European Union: European Tax Bulletin For Real Estate Funds: September 2012

Last Updated: 13 September 2012
Article by Deloitte Real Estate Group

Most Read Contributor in UK, August 2017

DENMARK: PARLIAMENT PASSES CORPORATE INCOME TAX CHANGES

The Danish Parliament passed a bill that contains a number of provisions designed to ensure, in particular, that multinational companies contribute to the financing of Danish welfare and to collect more revenue from such companies. The new law was published in the Official Gazette on 19 June 2012 and will generally increase the burden on Danish businesses, and includes the following measures:

  • A cap on the carryforward of tax losses;
  • The reintroduction of joint and several liability for jointly taxed companies;
  • A requirement to obtain an auditor's report in certain cases;
  • The publication of information about a company's tax matters; and
  • Rules affecting the allocation of income to a permanent establishment ("PE").

Tax loss carryforwards

The new law introduces restrictions on the carryforward of tax losses to ensure that a company making taxable profits in any year over a certain threshold pays some tax in that year. Losses still will be able to be carried forward indefinitely. Losses from previous years will be fully deductible up to taxable income that does not exceed DKK 7.5 million (to be adjusted annually), with any remaining losses only available to reduce remaining income by 60%. The restriction on the use of losses will take place at the level of joint taxation, i.e. it will apply where the total income of jointly taxed companies before losses exceeds DKK 7.5 million.

The new law codifies the "unity principle," under which the losses of a company or its jointly taxed subsidiaries may not be utilised by the group after a tax-exempt restructuring. In the past, the Danish tax court has overruled the tax authorities' attempts to apply this principle in connection with tax-exempt restructurings. Non-group-related assets and liabilities or the assets and liabilities of an unrelated company cannot be included in a joint taxation without impacting the tax loss position of the group.

The restrictions on loss carryforwards apply for income years starting on or after 1 July 2012 and the codification of the unity principle applies to restructurings occuring on or after that date.

Joint and several liability

Joint and several liability has been reintroduced (it was abolished in 2005 in connection with the introduction of mandatory joint taxation (group consolidation)) for income tax, on-account tax, underpaid tax, etc. The administration company of the joint taxation group and jointly taxed companies, in which all shares are held directly or indirectly by the ultimate parent company at the end of the income year, will be jointly and severally liable for the tax of these companies. Other companies in which all shares are held directly or indirectly by the company or companies owing the tax will also be jointly and severally liable. Certain individuals will have to be included in the assessment.

Other companies included in joint taxation (i.e. minority companies) will be liable on a subordinated basis, and the Danish tax authorities will be required to secure the relevant tax from the wholly owned companies before pursuing any claims against minority companies.

Similar principles will apply for withholding tax (i.e. on dividends, interest and royalties) for companies that are jointly taxed.

These provisions will apply from the income year starting on or after 1 July 2012 and for tax payments due on or after that date.

Assurance report

Beginning on 1 January 2013, the Danish tax authorities will be empowered to require certain businesses that are obliged to prepare transfer pricing documentation to obtain an assurance report on the transfer pricing documentation from an independent auditor. The auditor may not be the same as the person who audits the company's annual accounts or who assists in preparing the transfer pricing documentation. The independent auditor will have to certify whether he/she found any evidence that indicates that the company's controlled transactions do not comply with the arm's length principle.

The assurance report obligation will apply to companies that have transactions with related parties located outside the EU/EEA and resident in countries that have not concluded a tax treaty with Denmark and to companies that have had, on average, an operating deficit over the past four years (according to their annual accounts), measured as the company's operating income before financing, extraordinary items and taxes. Special rules will apply to banks and insurance companies.

The existing rules allowing the Danish tax authorities to assess taxable income will apply if the assurance report is not submitted within 90 days from the request. Further, the penalties for failure to comply with the transfer pricing documentation rules will be increased.

Publication of company tax information

As from 1 July 2012, the Danish tax authorities will be authorised to publish certain information about a company's tax matters (applicable to all companies required to file a Danish tax return). Such information includes the taxable income of a company after the deduction of losses for previous years, utilised losses for previous years and tax payable for the year, as well as the rules under which the company is taxed (e.g. Corporate Tax Act, Act on Foundations, Tonnage Tax Act or Hydrocarbon Tax Act).

Allocation of income to a PE

The new law brings Danish law in line with OECD principles, specifically the 2010 revision of the OECD model treaty, which essentially adopts the separate legal entity approach for the allocation of income to a PE (i.e. a PE is to be treated as an entity independent of the entity of which it is a part). The new measures will apply in situations in which there is no tax treaty or where an applicable treaty is based on the amended version of the OECD model treaty. Where the treaty is not based on the OECD model, the allocation will be based on the principles under the relevant treaty.

This provision will apply for income years beginning on or after 1 July 2012, although taxpayers will have the option to apply the new assessment method as from their 2012 income year.

DENMARK: AUTHORITIES RULE EU PARENT IS BENEFICIAL OWNER OF DEEMED DIVIDENDS

The Danish National Board published a binding ruling on 2 May 2012 dealing with the beneficial ownership of deemed dividend distributions from a Danish company to a non-Danish-resident company. The National Board ruled in favour of the taxpayer, allowing the deemed dividend to be distributed from Denmark free from Danish withholding tax.

This is the first case in which the National Board has found that an EU parent company to be the beneficial owner of a deemed dividend distribution.

Background

Under Danish tax law, dividends paid to a non-resident company are subject to withholding tax unless certain conditions are satisfied. The withholding tax is currently levied at a rate of 27% (28% before 1 January 2012) on dividends paid to a parent company, but may be reduced or eliminated if a taxpayer is entitled to invoke the benefits of a tax treaty or the EU Parent Subsidiary Directive ("PSD"). To benefit from treaty protection, the taxpayer must normally be the beneficial owner of the dividend income.

Facts of the case

The case before the board considered a Danish company that owned two Polish companies and was ultimately held by a Jersey company through intermediate holding companies in the Netherlands. The group considered transferring two Polish companies to a Polish fund through share exchanges and a share sale. The group argued that the deemed dividend distribution from the Danish company to its Dutch holding company as a result of the transfer would not trigger Danish withholding tax, whereas a deemed dividend distribution to the ultimate Jersey parent company would trigger Danish withholding tax at 27%.

Decision of National Board

The National Board found that the Dutch company should be considered the beneficial owner of the deemed dividends, because the dividends were subsequently not passed further up the chain. Accordingly, since the Dutch company was considered the beneficial owner of the dividends, no Danish withholding taxes should be imposed.

DENMARK: NEW RULES FACILITATE ENTRY OF FOREIGN INVESTMENT FUNDS INTO THE DANISH MARKET

On 8 May 2012 the Danish Parliament approved changes to the rules governing publicly traded Danish investment funds. The new rules simplify the administrative requirements for a mutual fund to be considered a "distributing fund," with the result that foreign mutual funds will be as attractive as Danish funds from a tax perspective, enabling foreign fund administrators to market their funds in Denmark. The rules will have effect as from 1 January 2013.

Under Danish law, the tax treatment of a mutual fund depends on whether the fund is classified as a distributing fund or an investment company. As discussed below, it is more advantageous for Danish individuals to invest in a distributing fund when the distributing fund invests in shares. However, the rigid requirements that must be met to qualify as a distributing fund (e.g. the fund can only issue one class of shares and it must make an annual distribution of certain income determined through complex calculations etc.) have effectively restricted the marketing of foreign funds to private investors in Denmark.

Under the new rules, distributing funds will be permitted to issue multiple classes of shares and they will not be subject to the detailed and complex distribution rules. The new rules will impact distributing share-based funds (i.e. those that invest at least 50% of their assets in shares) in particular.

Investment income earned by Danish individuals is taxed differently depending on whether the income derives from shares or other financial assets. For 2012, qualifying share income is taxed at a rate of 27% and non-qualifying share income that is deemed capital in nature is taxed at a higher rate of 42%, whereas income from other financial assets is taxed at a rate of up to 45.5% (to be reduced to 42% in 2014). For Danish tax purposes, it is only possible for investors to classify income from an investment fund as lower-taxed income from shares where the fund is classified as a share-based distributing fund.

Obstacles under existing rules

The inability of distributing funds to issue multiple classes of shares typically has been the primary deterrent to establishing and marketing Danish investment funds. The new rules abolish the single share class requirement.

However, to retain classification as a distributing fund and thereby be able to distribute dividends and capital gains on shares and income from shares, the difference in share classes can only vary with respect to currency denomination and/or allocation of administration costs.

The other requirement that has impeded the marketing of foreign investment funds is that, in the case of a fund classified as a distributing fund, all income realised during the year must be either distributed to the investors or retained in the fund, with a consequent step-up in the value of the certificates, with the investors being taxed on a calculated distribution regardless of whether the income is in fact distributed. The distribution currently must be calculated for the various types of assets, taking into account the fact that income can be classified as deriving from shares, receivables, derivatives, etc., as well as specific restrictions on the utilisation of losses.

However, under the new rules, the net income and calculation of the mandatory distribution will be simplified so that from 2013:

New rules

  • The entire distribution will be considered to derive from shares or other financial assets, regardless of whether the fund has a mixture of assets; and
  • The distribution will be comprised solely of the net return for the year, rather than the result arising from matching losses to specific gains, etc.

This revision to the way in which the distribution is calculated represents a significant simplification of the current rules, which hitherto have proven a formidable obstacle to foreign providers of investment fund products. Finally, it is proposed that holdings in other share-based funds (master/feeder structures) be considered holdings of shares, which will further widen the scope of a fund's investment possibilities.

FRANCE: REVISED BUDGET FOR 2012

The French government announced on 4 July 2012 a series of new taxes (that would raise approximately €7.2 billion) to fulfill campaign pledges to reduce the French deficit. The proposed measures, included in the second revised budget for 2012, will impact resident and foreign companies and individuals.

In addition to one-off surcharges on the assets of wealthy individuals and the inventory of oil companies and banks, the revised budget includes more permanent proposals. In particular, new anti-avoidance provisions have been included to attack tax optimisation structures implemented by companies. Companies will also be affected by a new 3% surcharge on distributed profits, and the use and transfer of losses will be further restricted.

The budget was approved by Parliament on 31 July and enacted on 17 August.

The main areas of change in the French corporate income taxation rules are outlined below.

Temporary exceptional contribution

The fourth amended budget for 2011 introduced a temporary contribution for companies subject to corporate income tax that have a turnover of at least €250 million. The contribution, which applies for fiscal years 2011 and 2012, is 5% of the corporate income tax liability, giving rise to an effective tax rate of up to 36.1%. It was anticipated that the 5% contribution would be paid after the fiscal year-end; however, the revised 2012 budget requires an advance payment of the contribution on the due date for payment of the fourth quarterly installment of corporate income tax in December 2012.

Surtax on corporate dividends

A 3% surtax will be levied on dividend distributions and deemed dividends paid by French entities. In practice, the scope of application of the surtax will be much wider than originally expected, since the surtax is now expected to apply to all dividends, even when paid to parent companies holding more than 10% of the distributing entity. However, certain specific exemptions are provided for dividends paid between members of a French tax consolidation group, or paid to collective investment funds, such as SICAVs, to small and medium-sized enterprises and to stock dividends. Moreover, an exemption will also apply to dividends paid by their qualifying subsidiaries to SIICs and SPPICAVs.

The surtax is expected to apply to distributions made from the date the budget is published in the official gazette. The 3% tax will apply not only to actual dividend distributions, but also to any amount that is deemed or characterised as a dividend by French law.

It is interesting to note that the surtax has been enacted as a result of the European Court of Justice ("ECJ") decision of 10 May 2012 in the Santander case which ruled the 30% domestic withholding tax applicable on dividends paid to non-resident collective investment funds as non-EU compliant. The budget thus provides for a new 15% withholding tax applicable on dividends paid by real estate investment companies that elected for the SIIC regime and have distributed out of their tax-exempt profits to collective investment funds located in EU or EEA member states or in treaty jurisdictions. These two provisions should also apply to distributions made as from the date the budget is published in the official gazette.

Intragroup forgiveness of debts

Under the current rules, debt waivers granted for financial reasons (as opposed to commercial reasons) by parent companies to their subsidiaries are tax deductible up to an amount equal to the negative net equity position of the subsidiary concerned. Under the new rules, debt waivers granted for financial reasons will no longer be tax deductible unless they are granted to an insolvent company. Conversely, when granted for commercial reasons (i.e. in the normal course of trade) rather than for financial reasons, waivers will still be tax deductible. This new measure will apply to financial years ending on or after 4 July 2012.

Banks and oil companies

Banks and oil companies will be subject to special measures:

  • Banks are subject to an annual contribution equal to the systemic risk tax introduced by Finance Act 2011 (0.25% of the amount of the minimum capital requirements in excess of €500 million), which was due at the end of April 2011 for the first time. The draft law provides for an additional one-off contribution (equal to the contribution paid in June 2012 which will have to be paid by the end of September 2012) and doubles the rate of the annual contribution to 0.5% as from 1 January 2013 ; and
  • A one-off surcharge will be levied on the value of the inventory of oil products stored in France. The surcharge will be imposed at a rate of 4% on the value of the average inventory of products held during the last three months of 2011 by oil companies, refiners and traders, and is due on 15 December 2012. However, the surcharge will not apply if the taxpayer has halted his activity for more than three months during the first six months of 2012.

Tax on financial transactions

France will impose a tax on financial transactions as from 1 August 2012. The tax will be levied on the acquisition of shares of companies listed on a French, European or foreign regulated market (regardless of where the buyer or seller are located or where the transaction takes place) when the market capitalisation of the French company issuing the securities exceeds €1 billion on 1 January of the tax year. The revised budget doubles the rate of the transactions tax to 0.2%.

Abusive transfer of losses

The draft legislation provides two types of measures to further restrict the conditions under which tax losses can be transferred and/or carried forward. These measures will apply to financial years ending on or after 4 July 2012.

  • The rules governing the conditions to obtain prior approval for a transfer of losses in a restructuring will be made more stringent. Under the current rules, mergers or similar transactions that benefit from the EU Merger Directive allow the tax losses of an absorbed company to be carried forward to offset against future profits of the absorbing company if prior approval is obtained from the French tax authorities. Approval is granted automatically if: (a) the transaction is governed by the special merger regime; (b) the transaction can be justified from an economic perspective and is mainly motivated by reasons other than tax; and (c) the activities that caused the losses for which the transfer is requested are continued for at least three years following the merger. The revised budget introduces two cumulative conditions to replace (c), i.e. the activities that caused the losses should not have been changed significantly during the los-smaking period in terms of clientele, employment, fixed assets, and the nature and volume of activities, and the activities that caused the losses will have to continue for at least the three years following the merger in respect of the same criteria. Additionally, losses incurred on passive income by companies whose assets are comprised primarily of financial holdings or the managing of property portfolios will no longer be transferred.
  • The concept of a "change in real activities" for purposes of the loss carryforward rules has been clarified. Currently, a change in a company's activities can result in the forfeiture of its loss carryforwards if the change in activities is significant. This concept has been developed by the French courts on a case-by-case basis. Objective guidelines will be included in the tax code to determine whether a change in the activities of a company will adversely impact the carryforward of losses. For example, a change in real activities that will result in the forfeiture of losses will include:
    • The addition of an activity that gives rise, as from its occurrence or as from the next fiscal year, to an increase of more than 50% of (i) the turnover the company or (ii) the average number of personnel and the value of gross fixed assets as compared to the year before the activity was added; and
    • The full or partial surrender or transfer of one or more activities that results in a decrease of more than 50% in the turnover of the company in relation to the year before the surrender or transfer of the activities or the average number of personnel and the value of gross fixed assets of the company.

Loss forfeiture could be avoided, however, where the addition, surrender or transfer of activities is essential to the activities that gave rise to the losses and the sustainability of jobs and the approval of the tax authorities is obtained.

It has been clarified that if the business no longer has the means by which to carry out its business (e.g. personnel, office etc) for a period of more than 12 months (except in cases of force majeure) this will qualify as a termination of business, resulting in a forfeiture of loss carryforwards. Forfeiture of losses will also result when an elimination of the means of production is followed by a sale of the majority of the company's shares. The consequences of a termination of a business could be avoided if the elimination of the means of production (even if exceeding 12 months) was intended to be temporary, it could be justified by non-tax reasons and approval is obtained from the French tax authorities.

Previously, rulings for the transfer of tax losses had never been granted to real estate companies by the French tax authorities on the basis that a pure rental activity did not qualify as a qualifying trading activity. It is unlikely, but possible that this position could change under the new budget.

CFC rules

The revised budget proposes several changes to France's controlled foreign company ("CFC") rules, which subject a French entity to French corporate income tax on profits of certain foreign entities that benefit from a beneficial tax regime and in which the French entity holds an interest (i.e. CFCs).

Under the proposed rules, for fiscal years ending on or after 31 December 2012, all French entities will have to demonstrate that the main purpose and effect of the operations of its foreign (non-EU) CFC was mainly non-tax driven to avoid the application of the CFC rules. Currently, if a CFC is outside the EU, the rules do not apply if the CFC carries on industrial and commercial activities in the jurisdiction in which it is located, unless (a) more than 20% of the profits of the CFC are derived from passive income; or (b) more than 50% of the profits are derived from passive income and income from intragroup services (including financial services). In both cases, the French company can still avoid the application of the CFC rules if it can show that the main effect of the CFC's activities is other than to allow the localisation of taxable income in a jurisdiction in which the CFC benefits from a privileged tax regime.

FRANCE: INVESTMENT FUNDS PREVAIL IN FRENCH WITHHOLDING TAX CASE BEFORE THE EUROPEAN COURT OF JUSTICE

On 10 May 2012 the European Court of Justice ("ECJ") ruled that foreign investment funds that invest in French companies should not be liable to withholding tax on dividends. Currently, French investment funds are exempt from French tax on dividends received from a French company, while foreign funds are subject to a 30% withholding tax (unless the tax rate is reduced under an applicable tax treaty).

The ECJ held that the discriminatory treatment of dividends paid to foreign investment funds violates the free movement of capital principle under the Treaty on the Functioning of the EU ("TFEU") and that the discrimination cannot be justified in either an EU or a third country context. The Court also said there is no reason to apply a temporal limitation on the effects of its decision.

This is a significant decision for investment funds, and the expected cost of the decision to the French tax authorities is in excess of approximately €4 billion. The decision will also have implications for similar challenges against several other EU member states by portfolio investors such as investment funds, pension funds and charities investing in those other member states.

Background

The case originally arose after the ECJ issued its 2009 decision in the Finnish Aberdeen case, in which it held that EU member states could not levy withholding tax on dividends paid to non-resident investment funds while exempting domestic investment funds from such tax. Following this ruling, many non-resident investment funds sought to recover French dividend withholding tax on the basis that French law contradicts EU law.

In 2010, there were 10 "test" cases held before the Administrative Lower Court of Montreuil on the tax treatment of French-source dividends paid to Belgian, German, Spanish and US investment funds. However, because of the number of withholding tax reclaims that were pending before French administrative courts at the time, the Lower Court referred the case to France's Supreme Administrative Court ("SAC").

In 2011, the SAC issued an opinion on some of the issues raised by the cases, but requested a preliminary ruling from the ECJ on whether the different tax treatment of French-source dividends paid to French investment funds and investment funds established in other EU member states and in non-EU countries is compatible with the TFEU, and whether the existence of discrimination must be determined at the level of the fund, the investors or globally.

Regarding dividends paid to non-EU funds, the SAC gave the opinion that the different treatment may violate the free movement of capital principle. The SAC also stated that the argument put forward by the French tax authorities, that the different treatment could be justified by the government's inability to conduct efficient tax audits outside the EU, could not be sustained in the case that the country in which the investment fund was established had concluded a tax treaty with France containing a mutual assistance clause.

The issues before the ECJ were whether foreign investment funds are sufficiently comparable to French investment funds to be treated in the same way (i.e. as tax-exempt), whether non-EEA funds should be entitled to the same benefit and if so, whether there is a justification for the imposition of a higher tax burden on these funds. Given the potential amount of the claims at stake, the French tax authorities asked the ECJ to consider blocking further claims by applying a temporal limitation.

ECJ decision

The ECJ ruled that the French rules are incompatible with the free movement of capital principle and that the tax treatment of the investors does not need to be taken into account in comparing the treatment of French and non-French investment funds. Accordingly, French and foreign investment funds are in comparable situations and the existing differential treatment violates EU law.

The ECJ also rejected France's request to limit the temporal effects of its decision to claims filed with the French tax authorities before 10 May 2012. Claims can therefore now be filed in accordance with the standard French statute of limitations. Under these rules, an ECJ decision indicating that French law is not in conformity with EU law is regarded as a new "event" allowing a claim to be made to recover undue taxes paid as from 1 January of the third year preceding the ECJ decision. Thus, taxpayers can file claims to recover tax paid on or after 1 January 2009.

While the ECJ did not specifically rule on investment funds established outside the EU, but clearly rejected the justification based on the efficiency of tax audits, the ECJ did indicate that the mere fact that France would be unable to conduct efficient tax audits outside the EU cannot justify the different treatment, even when the country in which the investment fund is established has not concluded a tax treaty with France that includes mutual assistance provisions. Consequently, non-EU funds now have an opportunity to seek the recovery of withholding tax paid.

Consequences

Based on the decision of the ECJ and the 2011 opinion issued by France's SAC, the Administrative Lower Court of Montreuil will rule on the 10 test cases before the other pending claims are addressed.

Non-resident investment funds with French dividend income will need to consider reclaiming French withholding tax paid as from 1 January 2009, and if necessary file a claim before 31 December 2014.

As a result of the ECJ decision, the 30% withholding tax on dividends paid to non-resident collective investment funds has been eliminated by the second revised budget for 2012. The budget thus provides for a new 15% withholding tax on dividends paid by real estate investment companies that have elected for the SIIC regime and have distributed out of their tax-exempt profits to collective investment funds located in EU or EEA member states or in treaty jurisdictions. These two provisions should apply to distributions made as from the date the budget is published in the official gazette.

ITALY: GUIDANCE ISSUED BY THE ITALIAN TAX AUTHORITIES ON THE NEW LOCAL TAX ON REAL ESTATE

On 18 May 2012 the Italian tax authorities issued the Circular Letter n° 3/DF which provides preliminary guidelines for the application of Imposta Municipale Propria ("IMU"). This new local tax on real estate replaced ICI (Italian council tax) from fiscal year 2012. In particular, the Italian tax authorities clarified the following:

  • IMU is due on any building registered or to be registered in the cadastral register, building sites and agricultural land.
  • IMU is payable by the following parties:
    • an owner of real estate property;
    • a person with any beneficial right to use a real estate property;
    • a license-holder, in the case of licensed state-owned areas;
    • a lessee of real estate properties held under a finance lease agreement; and
    • a tenant of real estate properties held under an operating lease.
  • The IMU tax base is calculated as follows:
    • Buildings: the "cadastral value" of the real estate, grossed up by 5% and multiplied by a specific coefficient which varies from 55 to 160 depending on the category of the real estate (e.g. 60 in case of building registered as "D" cadastral group). Specific rules apply to buildings without a cadastral value, buildings of historical or artistic interest and unsafe or uninhabitable buildings.
    • Building areas: the market value.
    • Agricultural lands: the cadastral value grossed up by 25% and multiplied by a coefficient equal to 135.
  • The IMU ordinary tax rate is equal to 0.76%, however rates can range from 0.46% to 1.06% depending on Municipality.
  • Specific tax rates apply in the following cases:
    • For rental properties or real estate held by an Italian company subject to IRES, the ordinary IMU rate may be reduced to a minimum rate of 0.4% by the Municipality.
    • For real estate properties held or built for sale purposes ("immobili merce" in Italian), the Municipality can reduce the IMU tax rate to a minimum rate of 0.38% provided that the builder does not rent the properties and the intention to sell is retained. The decreased tax rate would apply for up to three years from the date on which the construction of the building is completed.
  • IMU is generally due by each taxpayer in two instalments (or three where the house is a primary dwelling); each instalment is equal to 50% of the IMU amount calculated on the basis described above. The first instalment is due by 16 June each year, and the balance is payable by 16 December.
  • Taxpayers must file an IMU tax return within 90 days from the date on which possession of the property began or after which changes relevant to the assessment of IMU tax occurred.
  • IMU is not deductible for IRES and IRAP purposes.
  • Specific rules apply for primary dwellings (e.g. a 0.4% ordinary IMU tax rate, tax deductions are available).

ITALY: FURTHER GUIDELINES WITH REFERENCE TO THE AMENDMENTS TO THE SO-CALLED "DORMANT" COMPANIES RULE

On 11 June 2012 Circular Letter no. 23/E was released to provide clarification on the recent amendments introduced to the "dormant companies rule". In particular, the Italian tax authorities introduced new exemption clauses.

Further to the recent amendments introduced to the "dormant companies rule", companies are also considered "dormant" by the Italian tax authorities in the following situations:

  • where a corporate entity has generated tax losses for three consecutive fiscal years (the "observation period") it is considered dormant from the subsequent (fourth) fiscal year after the observation period.
  • where a corporate entity has generated tax losses for two out of three consecutive fiscal years and for the third fiscal year has a taxable income lower than the minimum income required by the dormant companies rule.

However, a company that would have been considered dormant through one of the criteria above will be considered non-dormant if certain exemption clauses apply. In this regard, the Italian tax authorities clarified that:

  • the ordinary exemption clauses (e.g. a company indirectly controlled by a listed company) can apply where the criteria above are met and shall be evaluated with respect to the year following the observation period (i.e. the fourth year); and
  • the new exemption clauses included in the Provision no. 2012/87956 are relevant to at least one of the fiscal years in the observation period , the company will be rendered non-dormant from the fourth fiscal year.

The main exemption clauses introduced by Provision no. 2012/8756 are the following:

  • companies that achieve a positive gross operating profit in at least one year of the observation period.
  • companies which have filed a tax ruling which was approved the Italian tax authorities.
  • companies which are incorporated in the first fiscal year of the rule's application (i.e. FY 2011).
  • companies that are required to file a "sector studies" calculation (because their revenue exceeds €7.5 million) and whose result exceeds the benchmark figure calculated by the tax authorities in relation to the company's type of business activities.

NETHERLANDS: NEW RESTRICTIONS ON PARTICIPATION FINANCING

The Netherlands is introducing rules that disallow the deductibility of interest for companies that have "excessive" debt in relation to their shareholdings. The new rules will become effective on 1 January 2013, and are expected to provide the Dutch state with an additional €150 million of tax.

The restrictions on interest deductibility are designed to address what is known as the "Bosal gap." As a result of the European Court of Justice in the Bosal case, in which the Court held that the Dutch provision disallowing a deduction for costs incurred in connection with a foreign shareholding was in confl ict with EU law, interest costs relating to participations are, in principle, deductible.

Under the current rules, interest on shareholder debt is, in principle, deductible for Dutch corporate income tax purposes, whereas dividend income from a qualifying shareholding is not considered taxable income. To rectify this mismatch, the deductibility of interest and related costs is limited under the new rules for companies that have excessive debt compared to the value of their shareholding. The new rules apply to intragroup and third party debt from Dutch and non-Dutch shareholders.

The new legislation includes a specific calculation method to determine whether a company is "excessively" leveraged. There is no requirement for a direct link between the debt financing and a specific shareholding. If and when the combined acquisition price for all shares held by the company exceeds its equity for tax purposes, the company is deemed to have financed the excess with debt. The interest and related costs on this debt financing portion would not, in principle, be deductible under the new rules.

For practical reasons, the first € 750,000 of interest expense will not be affected by the new rules. In addition, a specific exemption is included to prevent the rules from limiting the deductibility of interest in relation to shareholdings in operating companies. Although the rules could limit deductibility in relation to the debt financing of intragroup reorganisations, this exemption should allow interest and financing costs in relation to investments in operating companies to remain deductible. However, the exemption would not apply in certain cases, e.g. where hybrid financing is provided, to double dip structures and to tax planning structures aimed at tax avoidance.

The new rules include specific measures to prevent interference with the existing interest deduction limitations. Although it is indicated that the current limitations will remain in force, the Ministry of Finance is considering abolishing the thin capitalisation rules. This decision will depend on whether the negative impact of the abolition on the budget (estimated to be €30 million) can be offset by other measures.

POLAND: AMENDMENT TO THE POLAND-LUXEMBOURG DOUBLE TAX TREATY

A protocol amending the Poland-Luxembourg double tax treaty ("DTT") was signed on 7 June 2012.

The main change is the introduction of the "real estate clause", which states that the capital gains on shares deriving more than 50% of their value directly or indirectly from real estate property shall be taxable in the state in which the property is situated. This change will mainly impact Luxembourg entities that hold shares (directly or indirectly) of Polish companies that own real estate in Poland. Gains on the sale of shares of such Polish companies will be subject to income tax in Poland (previously the gain was not taxed in Poland and was fully attributable to Luxembourg, where it usually benefited from a tax exemption).

Other changes include:

  • The possibility to refuse the benefits resulting from DTT to payments made or income received under a so-called "artificial arrangement". It is not yet known what type of structures these new anti-avoidance rules will be aimed at.
  • The reduction of withholding tax on interest and royalties from 10% to 5%.
  • A change to the ordinary credit system of double taxation relief for dividend income, and income received from the transfer of assets and independent professional services by Polish residents.
  • The reduction of the withholding tax rate on dividends to 0% where at least 10% of shares in the subsidiary are held for an uninterrupted period of at least 24 months (for shareholdings of less than 10%, the rate of withholding tax will be 15%). The dividend withholding tax rate is currently 5% for shareholdings of at least 25%, and 15% for shareholdings less than 25%.
  • The introduction of the full right to exchange information in tax issues to include all taxes. Currently the right to exchange information only applies to taxes covered by the convention (i.e. excludes some local taxes etc).

These amendments will be applicable to tax years starting on or after 1 January of the calendar year following the year in which the Protocol enters into force, except for changes in respect of withholding taxes which will apply to income earned on or after the first day of the second month following the date on which the Protocol enters into force.

Therefore, if the ratification process is completed during 2012, the Protocol will be applicable to income derived from 1 January 2013. However, it is possible that the ratification process will not be complete until 2013, in which case the changes would enter into force in 2014.

SPAIN: TAX MEASURES INTRODUCED TO TACKLE ECONOMIC CRISIS

The Spanish government has introduced a series of tax measures to tackle the economic crisis, promote competitiveness and reduce the public deficit, while attempting to guarantee budgetary stability. Royal Decree Law 20/2012 was published on 14 July 2012 and is generally effective from that date, although some measures are effective retroactively for tax years beginning on or after 1 January 2012.

The decree makes changes to the corporate income tax rules and the standard and reduced VAT rates. The following corporate income tax changes are limited to tax years beginning in 2012 and 2013.

Repatriation incentive

A decree published on 31 March 2012 as a repatriation incentive introduced a special tax rate of 8% on the repatriation of profits derived from business activities carried on by foreign subsidiaries that do not qualify for Spain's participation exemption because they fail the "subject-to-tax test." In principle, dividends received by a Spanish company from a foreign subsidiary located in a zero or low-tax jurisdiction or a tax haven will be taxed at a reduced rate of 8% rather than the general corporate income tax rate of 30%. Under the April Decree, which applies until 30 November 2012, such foreign entities must still meet the active trade or business criterion.

The July decree (which also applies until 30 November 2012) provides for a special 10% tax rate on foreign-source income in the form of dividends or gains on the disposal of shares received by Spanish taxpayers that only meet the minimum 5% ownership requirement test (and do not meet the active trade/business criterion and subject to tax test).

Loss carryforward

Under the July decree, limitations on the use of net operating losses will apply if the business turnover (based on the 12 months before the date on which the 2012 or 2013 tax year starts) is more than €20 million. Where the turnover is more than €20 million but no more than €60 million, the portion of loss carryforward that can be set off against the amount of taxable income is limited to 50% of that amount. Where the turnover is more than €60 million, that portion is limited to 25%.

Amortisation

The maximum annual tax deduction limitation for intangible assets with an indefinite useful life has been reduced from 10% to 2%.

Estimated corporate income tax payments Three notable changes affect the payment of estimated taxes:

  • The exemption for avoiding international double taxation is only to be taken into account for purposes of estimated tax payments to the extent of 75%, i.e. 25% of the exempt foreign income will be added to the tax base for the purposes of calculating the estimated tax payments.
  • The applicable percentages for calculating estimated payments based on the volume of operations are increased. For example, entities subject to the general tax rate whose volume of operations exceeds €60 million will apply a percentage of 29% in calculating estimated tax payments rather than the general rate of 27% which was previously applied. The minimum advance payment is increased from 8% to 12% of the total book net income before application of the net operating loss carryforwards.

VAT

From 1 September 2012, the standard VAT rate will increase from 18% to 21% and the reduced rate from 8% to 10%. Additionally, various categories of goods and services will cease to be taxed at the reduced rate and will become subject to the standard rate.

SWITZERLAND: IMPACT OF SWISS DOUBLE TAX TREATY AMENDMENTS ON REAL ESTATE INVESTMENTS

Commercial real estate investments in Switzerland by non-Swiss resident investors have become increasingly common in recent years. In addition, Swiss institutional investors are seeking more real estate investment opportunities outside of Switzerland. Taking these two factors into account, the Swiss double tax treaty network is becoming increasingly important when considering tax planning on exit.

Swiss domestic taxation – a summary

The Swiss tax regime for capital gains on real estate is complex due to three different taxation levels and various cantonal (i.e. regional) tax laws which result in different real estate capital gain tax systems.

Federal income tax level:

  • Capital gains on direct disposals of real estate by companies are subject to federal income tax at an effective tax rate of c 7.8%.
  • The disposal of a real estate rich company which holds Swiss real estate by a non-Swiss resident seller does not trigger income tax at the federal tax level.

Cantonal income tax level:

Swiss cantons apply either the "monistic" or the "dualistic" tax system.

  • In the monistic system, capital gains derived from the disposal of real estate are subject to capital gains tax irrespective of whether the assets were held for private or business purposes. The tax rate can vary significantly depending on the ownership period and the location of real estate e.g. the tax rate for the canton of Zurich ranges between 20 and 60%.
  • In the dualistic system capital gains on the disposal of business assets by companies are generally subject to income tax at rates between 6 and 18% depending on location of the real estate e.g. c 10% for the canton of St Gallen (some exceptions exist), whereas capital gains on the disposal of real estate held for private purposes are generally subject to a higher capital gains tax rate (also dependant on location and ownership period) e.g. c 23-34% in the canton of St Gallen.
  • The disposal of a real estate rich company by a non-resident seller may trigger capital gains tax in cantons that apply the monistic system. In cantons that apply the dualistic system, capital gains tax should generally only be triggered on disposals by non-residents if the seller holds a real estate rich company for private purposes. However, some cantons that apply the dualistic system may also levy capital gains tax or income tax on such disposals of real estate assets in certain situations.

Swiss international taxation

Until recently, many Swiss double tax treaties have not considered paragraph 4 of article 13 of the OECD Model Tax Convention ("OECD MC") which allows the contracting state taxing rights over capital gains on real estate rich companies. The benefits of double tax treaties that do not include this provision have been commonly used in investment structures to avoid capital gains tax on the disposal of real estate rich companies.

Recent Swiss double tax treaty amendments

There have been amendments to several Swiss tax double treaties in recent months to bring these in line with the OECD MC.

The revised treaty between Netherlands and Switzerland, which came into force on 1 January 2011 includes paragraph 4 of article 13 OECD MC, which allows the contracting state to tax capital gains arising on the disposal of a real estate rich company in the state where the real estate is located. As a result, it may no longer be beneficial to hold Swiss real estate through the Netherlands.

The same applies to double tax treaties with the following jurisdictions that are/are due to be revised to include the real estate rich clause described above:

  • Greece (effective since 1 January 2012)
  • Poland (effective since 1 January 2012)
  • Portugal (not yet in force)
  • Russia (not yet in force)
  • Singapore (effective from 1 January 2013)
  • Spain (not yet in force)

New Swiss double tax treaties

New Swiss double tax treaties that include a provision similar to paragraph 4 of article 13 OECD MC include:

  • Hong Kong (not yet in force)
  • Malta (effective from 1 January 2013)
  • Tajikistan (effective from 1 January 2012)
  • United Emirates (not yet in force)
  • Uruguay (effective since 1 January 2012)

GERMANY: LOWER TAX COURT COMMENTS ON APPLICATION OF CHANGE-IN-OWNERSHIP RULES IN CONTEXT OF SHORTENING OF CORPORATE CHAIN

In a recently published decision dated 18 October 2011, the Lower Tax Court of Berlin-Brandenburg limited the application of the change-in-ownership rule and disagreed with the tax authorities' interpretation of the rule.

In the case, the two shareholders of a German loss-making company were merged downstream into the loss-making company. As a result, the shareholders of the companies that were merged in this transaction became the direct shareholders of the German loss-making company. The shareholders in the transferring companies that were merged did not change; the only result of the transaction was that their indirect shareholding in the German loss-making company became a direct shareholding.

Under the change-in-ownership rule, a direct or indirect share transfer of more than 25%/50% to one acquirer results in a partial/complete forfeiture of all tax loss carryforwards. Consequently, existing tax loss carryforwards can no longer be offset against taxable income generated after the time of the harmful share transfer. The intra-group restructuring clause, which exempts certain intra-group restructurings from the application of the change-in-ownership rule and which applies for all share transfers having economic effect after 31 December 2009, did not apply in the case because the downstream merger took place in 2008.

According to guidance issued by the tax authorities, the shortening of a corporate chain constitutes a harmful event under the change-in-ownership rule. The tax court concluded that a merger generally is a harmful event under the rule. However, where the only result of a merger is an exchange of an indirect shareholding for a direct shareholding, the law cannot be applied in its pure technical sense. The intention of the lawmakers and the rationale underlying the change-in-ownership rules also must be taken into account.

The change-in-ownership rule was introduced as an anti-abuse measure to prevent situations where losses of a German company can be shifted to a new (direct or indirect) shareholder by simply indirectly transferring the shares in the German loss company. Such abuse is not present where the corporate chain is shortened because the shortening of a chain will never involve the participation of a party that was not part of the corporate chain before the transaction. The Lower Tax Court, therefore, concluded that there was no abuse in the case and the change-in-ownership rule is not applicable.

The decision is one of a series of court decisions on the interpretation of the change-in-ownership rules and once again demonstrates that the tax authorities interpret the rules much more strictly than was intended by the legislator. The case is pending before the Federal Tax Court.

GERMANY: FEDERAL TAX COURT HAS CONSTITUTIONAL CONCERNS ABOUT INTEREST DEDUCTION LIMITATION RULE

In its decision dated 13 March 2012, the Federal Tax Court ("BFH") granted a suspension of the execution of a tax assessment on a German AG because the BFH has concerns about the constitutionality of the interest deduction limitation rules. The BFH overruled a decision of the local tax court of Munich, which had rejected the taxpayer's application for the suspension.

Under the interest deduction limitation rules, the deductibility of interest expense is limited to 30% of the taxable EBITDA of the business. One exception to the limited deduction is the "stand-alone clause." The stand-alone exception generally applies if the taxpayer can demonstrate that the company is not part of a group of companies and that no more than 10% of any group entity's net interest expense is paid on debt to substantial (i.e. holding greater than 25%) shareholders, parties related to such shareholders or secured third parties (generally termed "harmful shareholder financing"). Harmful shareholder financing exists where a shareholder directly grants a loan to its business, as well as where a bank with recourse to the shareholder grants a loan. This rule primarily targets back-to-back financing, but according to the tax authorities, it also covers cases in which a qualified shareholder provides a bank guarantee.

The taxpayer in the case relied on the stand-alone-clause for which it qualified, in principle. However, the taxpayer's shareholder had granted bank guarantees

which – in conjunction with direct loans – led to a presumption of harmful shareholder financing. As a result, the taxpayer could not deduct the entire interest expense and had to pay corporate income tax.

The BFH granted the suspension of execution of the tax assessment. It did not question the constitutionality of the interest deduction limitation rules as such, but the court has concerns that the presumption of harmful shareholder financing simply because of bank guarantees may be too far-reaching and thus may violate the equality principle in the constitution.

It remains to be seen whether the Constitutional Court, Germany's only court that is competent to decide on the constitutionality of law, will agree with the BFH. Because the BFH decision was made in proceedings for temporary legal protection, the BFH was not required to refer the question to the Constitutional Court. However, given that that BFH has now raised constitutional doubts, the local tax court of Munich, the court of first instance, likely will consult the Constitutional Court.

GERMANY: LOWER TAX COURT OF HAMBURG RULES ON ADD-BACK OF INTEREST AND RENTAL PAYMENTS FOR TRADE TAX PURPOSES

In a recently published decision, the lower tax court of Hamburg has asked the Constitutional Court to rule on whether the add-back of interest and rental payments for trade tax purposes is constitutional. The tax court of Hamburg is concerned that the rules violate the "abilityto- pay" principle without suitable justification.

The plaintiff in the case operated leased gas stations with a shop and car wash and incurred interest expenses and lease expenses for movable and immovable assets. The plaintiff took the position that the non-deductibility of the trade tax when calculating taxable income and the add-back of interest and rental expenses for trade tax purposes both violate the "ability-to-pay" principle and, therefore, both rules are unconstitutional.

The local tax court of Hamburg ruled that the non-deductibility of the trade tax as a business expense is constitutional, but reached a different conclusion with respect to the add-back of interest and rental payments for trade tax purposes. Although the Federal Tax Court and the Constitutional Court have already ruled that the previously applicable add-back rules (until FY 2007) were in line with the constitution, the lower tax court considers the new rules (applicable as of FY 2008) to be sufficiently different to re-refer the question of the constitutionality of the add-back rules to the Constitutional Court.

GERMANY: TAX COURT OF LOWER SAXONY RULES ON MINIMUM TAX RULE IN A LIQUIDATION CASE

In a recently published decision, the tax court of Lower Saxony ruled on a case in which the German minimum tax rules led to a final forfeiture of tax loss carryforwards. Under the minimum tax rules, 40% of the profits exceeding €1 million remain taxable irrespective of the amount of available losses brought forward. This may lead to a situation in which the taxpayer has to pay tax on the "remaining profits" even though tax losses are available and remain unused. Since losses can be carried forward indefinitely in Germany, the rule usually only results in the deferral of the loss utilisation. In the case, however, the company was liquidated so that the losses that were unable to be offset against profits due to the application of the minimum tax rules could not be used at all.

The taxpayer argued that the minimum tax rules should not be applied and that it should be allowed to fully utilise the losses carried forward because applying the rules in a liquidation situation would not be in line with the legislative intent and would lead to an inequitable result. The tax authorities disagreed, but the court held that, although the tax authorities have discretion to determine whether the minimum tax rules should be applied, the tax authorities must take all relevant facts and circumstances into account when making this decision. The court emphasised that, according to the technical explanations to the minimum tax rules, any restriction on the use of tax losses should be to extend them over time – the losses should not be eliminated with final effect. The court therefore referred the case back to the tax authorities asking them to reconsider their decision, but it also approved an appeal of its decision to the Federal Tax Court.

The decision should be viewed in the context of a series of cases in which German tax courts have expressed doubts in comparable situations as to whether the application of the minimum tax rules are in line with the German constitution. The tax authorities have issued guidance indicating that they will suspend execution of the minimum tax rules to taxpayers in certain cases where application of the rules would lead to a final elimination of tax loss carryforwards.

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