- Taxation of Legal Entities
- Residence - "Permanent Establishment" Test
- Basic Principles - Corporate Tax
- Gross Income - Deductible Expenses - Tax Rate - Filing of the Tax Return - Payment and Prepayment of Tax
- Relief of Losses
- Group Tax Relief
- Double Taxation and Relief for Foreign Taxes
- Branch or Company
- Illustration of Tax Calculation
- Capital Gains
- Withholding Taxes and Special Taxes:
- Construction - Technical Project Revenues - Royalties - Service Fees - Investment Income - Interest
- Proceeds from Liquidation
- Local Tax (Annual Tax on Real Estate)
TAXATION OF LEGAL ENTITIES
The profits of all Greek entities, irrespective of their legal form or of where the profits are earned, are subject to corporate tax. Profits distributed by such entities are not subject to further taxation in the hands of the recipients. Thus, not only are the profits of companies limited by shares ("AEs") taxable in this way, but also the profits of local partnerships, limited liability companies ("EPEs") and joint ventures. By exception, in the case of a partnership or EPE, individual partners who are also administrator(s) must have up to 50% of their share of the profits taxed in their hands at their personal tax rate. Such amount is deducted from the entity's profits in arriving at taxable profits. Where the partner is also participating in, and is the administrator of another partnership or EPE, he must elect to be taxed on this basis only with respect to one such entity. The election is made each year directly on the tax returns of the entities.
A foreign enterprise operating in Greece through a Branch or a subsidiary company, or indeed having acquired a "permanent establishment" in Greece is subject to corporate tax.
Off shore administrative or commercial/industrial companies (established in Greece under Law 89/1967 or 378/1968) are exempt from corporate tax. However, such entities are prohibited from carrying on business activities the object of which lies in Greece.
RESIDENCE - "PERMANENT ESTABLISHMENT" TEST
Entities established in Greece are resident in Greece for tax purposes and are taxable on their worldwide income. A foreign entity is subject to Greek corporate tax on income arising in Greece if it has or is deemed to have a "permanent establishment" in Greece.
Foreign enterprises are generally regarded as having a permanent establishment in Greece if they
- maintain one or more branches, agencies, offices, warehouses, plants, laboratories or other processing facilities in Greece,
- are engaged in manufacturing activities or the processing of agricultural products,
- transact business or offer services through a representative in Greece,
- render services of a technical or scientific nature in Greece, even without a representative,
- keep inventories of merchandise for their own account out of which they fill orders, or
- participate in a personal or limited liability company (i.e. partnership or EPE).
The above criteria are superseded by the provisions of the Double Taxation Treaties concluded by Greece with other countries which include a narrower definition of a permanent establishment.
BASIC PRINCIPLES - CORPORATE TAX
Greek corporations are taxed on their profits before distribution. Dividends are distributed from the after tax profits and are not subject to further taxation in the hands of the recipient. Branches of foreign companies are taxed on their aggregate profits irrespective of any profit remittances to their head offices.
The concept of a group of companies does not exist for Greek tax purposes. All entities are subject to tax on their own income and are not taxed on income from their participation in other companies.
Gross Income
The taxable profits (or losses) of each year are the profits (losses) shown in the financial statements, derived from the official books kept in accordance with the Books and Records Code after adjusting for non-deductible expenses and non-taxable income. Generally, non taxable income other than income from participation in Greek entities or joint ventures remains tax free as long as it is transferred (placed) in a designated tax free reserve not available for distribution. If such tax free income is distributed, it becomes subject to corporate tax. Tax free reserves become subject to corporate tax independently at the time they are distributed or capitalised. Transfers of profits by branches to their head offices are deemed to be distributions and thus these provisions apply to branches.
Deductible Expenses
Expenses qualify for tax deductibility only if:
- they are properly recorded in the official books and records which have been authenticated by the tax authorities prior to their use,
- they are properly supported by adequate documentation as specified in the Books and Records Code,
- they are incurred for the purpose of earning income (this is the concept of "productive" expenses), and
- they have been recorded in the period to which they relate.
When a company has both taxable and tax free income, including dividends or income from participation in Greek entities or joint ventures, a portion of the expenses is deemed to have been incurred in the earning of the tax free income and consequently they are not allowed for tax deduction. The method of computing the amount of the non-deductible expenses is determined in the legislation and it varies depending on the type of industry in which the entity is engaged.
Since 1992, depreciation of fixed assets is no longer compulsory but may be taken up to the maximum prescribed rates. Assets whose cost of acquisition is up to Drs 200 000 may be expensed in the year they are first put into use. Depreciation is taken on a straight line method. An exception was introduced in 1992 for new machinery and technical production equipment acquired after 1 January 1993, which should be depreciated using the declining balance method. However, these provisions are not yet in force as the relevant Presidential Decree has not been issued. Start up or pre-operating expenses or expenses for the acquisition of real estate may be deducted in one year or in equal instalments within a five year period. Leasehold improvements must be deducted in equal amounts over the life of the lease but the period cannot exceed five years.
Generally, provisions for expenses are not deductible. By exception, a provision for doubtful debts up to 0.5% of turnover and not exceeding 50% of trade receivables may be deducted. Also, provisions for retirement payments to personnel retiring in the following year may be deducted. There are special rules for determining the tax deductible provisions for doubtful debts of banks, leasing companies and factoring and forfeiting companies.
Royalties and fees paid for the use of licences, know how, technical aid, patents, trademarks, industrial processes, copyrights etc. are normally deductible in the year in which they are paid. Interest on loans and other credit is deductible in the year in which it is due and payable.
Exporters are entitled to special deductions of 2% of gross exports not exceeding Drs 3 billion and 1% of gross exports exceeding Drs 3 billion for years ending until 31 December 1996. These deductions are also available for advertising income of radio and television stations, for all income of newspapers and magazines and for income earned from non-resident tourists by hotels and tour operators. For companies in the petroleum and international road transportation sectors, the deduction is limited to 1% of gross exports.
Car expenses (depreciation, maintenance, repairs, circulation expenses, rentals to leasing companies) of leased or self-owned passenger cars are partially deductible. For company cars up to 2 000 cc, 80% of the expenses are deductible and for company cars exceeding 2 000 cc, only 25% of the expenses are deductible.
Group life insurance premiums paid for the company's personnel are tax deductible in full.
Research and development expenses are fully deductible in the year they are incurred or in equal instalments over three years if these expenses relate to tangible assets.
Salaries and other remuneration paid to partners of EPEs and partnerships (except for the imputed amount previously described) are not deductible for tax purposes from the profits of such entities.
Tax Rate
The tax rate applicable to the profits of a legal entity (other than the AE or a foreign branch) is 35%. For branches of foreign entities and Greek AE companies with bearer shares not listed on the Athens Stock Exchange at year end, the corporate tax rate is 40%. For AE companies with registered shares or shares listed on the Athens Stock Exchange at year end the corporate rate is 35%. When a company has both types of shares at year end, the taxable profit is divided in proportion to the number of shares of each type and taxed with the corresponding rate of tax. Generally when taxes are paid in one lump sum there is a 5% cash discount. Where income is taxed independently during the year following a distribution or capitalisation of tax-free reserves, no discount is available. Where the company earns income from real estate, the gross income therefrom is subject to a 3% supplementary tax, but such tax cannot exceed the corporate tax.
Filing Of The Tax Return
AEs and EPEs are obliged to file their tax returns by the 15th day of the fifth month following their accounting year end, whereas OEs, EEs and joint ventures maintaining double entry books are required to file within three and one-half months from the end of their accounting period. If a company files its tax return without making the appropriate tax payment (see below), it is considered as not having filed the tax return and, therefore, it is subject to all the consequences pertaining to the non-filing.
Payment And Prepayment Of Tax
The tax and the advance tax are payable in five equal monthly instalments, the first instalment being paid with the filing of the tax return. Profits of partnerships, limited liability companies and joint ventures are also subject to stamp duty at the rate of 1.2%, payable in full upon filing of the tax return.
Entities subject to corporate tax are also required to pay an amount equal to 50% of the current year's income tax as an advance against the following year's tax liability. Credit is given for the advance tax paid in the previous year.
RELIEF OF LOSSES
Tax losses of companies and branches of foreign companies may be carried forward and offset taxable income in the following five years. Losses cannot be carried back. Greek companies having a business interest (i.e. branch) abroad, may offset losses incurred by their foreign interest only from profits arising from a similar business interest abroad and not from profits arising from their business activity in Greece. Any unrelieved losses can not be set off (for Greek tax purposes) against income from foreign sources earned in subsequent years.
GROUP TAX RELIEF
The concept of group tax relief does not exist in Greece. Companies cannot transfer losses to other companies of the same group.
DOUBLE TAXATION AND RELIEF FOR FOREIGN TAXES
In the absence of a double taxation treaty, a Greek corporation or permanent establishment is entitled to claim credit for the foreign tax charged on income from any overseas source against the Greek corporate tax payable on that income. The amount of the credit is limited to the amount of Greek tax attributable to such income. Treaties for the avoidance of double taxation have been concluded with Austria, Belgium, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Hungary, India, Italy, Luxembourg, the Netherlands, Norway, Poland, Romania, Slovakia, Sweden, Switzerland, United Kingdom and the United States of America. A tax treaty with Bulgaria has been signed but is not yet in force. The tax treaties cover, inter alia, the withholding tax treatment on payments of dividends, interest and royalties from Greece to residents of the Treaty countries.
Transfer pricing rules allow the adjustment of the profits of a local subsidiary in respect of its transactions with its foreign controlling parent where the tax authorities find that an arms-length price has not been charged.
BRANCH OR COMPANY
When a foreign enterprise is deciding which alternative form of entity is preferable from a tax point of view, the following aspects should be taken into consideration.
- Both an AE and a branch of a foreign enterprise are subject to corporate tax at a rate of 40% except if the AE has registered shares or shares listed on the Athens Stock Exchange in which case the corporate tax rate is 35%. Both the AE and the branch must pay tax on aggregate profits irrespective of any profit remittance/distribution.
- A branch may reduce its taxable profits by being allowed to receive and have as a deductible expense an allocated portion of the central operating costs of the head office. By concession, the tax authorities have agreed under certain circumstances to allow subsidiaries to deduct similarly allocated head office costs.
- The establishment of a branch of a foreign enterprise in Greece creates a "permanent establishment" of that entity in Greece whereas investment in an AE does not.
ILLUSTRATION OF TAX CALCULATION
Income Tax Calculation for an AE Company for the year ended 31 December 1994 (Prepared as at 1 November 1995)
Assumptions:
- Net Profit of Drs 80 000 000 which includes gross rental income of Drs 2 000 000 and no tax free income.
- Prior year's advance tax was Drs 12 000 000.
- Registered shares at year end.
Taxable Profit: Drs 80 000 000 CALCULATION OF INCOME TAX PAYABLE Income tax - Drs 80 000 000 x 35% 28 000 000 Plus supplementary tax on rental income Drs 2 000 000 x 3% 60 000 Income tax charge for the year 28 060 000 Less prior year's advance tax (12 000 000) Plus this year's advance tax (Drs 28 060 000 x 50%) 14 030 000 Total income tax 30 090 000
CAPITAL GAINS
Capital gains (or losses) are generally regarded as ordinary business income (or losses) and are treated accordingly for tax purposes except that the gain from the sale of a business in its entirety, or a part in a partnership or an EPE, are taxed at 20% whereas gains from the disposal of business rights such as patents, industrial property, etc, at 30%. Gains from the sale of securities and shares held in Greek AE companies if transferred to a designated reserve are not subject to tax unless distributed or capitalised. If gains are taken to the income account they become taxable. Losses from similar transactions cannot be deducted from profits but may be set-off against the reserve.
Profits realised from the sale of shares in Greek AE companies by non-resident entities or individuals who do not have a permanent establishment in Greece are not subject to tax in Greece. However, the Ministry of Finance has recently taken the position that the sale of all of the shares in an AE company is equivalent to the sale of a business as a whole and accordingly, any profits realised on the sale of such shares should be subject to tax at the rate of 20%. This position is currently being challenged in court.
The capital gains tax applicable to the sale or transfer of real estate was abolished as of 9 November 1995.
WITHHOLDING TAXES AND SPECIAL TAXES:
Construction
The net taxable income of entities involved in the construction and sale of flats, housing etc. is deemed to be 15% of their gross revenue (the latter being calculated in accordance with the specific method laid down by the tax legislation). Other construction activities (sometimes referred to as "technical activities") are taxed on a deemed profit of 10%, 12% or 25% of gross contract revenue depending on the nature of the contract or customer. The tax rate on the deemed profit is 35% or 40% depending on the legal form of the entity as described above. Tax is withheld from payments to contractors at the rate of 3%. Taxes withheld are offset against the final tax liability or refunded, as the case may be.
Technical Project Revenues
Foreign entities and non-resident individuals which have no permanent establishment in Greece engaged in technical projects in Greece are taxed on their gross revenues. The tax rates are 4.0% for public sector works, 4.8% for private sector works where the contractor uses his own material and 10% where the contractor does not use his own materials. The applicable tax is withheld from each payment made to the contractor. If the entity carrying out the project acquires a permanent establishment in Greece, it is taxed as described above under construction. Where a treaty for the avoidance of double taxation is applicable, its provisions will apply.
Royalties
Royalties paid to companies or individuals with no permanent establishment in Greece are subject to a withholding tax of either 20% or 10% depending on the nature of the royalty payment. However, where a treaty for the avoidance of double taxation is applicable, its provisions will apply. There is no withholding on payments made to Greek residents.
Service Fees
In general, service fees paid to foreign undertakings or individuals which have no permanent establishment in Greece are subject to a 20% withholding tax unless a tax treaty provides otherwise. Fees incurred specifically for studies, designs, research and scientific advice, and supervision and consulting services on construction projects are subject to a 17.5% withholding tax. There is no such tax in the case of a Greek resident. Where a treaty for the avoidance of double taxation is applicable, its provisions apply.
Investment Income
Other than dividends paid to a foreign entity which are not subject to any withholding tax, investment income paid to a foreign entity with no permanent establishment in Greece is subject to a withholding tax at the rate of 40%, subject to the provisions of an applicable tax treaty for the avoidance of double taxation.
Interest
Except for interest from bank deposits or state bonds which is tax free or taxed in a special way, interest remitted to non-resident entities is subject to withholding tax at the rate of 40%, or to the rate applicable in a tax treaty for the avoidance of double taxation. When taxable interest is paid to a resident entity, it is subject to a withholding tax in the form of an advance tax of 20%. Interest earned on government bonds, bonds issued by certain international institutions, treasury bills, deposits in foreign currency and for non-residents only, from bank deposits in drachmae, is tax exempt. A 15% tax is levied on interest earned from certain bonds, certain other interest-bearing securities and for residents, on bank deposits in drachmae.
PROCEEDS FROM LIQUIDATION
Proceeds from the liquidation of an AE or an EPE company are not subject to tax if they represent return of capital. If any proceeds represent a distribution of tax-free reserves they become subject to corporate tax.
LOCAL TAX (ANNUAL TAX ON REAL ESTATE)
An annual tax on real estate assessed on the market value of the land and buildings was abolished in 1993. This tax has been replaced by a local tax to be collected by the municipalities at a rate between 0.025% to 0.035% (as determined by the relevant municipality) of the real estate's objective value (see discussion under Real Estate Transfer Tax later in this chapter for an explanation of the objective value system).
The contents of this article are intended to provide a general guide to the subject matter. Specialist advice should be obtained before any action is taken.
For further information contact Marios T. Kyriacou, KPMG Peat Marwick Kyriacou, Athens, Tel: +301 6062100; Fax: +301 6062111 or enter text search "Peat Marwick Kyriacou" and "Business Monitor".