Moore Stephens European Tax Brief. This newsletter summarises important recent tax developments of international interest taking place in Europe and in other countries within the Moore Stephens European Region.
The material discussed in this newsletter is meant to provide general information only and should not be acted upon without first obtaining professional advice tailored to your particular needs. European Tax Brief is published quarterly by Moore Stephens Europe Limited in Brussels.
Government introduces corporate 'fairness' tax
In search of extra revenue, the Belgian government has introduced a so-called 'fairness tax', a minimum tax for companies that distribute dividends, but have a zero corporate tax liability due to tax losses brought forward and/or a notional interest deduction.
The new tax is applicable to large companies only. Small or medium-sized companies do not fall within the scope of the fairness tax. A company is considered large if it exceeds two or more of the following thresholds:
- annual turnover: EUR 7.3 million;
- balance-sheet value: EUR 3.65 million; or
- average full-time employees: 50.
If the average number of full-time employees exceeds 100, the company is large whatever its turnover or value. The existence of associated companies must be taken into account.
The dividends that might trigger liability to the new fairness tax are 'normal' dividends. Liquidation proceeds are not targeted, nor are the dividends distributed under the temporary transitional measure whereby reserves may be capitalised in return for a one-off 10% withholding tax.
The calculation of the fairness tax is achieved in three steps.
First, the final taxable profit is subtracted from the total of dividends distributed throughout the accounting year.
If the company's final taxable profit equals or is greater than the distributed dividends, no fairness tax will be due.
If the result of the operation is positive, however, the calculation proceeds to step two.
The fairness tax is applicable as of tax year 2014 (accounting periods ending on or later than 31 December 2013).
As a transitional measure, dividends originating from reserves taxed in previous accounting years and at the latest tax year, 2014 will not be subject to the fairness tax. In deciding which dividends are attributable to previous years' reserves, the LIFO method must be used.
Step two then consists of deducting any such dividends from the result of step one.
The fairness tax targets companies that eliminate their taxable profit by means of the notional interest deduction and tax losses brought forward. Losses due to the exemption for results of foreign branches, the dividends received deduction or the deduction for patent income will not give rise to the fairness tax.
Step three therefore consists of multiplying the step two result by a fraction in which the denominator is equal to the taxable profit augmented by the dividend distribution and disallowed expenditure and the numerator is equal to the notional interest deduction plus the tax losses brought forward and set off against the taxable profit.
The rate of the fairness tax is 5.15%, which is applied to the result of step three. The fairness tax is not deductible for corporate income tax purposes and cannot be decreased by any available tax reliefs or credits.
Belgian branches of foreign companies may also be subject to the Belgian fairness tax if the company is a large company.
Since permanent establishments cannot distribute dividends, the expression 'dividends' in the case of permanent establishments is taken to mean that proportion of the gross dividends distributed by the head office which corresponds to the proportion that the Belgian branch's [positive] profit bears to the total profits of the foreign company.
However, the legislation for the profit tax is worded in such a way that unwanted or unexpected results may ensue. For example, suppose a Belgian company receives income from a foreign branch but has no other taxable income. This foreign income is exempt from Belgian corporate income tax. If in a future year, the company makes a small gross taxable profit entirely offset by the notional interest deduction and decides to distribute the previous foreign branch earnings, it may have a liability to fairness tax higher than its gross taxable profit and payable, moreover, in respect of tax-exempt income.
Moore Stephens has asked the Ministry of Finance for clarification in this respect.
The Belgian State is expecting revenues of EUR 140m from the new fairness tax. The legislative flaws ought, however, at least to be clarified and preferably eliminated if numerous administrative procedures and possibly litigation are to be avoided.
Notional-interest deduction cannot exclude foreign branch assets
The Court of Justice of the European Union (CJEU) has held that Belgium may not exclude the assets of a company's permanent establishments abroad from the calculation of the notional-interest deduction.
Under Belgian law, as an incentive for equity financing as opposed to debt financing, companies may claim a deduction for notional interest, as a fixed percentage of their total equity at the end of the preceding financial year. However, if the company has a foreign permanent establishment the income from which is exempt from tax in Belgium under a tax treaty, it must deduct the value of the net assets of that establishment from the equity base on which the notional interest is calculated.
In Argenta v Belgium (Case-350/11), the taxpayer was a Belgian bank with a branch (permanent establishment) in the Netherlands, and was required by the Belgian tax authorities to reduce its equity base for the purposes of calculation of its notional interest, as described. Argenta v Belgium (Case- 350/11), the taxpayer was a Belgian bank with a branch (permanent establishment) in the Netherlands, and was required by the Belgian tax authorities to reduce its equity base for the purposes of calculation of its notional interest, as described. Argenta argued that this rule was in breach of the freedom of establishment guaranteed under Article 49 of the Treaty on the Functioning of the European Union (TFEU).
The CJEU found in Argenta's favour. It held that the rule was indeed in breach of Article 49 and could not be justified either on the grounds of the need to preserve the coherence of the fiscal system or the need for a balanced allocation of taxing powers between Member States.
Since a notional interest deduction was available even where there was no profit or income, restricting it to cases where profits were taxable in Belgium could not be justified on coherence grounds. The fact that Belgium had chosen in a double tax treaty to exempt income from a permanent establishment in another Member State could not systematically justify any refusal to grant an advantage to a company with a permanent establishment in the other state. The notional interest deduction did not jeopardise either country's power to tax income arising in its territory and so would not result in the shifting of income from one state to the other.
Partial-exemption calculation cannot include foreign-branch turnover
In its recent judgment in a VAT case, Case C-388/11 (Le Crédit Lyonnais v Ministre du Budget, des Comptes Publics et de la Réforme de l'Etat), the Court of Justice of the European Union (CJEU) confirmed that a partly exempt taxable person cannot include the turnover of its foreign branches in its partial-exemption calculation.
Crédit Lyonnais is a French bank with an international presence in the form of branches both in other EU Member States and in third countries. Where a taxable person carries out both taxable transactions and exempt transactions (i.e. it is 'partly exempt'), it may fully deduct the input VAT attributable directly to taxable transactions and has no right of deduction in respect of input VAT directly attributable to exempt transactions. Where input VAT (e.g. on overheads) is attributable to both taxable and exempt transactions, a proportion of that VAT is deductible. The standard method of calculating that proportion is to divide its taxable turnover by its total turnover. The bank argued that it should be able to include the turnover of its foreign branches in that calculation, since earlier case law of the CJEU had held that a principal establishment together with its foreign branches must be regarded as a single entity.
The CJEU rejected the bank's argument, however, supplies made by fixed establishments in other Member States were subject to the laws of those states and thus to those states' systems of deduction. Neither was there any support in the VAT directive for the notion that supplies made by fixed establishments in third states could affect the deduction system to which the principal establishment was subject. It followed that neither the turnover of a branch in another Member State nor the turnover of a branch outside the European Union could be included in the partial-exemption calculation for the principal establishment.
Finally, the Court held that where a Member State adopts a partial-exemption method where the calculation is to be carried out separately for each sector of a business, it could not adopt a rule that authorised a taxable person to take into account the turnover of a foreign branch.
EU enacts anti-VAT fraud directives
Following their approval by the Council of the European Union, which consists of representatives of the governments of the 28 Member States, two VAT directives proposed by the European Commission to tackle VAT fraud have been adopted.
As reported in European Tax Brief, Volume 2 Issue 4 (January 2013), the two proposals formed part of the Commission's Action Plan against tax fraud, evasion and aggressive tax avoidance, launched on 6 December 2012.
Under the so-called 'quick reaction mechanism' (QRM), now contained in directive 2013/42/EU, Member States are authorised to take immediate measures when cases of sudden and massive VAT fraud are discovered. Previously, where a Member State wished to take measures not authorised under the VAT directive (2006/112/EC), it had to apply for a derogation to the Commission and this could take many months, if not longer.
Under the new QRM, a request by a Member State to introduce a temporary reverse charge mechanism to combat the fraud in question has to be either approved or refused by the Commission within one month, provided sufficient evidence of the fraud has been presented to it and other Member States. If approved, the mechanism is put in place for a maximum of nine months. Under the reverse charge, the obligation to account for and pay VAT on a supply is transferred from the supplier to the customer.
The second measure, contained in directive 2013/43/EU, approved by the Council allows the reverse charge to be applied optionally and temporarily to the supply of certain goods and services thought to be particularly susceptible to fraud, and not already specifically allowed under the VAT directive or the subject of a special derogation awarded to the Member State in question.
These temporary applications of the reverse charge must apply for a minimum of two years but may last no longer than 31 December 2018, allowing the Commission to work on a permanent solution to the problem.
The reverse charge is particularly effective in combating carousel fraud, which is one of the most commonly occurring types of VAT fraud. Under carousel fraud, supplies are traded rapidly several times without payment of VAT.
According to the latest study from the Commission, the 'VAT Gap', which is the difference between the VAT actually collected and the amount that theoretically should have been collected based on trade statistics, cost the European Union and Member States EUR 183 000 million in 2011. Not all of the VAT Gap is attributable to fraud, however.
Commission launches standard VAT return
The European Commission has published its proposal for a standard VAT return to be used in all 28 Member States. The proposal, which takes the form of a proposal for a directive, together with supporting documents, has been described by Commissioner Šemeta as a 'win-win situation', and would if adopted, see the standard return replace all the existing 28 different national VAT returns.
The Commission believes that use of the new return, together with the introduction of uniform return periods, could cut costs for EU businesses by up to EUR 15 000 million a year. The proposal foresees a uniform set of requirements for businesses when filing their VAT returns, regardless of the Member State in which they do so.
To quote the Commission: 'Every year, 150 million VAT returns are submitted by EU taxpayers to national tax administrations. Currently, the information requested, the format of national forms and the reporting deadlines vary considerably from one Member State to the next. This makes VAT returns for cross-border businesses a complex, costly and cumbersome procedure. Businesses operating in more than one Member State have also complained that it is difficult to remain VAT compliant, due to the intricacy of the process'.
The new standard VAT return has only five compulsory boxes for taxpayers to fill in. Member States would have the option to request a number of additional standardised elements, up to a maximum of 26 information boxes. By contrast some Member States currently require up to 100 information boxes to be completed.
There would also be a standard return period throughout the European Union. Businesses would file the standard VAT return on a monthly basis, but micro-enterprises would have a quarterly return period. The obligation to submit a recapitulative annual VAT return, which some Member States currently demand, would be abolished. The proposal also encourages but does not mandate electronic filing, as electronic filing would have to be made available throughout the European Union.
Even if the proposal is approved on schedule, the new return is unlikely to be up and running before 2016.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.