dutch company s net equity; The Luxembourg thin capitalization rule stems from administrative practice only and is thus not explicitly defined in tax law. That is, the Luxembourg tax authorities generally accept a 85/15 debt-equity ratio for intercompany loans that are concluded to acquire shares. Conversely, in the event of real estate companies, a 90/10 debt-equity ratio is often retained. Excessive interest payments are reclassified into a dividend distribution and generally attract 15% Luxembourg dividend withholding tax; In France, thin capitalization can arise if one of the following 3 thresholds is exceeded: (i) a 1,5/1 debt-equity ratio, (ii) 25% of the profit-before-tax in the hands of the French borrower including, amongst others, intercompany interest expenditure or (iii) intercompany interest income. Excessive interest is disallowed for French corporate tax purposes and, if conditions are satisfied, can be carried-forward to a subsequent financial year; A recent trend that we see in many European jurisdictions (e.g. Germany, Italy and Spain) is that a thin capitalization rule in essence comes down to an EBITDA-test. For example and simplified: in Germany, all (i.e. both intercompany and 3rd party) net interest expenses (i.e. interest expenses minus interest income) are only taxdeductible up to 30% of the German borrower s EBITDA. This European trend is inspired by US interest capping rules. This comparison shows that the Belgian 5/1 limit is actually fairly competitive compared with similar foreign anti-base erosion regulations. What to do next? It goes without saying that the new general 5/1 thin capitalization rule will have a significant impact on the Belgium market, not in the least since Belgium taxpayers have psychologically never been confronted with such an anti-base erosion test before. Consequently, it is strongly advised that Belgium companies take the following actions: Map all intercompany loans, incl. applicable interest rates and guaranty arrangements; Consider the Group s core business to ascertain whether an exemption is available; Simulate the 5/1 thin capitalization impact; Consider conversion of debt-into-equity to satisfy the 5/1 safe-harbour rule; Consider (partial) reimbursement of outstanding loans; Etc. VMB Accountants & Tax Consultants cvba 2

3 Financial leasing: a supply of a good or a service for VAT? The European Court of Justice ( ECJ ) recently defined a number of criteria under which the financial leasing of a good could qualify as a supply of a good. This case is in particular relevant, since financial leasing is not treated in the same way in all EU Member States. Also the Belgian VAT authorities might have to change their traditional position on this matter. From a Belgian perspective, leasing as a principle qualifies as a service. If the lessee levies a purchase option, only at that time and for that amount a supply of a good takes place (this as opposed to a hirepurchase). The qualification of leasing for VAT purposes is however a topic which is not harmonized across the EU. Some countries have similar rules as Belgium (e.g. France, UK, Luxembourg). But in other countries, leasing under certain conditions immediately qualifies as a supply of a good (e.g. The Netherlands, Germany). This different view on the qualification of leasing goes back to different interpretations of article 14(2)(b) of the VAT Directive, which states that the actual handing over of good pursuant to a contract for the hire of those goods for a certain period, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final installment is to be regarded as a supply of goods. In the case of a financial leasing contract however, there is not necessarily any acquisition of the good since such a contract may provide that the lessee has the option of not acquiring those goods at the end of the lease period. Criteria The ECJ started with stating that the leasing of a good, as a general rule, must be categorized as a supply of a service. However, referring to international accounting standard IAS 17, the ECJ is of the opinion that an operating lease must be distinguished from a finance lease. The nature of the latter being that substantially all the risks and rewards of legal ownership are transferred to the lessee. In this respect, one must bear in mind that for VAT purposes, the concept of supply of goods does not refer to the transfer of ownership under civil law, but to any transfer of tangible property by one party which empowers the other party actually to dispose of it as if the recipient were the owner of the property. For this reason, the ECJ ruled that a financial leasing contract can be considered as the supply of a good if one of the following two conditions is met: The ownership of the goods transfers to the lessee on expiracy of the contract, or The lessee is to possess all the essential powers attaching to the ownership of the good. This means in particular: - that substantially all the rewards and risks incidental to legal ownership of the good are transferred to the lessee, and - that the present value of the amount of the lease payments is practically identical to the market value of the property. Impact Whether a leasing qualifies as a supply of a good or a service can have an impact on many levels: The place of supply rules, which are different for services and goods; The person liable to pay the VAT due; The moment on which the VAT becomes due; The taxable basis on which VAT is due (e.g. can interest amounts be exempt?) VAT registration requirements in other countries. In this context, the question also arises whether in a financial leasing context the leased good will be considered as a capital good for VAT purposes in the hands of the lessor or the lessee? This is relevant to determine which party will be liable to make the necessary VAT deduction adjustments (if any). The traditional Belgian point of view is that the leased good only qualifies as a capital good in the hands of the lessor. This position might no longer make sense if the lease qualifies as a supply of a good. Actions to be taken? Businesses involved in financial leasing are recommended to monitor the further developments on national level. It is not unlikely that certain national tax authorities will refine their position in this respect. It seems rather unlikely that tax authorities will use this ECJ case to challenge the VAT treatment applied in the past on the basis of their own former administrative position. Business however need to be well aware of the implications of such a new administrative position for their future operations. Businesses that believe that the qualification of a financial leasing contract as a supply of a good would be more interesting in their situation (assuming the criteria are met), do not necessarily need to await an initiative from their national authorities. They can now proactively use this ECJ case to try to agree with the authorities on a different qualification, referring to the direct effect of the VAT Directive and the ECJ case law. VMB Accountants & Tax Consultants cvba 3

4 Be prepared for the new US FACTA rules A new set of US tax rules called FACTA - will have a significant impact on numerous non-us persons. FACTA stands for Foreign Account Tax Compliance Act. These new rules require non-us financial institutions (which are very broadly defined) and certain non-us entities owned by US persons to provide information to the US tax authorities (IRS) in order to identify US persons investing in non-us bank and financial accounts. To encourage such non-us persons to duly comply with this identification formality, a new 30% US withholding tax is levied on withholdable payments made to nonparticipating foreign financial institutions (FFI). Withholdable payments include all US-source income and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from US-sources. A FFI is a non-us entity that accepts, deposits or holds financial assets for the account of others as a substantial part of its business, or engages primarily in the business of investing or trading securities, commodities, partnerships, etc. A participating FFI will conclude an identification agreement with the IRS and will thus not be subject to the aforesaid 30% US withholding tax. If you believe that the new US FACTA rules can impact your business, you are strongly encouraged to: Conduct education sessions across your organization for awareness purposes; Develop a communication plan for notifying your customers; Identify FFI funds, products or entities within your organization and begin the registration process; Compare existing customer data to proposed FACTA requirements; Review current technology and reporting infrastructure; Etc. New VAT treatment proposed for vouchers The EU Commission has recently published a proposal for Directive on the VAT treatment of vouchers. The new rules are scheduled to enter into force on national level as from 1 January The EU VAT Directive currently does not provide for rules on the VAT treatment of transactions involving vouchers. The absence of common rules has obliged EU Member State to develop their own VAT rules in this respect. This lack of coordination is in particular problematic for cross-border situations and for chain transactions in the commercial distribution of vouchers. The ECJ has on several occasions been asked how the VAT Directive should be applied in this respect. To provide clarity on this matter, the Commission has now proposed a specific VAT treatment for vouchers. What is a voucher? A voucher is an instrument which gives the holder a right to goods or services, or to receive a price discount or rebate with regard to a supply of goods or services. An instrument whose purpose is merely the making of payments is not be regarded as a voucher. The Commission proposal distinguishes 3 types of vouchers: A discount voucher: a voucher carrying a right to receive a price discount or rebate with regard to a supply of goods or services. A single-purpose voucher: a voucher carrying a right to receive a supply of goods or services where the supplier's identity, the place of supply and the applicable VAT rate for these goods or services is known at the time of issue of the voucher. A multi-purpose voucher: any other voucher. Proposed VAT treatment The sale of a single-purchase voucher would be considered as an advance payment for the supply of the good/service to which it relates. As a result, the VAT becomes due immediately, i.e. upon payment for the voucher. In case of a sale of a multi-purpose voucher, the VAT would only become due when the voucher is redeemed for a specific good or a service. Intermediary persons selling multi-purpose vouchers will be considered to render a distribution service to the issuer of the voucher (or the previous distributor in the chain). The taxable amount of their service is determined by the difference between the nominal value of the voucher and the price paid by the intermediary person. The Commission proposes to treat free discount vouchers not longer as a third party consideration, but as a redemption service which is supplied by the redeemer towards the issuer of the voucher. Next steps The proposal will have an impact on all entrepreneurs issuing, redeeming or distributing vouchers. In case this proposal is adopted in its current form, the Belgian authorities will certainly need to amend their position in this matter. Do note that the proposal however still needs to be approved by the EU Council and published as a Directive. VMB Accountants & Tax Consultants cvba 4

5 International tax highlights Belgium Cyprus EU India Japan Kazakhstan Russia Switzerland Switzerland EU requests to amend notional interest deduction (NID) rule - The European Commission has officially asked Belgium to amend its NID legislation. Current Belgian rules provide that a NID is granted for BE GAAP equity corresponding with Belgian based real estate and permanent establishments, while no NID is granted for foreign based real estate and permanent establishments. The EU does not challenge NID as such, only its discriminatory application. New attractive tax legislation for Intellectual Property - Cyprus tax legislation has been amended in such a way that there will be a 80% tax exemption for net royalties and net capital gains derived from IP owned by Cypriot resident companies. This results in a 2% effective tax rate. The definition of IP comprises all intangible assets, including copyrights, patents and trademarks. All expenditure of a capital nature for the acquisition or development of IP is tax-deductible over 5 tax years. Vote for a compulsory common corporate tax basis (CCCTB) - The use of a CCCTB should be made compulsory, said the EU Parliament in a recent vote. Initially, the CCCTB would only apply to European cooperative companies, which are by nature cross-border. After 5 years, it would apply to all companies while small and medium-sized enterprises (SME) can opt for it if they so wish. SMEs should also benefit from reduced administrative burdens. The CCCTB system would give companies a single set of rules for calculating their taxable profits, rather than having to comply with differing accounting rules in each Member State in which they work. CCCTB does however not impose any common tax rates. New PAN Application Form - The Permanent Account Number (PAN) is very important for both Indian entities and foreign entities doing business with Indian entities. E.g. without a PAN it is not possible to file an Indian tax return or open a bank account. As more foreign investment flows into India, the number of PAN applications will continue to increase. For this reason, the Finance Ministry has recently revised both the Form and application process. Reduced corporate tax rate, but new surtax - For fiscal years starting as of 1 April 2012, the corporate tax rate is reduced from 30% to 25,5% and applies to ordinary corporations with a share capital exceeding JPY 100 million. However, simultaneously a 10% surtax is imposed for 3 years. As a result, the national corporate tax rate equals 28,05% for the 1st 3 years, and 25,5% thereafter. For SMEs, the 18% special tax rate for the 1st JPY 8 million of taxable income is reduced to 15% (also subject to the new 10% surtax) for fiscal years starting between 1 April 2012 and 31 March Thus, the national corporate tax rate for SMEs will be 16,5% for the above periods as regards the 1st JPY 8 million of income. Simplified rules for registration and liquidation - New rules are proposed to simplify the registration and liquidation procedures for legal entities, as well as the registration of branches and representative offices. E.g.: on-line registration would be allowed while paper registration certificates would be replaced by electronic certificates. Also, Kazakhstan would move from a permission-based registration system to a notification system. More stringent rules regarding treaty shopping and payments to blacklisted jurisdictions - The Federal Tax Service submitted to the Parliament proposed changes to the Russian Tax Code to limit treaty shopping and allow the Russian tax authorities to challenge the tax deduction of certain payments made to blacklisted offshore jurisdictions. This proposal is in line with the Russian Government's tax policies, designed to counteract abusive tax planning and encourage offshore companies to move to Russia Willingness to conclude tax information exchange agreements - Switzerland and the Global Forum on Transparency and Exchange of Information for Tax Purposes agreed that Switzerland will provide mutual administrative assistance in accordance with international standards to interested countries and territories. In this way, Switzerland wants to prevent illegal flows of capital and strengthen the integrity of Switzerland's financial centre. Lump-sum taxation of eligible individuals will not be abolished - In May 2012, the Swiss Government has confirmed that it will not abolish the lump-sum personal income taxation that applies to wealthy foreigners. To VMB Accountants & Tax Consultants cvba 5

6 be eligible for this lump-sum taxation, a foreigner needs to earn a taxable income of at least CHF per annum. Ukraine New tax incentives for IT industry - The Parliament of Ukraine has adopted laws that provide major tax incentives to the IT industry, incl. a VAT exemption and a 5% corporate tax rate for qualifying activities in the period between 1 January 2013 and 1 January To actually be eligible for these incentives, IT companies should file an application. To keep in mind January 2012 Application of new computation method of benefit in kind derived from a company car for Belgium personal tax purposes 1 January 2012 Application of new general anti-abuse of law rule for Belgium personal tax purposes 1 January 2012 Obligation to report qualifying interest and dividend income, as well as the identity of the beneficiary, to a Central Database (unless 25% WHT was applied at source) 1 January 2012 In case of qualifying interest and dividend income exceeding EUR per calendar year, in principle 4% additional tax is due above 21% WHT. Debtors of this income have to remit this 4% on the bank account BE of the tax authorities within 15 calendar days as of the date of attribution of the income. Within the same deadline, a tax return 273C has to be filed by that debtor 16 April 2012 The sales price of real estate can only be paid in cash for maximum EUR (before: EUR ) while the excess can only be paid by bank wire transfer or cheque. The real estate purchase deed has to explicitly mention the seller s bank account. 1 May 2012 Application of new computation method of benefit in kind derived from a company car for Belgium payroll withholding tax purposes 1 June 2012 Application of new general anti-abuse of law rule for Belgium capital duty and succession duty purposes 30 June 2012 Ultimate deadline to regularize previously non-reported benefits in kind, to avoid a 309% secret commission assessment 1 July 2012 Interest made payable as of 1 July 2012 is in principle subject to the new 5/1 thin capitalization rule, unless an earlier date of entry into force will be defined 1 July 2012 The lump-sum mileage allowance for employees who use their own car for professional purposes increases to 0,3456 /km 30 December 2012 Financial years closing per (or before) 30 December 2012 are eligible for a notional interest deduction ( NID ) of 3,425% 31 December 2012 Companies with a year-end date as of 31 December 2012 are subject to the new corporate tax rules governing capital gains/losses on shares 31 December 2012 Companies with a year-end date as of 31 December 2012 are subject to the new general anti-abuse of law rule for corporate tax purposes 31 December 2012 Financial years closing as from 31 December 2012 are likely eligible for a NID of 3% 31 December 2012 Deadline to convert bearer securities at 1% stamp duty tax VMB Accountants & Tax Consultants cvba 6

7 January 2013 Entry into force of new VAT invoicing Directive 31 December 2013 Ultimate deadline to convert bearer securities (at 2% stamp duty tax) January 2014 The sales price of real estate can only be paid by bank wire transfer or cheque VMB Offices 2000 Antwerp Entrepotkaai Brussels Koning Albert I laan Hasselt Kempische Steenweg 301, bus Neerpelt Toekomstlaan 1B +32 (0) (0) (0) (0) The material contained in this publication is not intended to be advice in any particular matter. Should you consider to act on the basis of any matter contained in this publication, please contact us for appropriate professional advice with your regular VMB contact or with Kurt De Haen (kurt.dehaen@vmb.be) or Wouter Brackx (wouter.brackx@vmb.be). VMB Accountants & Tax Consultantss cvba 7