23 January 2015 International Tax Alert News from the Global Tax Desk Network EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: http://www.ey.com/gl/en/ Services/Tax/International- Tax/Tax-alert-library#date France and Singapore sign revised income tax treaty Executive summary On 15 January 2015, France and Singapore signed a revised tax treaty (Revised Treaty) which will replace the existing treaty signed in 1974. In addition to updates to the wording reflecting changes to the Organisation for Economic Co-Operation and Development (OECD) Model Tax Convention, the highlights include an increase in the time threshold for the creation of a construction permanent establishment (PE), exemption or reduction of withholding tax on dividends and interest and introduction of a main purpose test type general anti-abuse rule. The Revised Treaty will have the force of law upon the exchange of notifications of ratification. In France, it will become effective after the calendar year in which the Revised Treaty enters into force. In Singapore, the provisions of the Revised Treaty will have effect in respect of tax chargeable for any year of assessment 1 beginning on or after 1 January in the second calendar year following the year in which the Revised Treaty enters into force; in all other cases, on or after 1 January of the calendar year next following the date on which the Revised Treaty enters into force. This Alert summarizes the key provisions outlined in the Revised Treaty. Detailed discussion The key features of the Revised Treaty are summarized below. PE definition In determining whether a building site, a construction, assembly or installation project or supervisory activities in connection therewith constitutes a PE, the time threshold is extended from 6 months to 12 months.
The Revised Treaty includes a service PE provision found in the United Nations Model Double Taxation Convention. The furnishing of services, including consultancy services, by an enterprise of a Contracting State directly or through employees or other personnel engaged by the enterprise for such purpose, would create a PE if the service activities continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 365 days within any 15-month period. There is no change to the specified activities deemed not to be a PE. In the Revised Treaty, consistent with the OECD Model Tax Convention, it is added that a PE will not be deemed to include the maintenance of a fixed place of business solely for any combination of the specified activities, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. Further, the Revised Treaty removes the provision which deems a person who maintains a stock of goods or merchandise from which he regularly fills orders on behalf of the enterprise to represent a PE. Exemption of profits from operation of ships or aircraft in international traffic The allocation of taxing rights is now aligned to the place of effective management of the enterprise instead of the Contracting State of the enterprise. It is added that the profits from the operation of ships or aircraft in international traffic include income incidental to such operation such as interest generated by the funds required for the carrying on of such operation and profits from the bareboat charter of ships or aircraft and profits from the use, maintenance or rental of containers. Taxation of dividends The Revised Treaty provides a reduced withholding tax rate on dividends of 5% (currently 10%) if the recipient is the beneficial owner of the dividends and owns directly or indirectly at least 10% of the share capital of the company paying the dividends. 2 In other cases, a reduced withholding tax rate of 15% continues to apply. The definition of dividend is extended to include any income treated as a distribution by the laws of the source State. In addition, distribution of income by an investment vehicle organized under the laws of a Contracting State will be treated as a dividend under certain circumstances. Taxation of interest The treaty withholding tax rate is maintained at 10%. 3 The exemption of interest on debentures or loans issued by an enterprise engaged in an industrial undertaking is removed. Further, the exemption coverage is expanded to include the following: Interest paid in respect of a debtclaim or of a loan guaranteed or insured or subsidized by the government of a Contracting State or by any other person acting on behalf of a Contracting State and interest paid by an enterprise of one of the Contracting States to an enterprise of the other Contracting State. The definition of interest under the Revised Treaty explicitly includes premiums and prizes attaching to government securities as well as to bonds and debentures. Capital gains tax (CGT) exemption The Revised Treaty continues to exclude a CGT exemption on gains derived from disposal of land-rich entities. The definition of a landrich entity is amended to refer to an entity (e.g., company, trust or any other institution or entity) the assets or property of which consist of more than 50% of their value, or derive more than 50% of their value, directly or indirectly through the interposition of one or more other companies, trusts, institutions or entities, from immovable property situated in a Contracting State. Immovable property pertaining to business carried on personally by such company shall not be taken into account. Elimination of double taxation In the case of a resident of France, the Revised Treaty provides elimination of double taxation through a tax credit in lieu of deduction for income that is not exempted under the French corporation tax according to the Revised Treaty or French domestic law. 2 International Tax Alert Global Tax Desk Network
The Revised Treaty provides elimination of double taxation by tax exemption on certain dividends and profits attributable to a PE situated in a Contracting State of an enterprise of the other State and remitted to the Contracting State. Where the resident of a Contracting State owns directly at least 10 % of the capital of the dividend paying company resident in the other State, the dividends received will be exempted from tax in the Contracting State. Further, the Revised Treaty eliminates the matching credit on royalties whereby, under the existing treaty, France allows to credit against French tax an amount equal to 10% of the gross amount of the royalties which arise from sources within Singapore which qualify for treaty exemption. Time limit for seeking resolution under mutual agreement procedure (MAP) The Revised Treaty includes a time limit of three years from the first notification of an action resulting in taxation not in accordance with the treaty provisions for a resident of a Contracting State to seek resolution under MAP. Introduction of general antiavoidance rules The provisions of the articles on dividends, interests and royalties are amended to include a beneficial ownership test. The Revised Treaty includes a new provision denying treaty benefits where the main purpose of transactions or arrangements was to secure a more favorable tax treatment which would be contrary to the object and purpose of the relevant treaty provisions. Endnotes 1. The term year of assessment (YA) refers to the year in which income tax is assessed on the company. The basis period for a particular YA for a company is the financial year ending in the year preceding that YA. 2. Singapore does not currently impose any withholding tax on dividends. 3. No withholding tax is imposed under the French domestic law, other than payments to certain non-cooperative jurisdictions. International Tax Alert Global Tax Desk Network 3
For additional information with respect to this Alert, please contact the following: Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty +1 212 773 7479 chris.finnerty@ey.com Kaz Parsch +1 212 773 7201 kazuyo.parsch@ey.com Bee-Khun Yap +1 212 773 1816 bee-khun.yap@ey.com Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Scott +1 713 751 5775 trang.scott@ey.com Ernst & Young LLP, French Tax Desk, New York Frédéric Vallat +1 212 773 5889 frederic.vallat@ey.com Daniel Brandstaetter +1 212 773 9164 daniel.brandstaetter@ey.com Laurent Bibaut +1 212 773 6817 laurent.bibaut@ey.com Ernst & Young Solutions LLP, International Tax Services, Singapore Chung-Sim Siew Moon +65 6309 8807 siew-moon.sim@sg.ey.com Chester Wee +65 6309 8230 chester.wee@sg.ey.com Desmond Teo +65 6309 6111 desmond.teo@sg.ey.com Matthieu Chevalier +65 6309 8401 matthieu.chevalier@sg.ey.com Ernst & Young Société d Avocats, Paris Claire Acard +33 1 55 61 10 85 claire.acard@ey-avocats.com Eric Verron +33 1 55 61 13 31 eric.verron@ey-avocats.com Global Tax Desk Network of Ernst & Young LLP in the United States Argentina Hungary Russia Australia Austria Belgium Brazil Canada China (Mainland) Czech Republic Denmark Finland France Germany Hong Kong Iceland India Ireland Israel Italy Japan Luxembourg Mexico Netherlands Norway Pan-Africa Poland Scandinavia Spain Sweden Switzerland Turkey United Kingdom Vietnam Asia Pacific Business Group Central European Business Group Eastern European Business Group EMEIA Financial Services Latin American Business Center 4 International Tax Alert Global Tax Desk Network
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