Category Archives: Tax

A Review of The Tax Cuts and Jobs Acts of 2017 in the Lull Before the Biden Administration’s Promised Redux

November 24, 2021Articles, Latest News, Taxbiden redux, case study of taxation, job acts, TaxationSelwyn Whitehead

A. Introduction – An Overview of the TCJA of 2017

On December 20, 2017, the U.S House of Representatives and. Senate passed H.R. 1, “[a]n Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (referred to hereinafter as the “Tax Cuts and Jobs Act of 2017” or (“the TCJA”)), enacting the most sweeping tax reform bill in 30 years. Then-President Trump signed the TCJA into law on December 22, 2017. And as a result, most of the provisions of the TCJA became effective for tax years beginning after December 31, 2017 (January 1, 2018), and ending on December 31, 2025.

However, America now has a new president, Joe Biden, who during his campaign and subsequently after taking office has promised to bring an end to what he characterizes as the sweeping tax cuts in favor of corporations and high net worth individuals at the expense of the working-class Americans that the TCJA has wrought. And while world events have overtaken Biden’s young administration’s focus on bringing its version of tax reform to the forefront, I believe it might be prudent to use this lull in Congressional and Presidential focus on the Tax Code to reacquaint ourselves with the key provision of the TCJA and how they impact individual and business taxpayers.

B. Changed Tax Rates and Brackets due to the TCJA of 2017

What follows is a chart comparing the tax rates and brackets for pre-TCJA-2018 and post-TCJA-2019 tax years.

Under the TCJA, the top tax rate drops from 39.6% to 37%, and it takes effect at $600,000 of taxable income for married couples rather than about $480,000 under the pre-TCJA regime. For single filers, the top rate takes effect at $500,000 rather than $426,700. The lowest rate remains 10%, which takes effect at the first dollar of taxable income. However, taxpayers may have more or less income before the 10% rate applies than they did in the past, due to changes to deductions, exemptions, and other provisions.

Let’s quantify the changes for a “typical” hypothetical taxpayer, Mary Jane:

In 2018 when filing her taxes for 2017, Mary Jane, a single lawyer-taxpayer with a taxable income of $100,000 paid $20,842.75 in taxes: ($9,525 x 0.10 = $952.50) + ($29,175 x 0.15 = $4,376.25) + ($55,000 x 0.25 = $13,750.00) + ($6,300 x 0.28 = $1,764.00).

However, in 2019 when filing her taxes for 2018, as a result of the reduction of the tax rates and the expansion of the tax brackets, when filing for the 2018 tax year, Mary Jane, still single with a taxable income of $100,000 paid only $18,289.50 in taxes: ($9,525 x 0.10 = $952.50) + ($29,175 x 0.12 = $3,501.00) + ($43,800 x 0.22 = $9,636.00) + ($17,500 x 0.24 = $4,200.00).

C. Key Deduction/Exemption Changes Bought on by the TCJA

This section highlights the key changes the TCJA of made applicable to individuals. Changes affecting businesses, including provisions affecting corporations versus pass-through entities, such as proprietorships, partnerships, S corporations, and their owners, are addressed in Part E., below.

While the TCJA made a number of important changes to the taxation of individuals, many of these provisions, unless extended by Congress, will sunset in tax years beginning after December 31, 2025 (January 1, 2026), at which time the rules under pre-TCJA law will spring back into effect.

1. Elimination of Taxpayer Personal Exemptions/ Increase in the Standard Deductions

For many taxpayers, especially those with several dependent children, the TCJA’s most sweeping change was the increase in the standard deductions and the repeal of all personal exemptions. The TCJA raised the 2018 standard deduction to $24,000 per married couple and $12,000 for singles, compared with $13,000 and $6,500, respectively, under prior law.

As a result, the number of filers who itemized for 2018 was expected to, and did, drop by more than half—from nearly 47 million to about 19 million out of about 150 million expected tax returns, according to the Tax Policy Center.

As a result of the change, taxpayers can no longer claim a personal exemption deduction for themselves, their spouse or any of their dependents. Each personal exemption in 2017 provided a $4,050 tax deduction. This allowed a family of four to deduct a total of $16,200 in addition to a standard deduction of $13,000, itemized deductions and any adjustments to income. The loss of this personal exemption deduction greatly reduced the tax benefit of the increased standard deduction for taxpayers with large families.

To make up for the loss of this deduction, the child tax credit for qualifying children under the age of 17 was increased by $1,000 and made available to more taxpayers. Additionally, the TCJA created a new $500 credit for all other dependents, though there is no credit for the taxpayer and her spouse.

2. Elimination of Alimony (Paid) Deduction and Alimony Received (Inclusion)

For divorce decrees or separation agreement executed after December 31, 2018, any alimony paid was no longer a deductible expense for the payer. And any alimony received no longer needed to be included in the taxable income of the recipient. It is important to note that this new rule did not affect tax year 2018 returns or anyone who at the time of enactment was then paying or receiving alimony. Taxpayers who divorced before December 31, 2018 continued to be able to deduct and/or are required to report alimony payments as income.

3. Elimination of the Nonmilitary Job-related Moving Expenses Deduction

Under the TCJA, job-related moving expenses paid by an employee lost their deductibility. Only active-duty members of the armed forces who move due to a military order can claim that activity as an adjustment to income. As of the new law, employer-to-employee payments of non-military moving expenses became income that must be included in the employee’s taxable wages, tips, and other compensation reported on a W-2.

4. Limits on Mortgage Interest Deductions for Acquisition Debt and Elimination of the Home Equity Loan Interest Deduction

Under the TCJA taxpayers could continue to claim an itemized deduction for their home mortgage interest on acquisition debt — that is, debt secured by the home and used to buy, build or substantially improve it — up to $750,000 in principal ($375,000 if married and filing separately) on home purchases made after December 15, 2017.

Interest on then-existing acquisition debt of up to $1 million in principal for home purchases made prior to December 16, 2017 was “grandfathered” and remains deductible. The higher $1 million principal limit also applies to acquisition debt incurred before December 16, 2017 that is subsequently refinanced.

Home equity interest – interest on mortgage debt to pay for anything other than to buy, build or substantially improve a residence – became no longer deductible under the TCJA. Additionally, existing home equity debt was not grandfathered.

As a result of the TCJA it has become more important than ever for homeowners who can itemize to keep separate track of acquisition debt and home equity debt going back to the original purchase of their residences.

5. Elimination of the Casualty Loss Deduction

Only a taxpayer who suffers a personal casualty loss from a disaster declared by the president will be able to claim a personal casualty loss as an itemized deduction. Casualty losses are losses sustained by a taxpayer that are not connected with a trade or business or otherwise entered into for profit. They include property losses arising from fire, storm, shipwreck, or other casualty, or from theft.

6. Elimination of the Employee Business Expenses Deduction

Pursuant to the TCJA, none of the previously allowed miscellaneous expenses that were subject to the 2%-of-AGI exclusion remain deductible on Schedule A. Employee business expenses that had not been reimbursed by the taxpayer’s employer were the most prominent deductible items in this category.

Additionally, the TCJA eliminated employee-taxpayers’ ability to deduct business meals, travel and entertainment from their taxes. The eliminated deductions included using a car for business as well as job-related education, job-seeking costs, a qualified home office, union and professional dues and assessments, work clothes and work supplies.

7. Elimination of Investment Expenses Deductions

Investment expense recapture was also eliminated under the TCJA, making it no longer deductible as a miscellaneous expense on Schedule A. The eliminated expenses include custodial and maintenance fees for investment and retirement accounts, fees for collecting dividends and interest, fees paid to investment advisers, the cost of investment media and services, and safe deposit box rental fees. Investment interest remains deductible as interest on Schedule A, subject to the limitations of IRS form 4952.

8. Tax Preparation Fees Deduction

Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax are no longer deductible on Schedule A pursuant to the TCJA, no matter which level of government is presiding over the taxation or even what the tax is levied upon.

9. Elimination of Certain Legal Fees Paid on an Award, Judgment or Settlement Deduction

The TCJA also changed the nature and structure of financial agreements between counsel and our clients. For example a legal award, judgment or settlement for personal physical injuries or physical sickness is tax exempt. So, the related legal fees are not deductible since that income is not taxable. Also, in the wake of the “#metoo” and “Time’sUp” movements, there is no deduction for sexual harassment or abuse settlements if the settlement includes a non-disclosure agreement.

Legal fees related to an award, judgment or settlement of claims of unlawful discrimination are deducted as an adjustment to income on the 1040 form, reducing adjusted gross income.

However, all other Legal fees related to all other taxable awards, judgments or settlements, which were previously allowable as miscellaneous expenses on Schedule A, are no longer deductible on the 1040. For example, if a taxpayer is awarded a settlement of $100,000 and her attorney receives $30,000 of it, the taxpayer must pay federal income tax on the entire $100,000 even though she only received $70,000.

10. Doubling of the Estate and Generation Skipping Tax Exemption to $11,400,000 ($22,800,000 for married couples)

The TCJA doubled the estate and generation-skipping tax exemption to $11,400,000 ($22,800,000 for married couples). Additionally, the step-up in basis is retained at death. As can be seen from the following graph, the enhancement sunsets at December 31, 2025.

Illustration by: Keebler Tax & Wealth Education, Inc.

11. New Flexibility in Education Provisions

Post TCJA, Section 529 Plans allow the distributions of up to $10,000 for “qualified expenses” for elementary school and high school, and starting in 2018, the forgiveness of student loan debt will not be taxable income to the student on account of the student’s death or total disability.

12. New Flexibility for ABLE Accounts

The TCJA also allows for increases in contribution limits in certain circumstances and allows for rollovers from 529 accounts to ABLE accounts.

D. State and Local Tax (“SALT”) Issues

“The U.S. Supreme Court’s ruling in South Dakota v. Wayfair Inc., No. 17-494 (U.S. 6/21/18), coupled with the passage of the TCJA, has had the greatest impact on SALT practice in decades, positioning SALT issues to be a one of the leading consideration in the overall tax landscape in the 2019 tax return preparation season and beyond While the reverberation of tax legislation can sometimes take months or longer to take hold, Wayfair and the TCJA began to make waves across the country in just a matter of weeks. For taxpayers and tax professionals this consequence continues to mean that SALT’s influence is now greater than ever, drawing more attention to the key role indirect taxes play in a taxpayer’s comprehensive tax strategy.” [1]

1. The TCJA’s SALT Deduction Limitations

Under TCJA, the SALT deduction was limited to only $10,000.00 per household as to an individual or married filing jointly taxpayer. This limitation has proven to be a handicap for many taxpayers, especially those who are homeowners in high home value states such as California and New York; taxpayers who have traditionally been able to take substantial itemized deductions for both the interest paid on their mortgages and the property taxes paid to their county tax collectors.

However, state, local, and foreign property taxes and state and local sales taxes continued to be allowed as a deduction when paid or accrued in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income).

**2. The Impact of Wayfair on the taxation of e-commerce taxpayers.**

Wayfair, which held that states can mandate that out-of-state retailers collect sales taxes from in-state customers, even if the retailers have no physical presence in the state. As such, “Wayfair overturned 26 years of precedent (see Quill Corp. v. North Dakota, 504 U.S. 298 (1992)) by changing the nexus landscape from a physical presence to more of an economic influence considering how companies do business in today’s digital climate. Over the past two decades it had been challenging for states to meet budget requirements, and some would assert that this problem was attributed to out-of-state retailers being able to skirt their sales tax responsibilities thanks to the precedent from Quill, which was decided in a less digital world.

“Once the opinion was handed down in Wayfair, it did not take long for states to act and enforce sales tax requirements on out-of-state sellers selling goods and services into their jurisdictions. Before this landmark decision, just 20 states had some sort of economic nexus standard on the books or in the works. Within eight weeks after it, that number was up to 30 plus. The case has also opened the door for states without a sales tax to reconsider implementing one, as e-commerce becomes the norm.

“On the taxpayer side, misconceptions exist that because remote sellers were not charging sales tax on their goods, those transactions were tax-exempt. In reality, those transactions were supposed to be reported on use tax returns, but very few consumers complied with these obligations. Going forward, individuals will likely have to start paying sales tax on more of their out-of-state purchases, which can be seen as leveling the playing field between e-commerce and brick-and-mortar retailers.”[2]

[1] Brawdy, Why SALT will take center stage next to tax reform in 2019, The Tax Adviser (Dec 1, 2018)

[2] Id.

E. Overview of the TCJA’s Reduction of the Top Corporate Tax Rate from 35% to a Flat 21% Rate and Section 199A, the New 20-percent Deduction for Pass-through Businesses Pursuant to Section 199A of the Internal Revenue Code

1. Corporate and Small Business Tax Rates Reduction

Under the pre-TCJA law, “the highest corporate income tax rate was 35% and the highest rate of tax on qualified dividends received by an individual was 23.8 percent (20% plus the 3.8% tax on net investment income). As a result, under pre-TCJA law, the overall effective rate on corporate income distributed to individual shareholders was 50.47 (35% taxable income plus 15.47% (65% of taxable income times 23.8%)).” [1]

The TCJA eliminated the graduated income tax with a top rate of 35% and replace it with a flat 21% corporate income tax rate beginning in the 2018 tax year.

Corporate Tax Rate

2017

2018

21% Flat rate

According to a joint analysis from the Congressional Budget Office (“CBO”) and the Joint Committee on Taxation (“JCT”), the reduction will reduce revenue by $1.65 trillion over a decade. These corporate tax changes are permanent, while many of the major individual provisions, including changes for pass-through businesses, discussed below, will sunset for tax years beginning after December 31, 2025.

“Also, prior to the TCJA, sole proprietorships and owners of pass-through entities were subject to a maximum marginal rate of 43.4%, (39.6% plus 3.8% if the income was not subject to self-employment (“SE”) tax). Beginning on January 1, 2018, and ending on December 31, 2015, the highest individual rate is now 37% resulting in an effective rate of 40.8% when the net investment income tax applies.

“With the corporate income tax rate now a flat 21% and the corporate alternate minimum tax (“AMT”) repealed, a C corporation distributing all of its after tax profits as dividends to individual shareholders in the highest tax bracket results in a maximum effective rate of 39.8%, (21% of taxable income, plus 79% of taxable income times 23.8%). Thus, the reduction in corporate and individual tax rates after December 31, 2017 reduces the highest marginal effective rate on business income from 50.47% to 39.8% for a C corporation distributing its after-tax profit and from 43.4% to 40.8% for pass-through entities.”[2]

2. An Overview of the TCJA’s Section 199A’s Qualified Business Income Deduction

After all the math is done, Section 199A of the TCJA .grants an eligible business-owner-taxpayer other than a corporation a deduction equal to 20% of the taxpayer’s qualified business income, subject to deduction phase-outs and limitations phase-ins that are dependent upon the type of business the taxpayer is engaged in.

For example, for business owners with taxable incomes in excess of $207,000 ($415,000 in the case of taxpayers married filing jointly), the 20% deduction is phased-out, such that no deduction is allowed against income earned in a “specified service trade or business,” (“SSTB”).

Specified Service Trade or Business

Health
Law
Accounting
Actuarial science
Performing arts
Consulting
Athletics
Financial services
Brokerage services
Investing and investment management
Services in trading
Services in dealing securities, commodities, and partnership interests
Any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners

On the other hand, at these same income levels, the deduction against income earned in an eligible business, a non-SSTB, is limited to the greater of:

50% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, or

The sum of 25% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the taxpayer’s share of the unadjusted basis immediately after acquisition of all qualified property.
199A’s Business Classifications, Deductions and Limitations

	Non-Service or Non SSTB Service Business	SSTB Service Business
Taxable income less than $315,000 (MFJ 2018)	20% deduction	20% deduction
Taxable income greater than $315,000 but less than $415,000	Limitation phased-in	Deduction phased-out
Taxable income greater than $415,000 (MFJ 2018)	Wage/Capital Testing	No deduction

Illustration by: Keebler Tax & Wealth Education, Inc.

Once the taxpayer’s 20% deduction is computed and limited, as appropriate, it is added to the second deduction offered under Section 199A; a deduction for 20% of the taxpayer’s qualified REIT dividends and publicly traded partnership (PTP) income for the year. These two deductions are truly separate and distinct. For example, if a taxpayer has a net loss from her pass-through businesses, it does not preclude the taxpayer’s ability to claim a deduction of 20% of REIT dividends and PTP income. Likewise, if a taxpayer’s sum of REIT dividends and PTP income is a loss, it does not reduce the taxpayer’s pass-through deduction.
After each separate deduction is computed, they are added together and then subjected to an OVERALL limitation, equal to 20% of the excess of:
The taxpayer’s taxable income for the year (before considering the Section 199A deduction), over
The sum of net capital gain (as defined in Section 1(h)). This includes qualified dividend income taxed at capital gains rates, as well as any unrecaptured Section 1250 gain taxed at 25% and any collectibles gain taxed at 28%.

The purpose of this overall limitation is to ensure that the 20% deduction is not taken against income that is taxed at preferential rates.

3. Advantages and Disadvantages of Business Entity Selection Before and After the TCJA

In the wake of the TCJA taxpayers and their advisors will need to analyze whether a small closely-held business should operate as a C corporation rather than, as most practitioners advised before the TCJA, a partnership or S corporation or other pass-through entity.

Aside from the change in corporate and individual effective tax rates after the TCJA, there remain the same array of tax factors and other considerations that must be taken into account to determine the optimal tax-efficient choice of entity for a small business.

“Because being a C corporation subjects the taxable income of a business to double taxation, most closely held small businesses have historically chosen to be taxed as either an S corporation or as an LLC. An added advantage of an S corporation is that its shareholders avoid self-employment tax on their distributive share of profits. While LLC members often attempt to avoid SE tax by analogy to being limited partners, courts have universally rejected this position, especially where the owners perform services. [See, e.g., Joseph Radtke, S.C. v. United States, 712 F. Supp. 143 (E.D. Wis.1989) aff’d, 895 F.2d 1196 (7th Cir.1990).]

“With the 21% flat corporate rate is now lower than most individual marginal rates and the QBI deduction reducing the effective tax rate on pass-through entity income, the general conclusion that a pass-through entity is necessarily the most tax-efficient choice of entity needs re-examination. In short, the disparity in tax rates between individuals and corporations must be compared with the impact of the QBI deduction for individuals to re-determine the best after-tax return for small businesspersons.

“If an entity, after taking into account the lower corporate tax rate and the QBI deduction, decides to change its status from C to S corporation or vice versa, there are several additional technical consequences from the decision. First, in converting from a C corporation to an S corporation, any excess of the fair market value of the assets of the C corporation over their bases constitutes a net built-in gain which is subject to corporate-level income tax if within 5 years after the S election the assets are sold or the S corporation is liquidated. §1374.

“Therefore, a fast growing business with a need to reinvest its earnings may choose to operate as a C corporation, converting to an S corporation to distribute current earnings when the need to retain capital declines. However, the S corporation will need to wait 5 years from the effective date of the S election before selling any property whose appreciation is attributable to the period it was a C corporation. Conversely, for any corporation revoking its S election to take advantage of the 21% tax rate, the 2017 tax act has a special provision that allows for a six-year recognition period for any §481 adjustment arising from the revocation. §481(d)(1).

“Specifically, the six-year period applies only to an “eligible terminated S corporation,” defined as any C corporation that was an S corporation immediately before enactment of the 2017 tax act (December 22, 2017) and revokes its S election within two years after that date. In addition, the owners of the corporation at the time of revocation must be the same persons who owned the corporation in the same proportions as on the date of enactment of the 2017 tax act. §481(d)(2). In addition, a corporation revoking its S election may extend its post-termination transition period so that distributions by the C corporation are treated as nontaxable amounts from the S corporation’s accumulated adjustment account (AAA) rather than taxable dividends from earning and profits (E&P). §1371(f).”[3]

[1] Williamson and Harr, Being an S or C Corporation for Small Businesses After the 2017 Tax Act and the QBI Deduction, Tax Management Memorandum (BNA) (Feb. 4, 2019)

[2] Id.

[3] Williamson and Harr, Being an S or C Corporation for Small Businesses After the 2017 Tax Act and the QBI Deduction, Tax Management Memorandum (BNA) (Feb. 4, 2019)

Protection of Assets or Tax Evasion? Recent Trends of Russian Court Practice in Light of the De-Offshorisation Policy

December 16, 2016Articles, Latest News, TaxAnastasya Kuzmina

The de-offshorisation of the Russian economy that started in 2014, introduced a new reality for Russian business, which requires adaptation by way of revising business structuring schemes that have been used for years. Within the framework of the battle against tax evasion, the government is establishing new rules aimed at the prevention of profit related to Russian assets being taken abroad. This provided, considering the international policy, according to which all countries of the world should be engaged in a joint battle against aggressive tax planning within the BEPS plan, each year the tax authorities have more and more instruments for exercising control over transactions.

Many precedent decisions for taxpayers have been made by Russian courts in the last year, reflecting new approaches in the law enforcement practice, including approaches to using international treaties. In particular, analysis of court decisions shows intensification of the trend in restricting benefits under double tax treaties (hereinafter the “DTTs”).

This is due to the fact that the courts began to actively use the doctrine of a beneficiary or entity actually entitled to income, which was entered into the Russian tax law at the end of 2014, and as a result the practice turned to a notable extent against the taxpayers. The so-called conduit structures, in other words, transit companies which are actually entitled to benefits under international agreements (DTTs), but have no actual right to income, may be said to have become victims of the government policy. In the event such a structure is revealed, the tax authorities and courts acknowledge the use of benefits under the respective DTTs as unjustified and insist on payment of tax in Russia if the ultimate beneficiaries are unknown or are located in jurisdictions which do not have international agreements with Russia.

It is worth noting that in order to make a decision as to who the entity that actually controls the assets is, tax authorities assess the economic nature of transactions on transferring assets and define a taxpayer’s rights and obligations in terms of the true economic purpose of the transaction (in the inspector’s judgement). The problem is that such assessment can be rather subjective and can disregard or ignore objectives of the business on protecting its assets. As a result, even though under the law it is the tax authority’s responsibility to prove that a scheme was created for receiving unjustified tax benefits, in such disputes the taxpayer also has to collect sufficient evidence in order to prove reasonable economic grounds for transferring assets to a particular company, as well as to substantiate the entire ownership legal structure in general.

Meanwhile, court practise shows that simple arguments regarding the multistage scheme for transferring shares being created for protecting them against being seized unlawfully, are insufficient for justifying a company’s position. For example, in one of the most high-profile cases this year on a complex share holding structure in a Russian company, the tax authorities assessed the following: aggregate of actual relations within the entire group of foreign companies, the interdependency between all members of the group and the rights of owners holding Class A and Class B shares. The tax authority, having analysed the said circumstances, determined that the Cyprus company was a formal/technical one to which the assets were transferred, and the BVI entity was the one with actual control over the shares.

As a result, the tax authority, and later the court, arrived at a conclusion that the Russian company has not fulfilled its obligations of a fiscal agent and has not paid taxes to the Russian state budget on the foreign organization’s income received from sources in Russia in form of property divided in transactions among foreign companies to the benefit of companies on the British Virgin Islands which do not have a DTT with Russia.[1]

At the same time, the tax authority and court also referred to “the actual goal pursued by the taxpayer when conducting disputable operations,” which according to the conclusion of the tax inspectorate was solely that of transferring the property to an offshore company and of tax evasion. It is worth noting that this scheme of creating a holding company for better legal protection of assets did not violate legislation in force during the time period being inspected. Therefore, the decision of the tax authority and court was not based on any legal regulations, but only on the court concept of “unjustified tax benefits,” which is interpreted more and more broadly each year.

As the main argument in court, the tax authorities use the legal position of the Russian Supreme Commercial Arbitration Court that tax benefit can be recognised as unjustified, in particular, in casesfor tax purposes when transactions are registered not in accordance with their true economic essence or operations are included that are not supported by reasonable economic or other grounds (business purposes).[2] The broad interpretation of this position eventually leads to taxes on a transaction, which are paid in a reduced amount or are not paid at all (which is lawful from a formal perspective), being by default recognised by the supervisory authorities as an unjustified tax benefit.

The case described above confirms that the redistribution of Russian assets among foreign structures is now under the scrutiny of the tax authorities which are very sensitive to Russian companies being owned using offshore companies. At the same time, it is necessary to take into account that irrespective of the fact that the de-offshorisation policy was adopted in 2014, and the respective concepts were introduced into law and became applicable from 2015, the courts acknowledge the right of the tax authorities to determine the tax consequences after identifying the beneficiary of income for periods before 2015, when such notion did not yet exist in the tax law.

It should be noted that pursuant to the tax legislation, the depth of a tax inspection is restricted by a three-year period. Meanwhile, the regulatory authorities are entitled to go beyond these limits and inspect the taxpayer’s actions for the preceding 10 years within the framework of criminal cases initiated in respect to tax crimes.

It is important to note that due to the changes in the criminal procedure laws in 2014, the law enforcement bodies got an opportunity to initiate criminal cases independently without the need to obtain results of tax inspections performed by territorial tax inspectorates. Based on information of the General Prosecutor’s Office and investigating agencies, after the said changes, and after the police were once again granted the powers to perform investigative activities on tax crimes, the number of tax evasion criminal cases increased approximately by 68% in 2015, as compared to 2014, and it seems that the figures in 2016 will not decline.

Such frightening statistics mean that companies adopting decisions on using offshore entities when building cross-border business structuring schemes are under risk. And at the same time, such business decisions can become the subject matter of an inspection conducted by the investigating agencies for a period exceeding 3 years.

Considering the court practise being formed, the trend of inspecting companies whose assets are owned by foreign structures, as well as the development of cross-border exchange of tax information, companies need to assess all existing tax risks within the conditions of a new economic reality and, if needed, to revise their business structure.

[1] Resolution of the Commercial Arbitration Court for North-West Circuit dated 15 March, 2016 on case No.А13-5850/2014.

[2] Decree No.53 “On Commercial Arbitration Courts’ assessment of grounds for a taxpayer receiving tax benefit as to being justified” of the Plenum of the Russian Supreme Commercial Arbitration Court dated 12.10.2006

Croatia: Tax Reform to Promote Economic Goals

December 14, 2016Articles, Latest News, TaxTamara Jelić Kazić

As the Croatian Government announced tax reform and sent several amendments of the tax legislation to the Parliament procedure, it is likely that 2017 will bring significant changes to the Croatian tax system[1]. The two main objectives of the reforms are: increasing the sustainability of the general state debt and promotion of growth and employment in the Croatian economy. The aim is to reduce the overall tax burden, to promote the competitiveness of the economy and to introduce a sustainable and simple tax system that may be supported by cheaper tax administration.

In the corporate profit tax sphere, the general tax rate will be reduced to 18%, while the lower rate of 12% will apply to taxpayers with annual turnover up to TEUR 400. The popular incentive (tax exemption) for reinvested profit is being abandoned and regional and other tax related incentives are kept only under the Investment Promotion Law.

In order to combat illiquidity and insolvency of the private sector, the proposal aims to reduce the share of non performing loans in the finance sector by introducing one time measure to write off bad and doubtful debts with the relevant cost being fully tax recognized.

Obstacles to the development of foreign and domestic investment should be further eliminated by introducing the possibility to sign the advance pricing agreements. Further details are also introduced with respect to interest applied in the related party financing.

In the personal income tax sphere, the increase of the tax-free allowance and the reduction of the top tax rate is aimed to reduce the overall personal income tax burden, allowing Croatia to be a more competitive environment for highly skilled personnel and professionals. At the same time, the reform introduces social security liabilities to specific non-employment types of income as well as synthetic taxation of other income (leading to more fair participation in the overall tax / social security burden).

In the VAT system, VAT rate on certain goods and services (e.g. electricity supply) is reduced from 25% to 13%, while increased from 13% to 25% for example on hospitality services (but not for tourism and hotel accommodation services generally, which will continue to apply reduced VAT rate of 13%). As of 2018, both VAT rates will be reduced: to 24% and 12% respectively.

Threshold for entering the VAT system is increased to TEUR 40. Billing method (as opposite to payment method) will be applied for VAT due at import of high value machinery and equipment.

Amendments to the VAT Law also address VAT treatment of transfer and utilization of value-coupons.

Further liabilities are introduced to taxpayers who participated in Carousel fraud or similar fraudulent activities where VAT obligation remained unsettled as well as to taxpayers who did not pay to the supplier at least the amount of VAT charged for the supply received in the prescribed deadlines.

Changes are introduced also with respect to the tax procedures, whereas the 3-year relative statute of limitation is abandoned and a single 6-year statute of limitation is introduced. The tax inspections, however, will be allowed only within 3 years from the commencement of the statute of limitation. Deadline for correction of the tax return is prolonged from 1 to 3 years.

The above represent only a high-level overview of most significant changes to the Croatian tax system, while details and several other types of fiscal liabilities are not addressed.

The entrepreneur community in Croatia would really like to see the reduction in overall tax burden and promotion of the competitiveness of the Croatian economy, through assertive strategies and the much-needed predictability of economy. It, however, remains to be seen whether the new tax reform and its many specifics, such as increased amounts of tax-deductible entertainment expenses, deductible input VAT on cars, elimination of exemption for first property acquisition while reducing of real estate transfer tax rate from 5% to 4%, are indeed the real answer to Croatian economic challenges.

[1] This Article is prepared under the assumption that the Parliament will adopt changes of laws as currently proposed

The Automatic Exchange of Financial Information in Bulgarian Context – the Reach

September 2, 2016Accounting and Audit, Articles, Corporate/Commercial Law, Latest News, TaxViara Todorova

I. Introduction

In 2015 Bulgaria introduced in its Tax and Social Security Procedure Code (“TSSPC”) a system implementing the regionally and globally harmonized rules on automatic exchange of financial information in the field of taxation. The participating jurisdictions are the European Union member states under Directive 2014/107/EC amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (“Directive 2014/107/ЕС”), the United States of America under the intergovernmental Agreement to Improve International Tax Compliance and to Implement FATCA (Foreign Account Tax Compliance Act) and any other jurisdiction, with which Bulgaria or the EU has concluded a treaty for exchange of information. As a result, a whole new section became effective in 2016, regulating the obligations of the financial institutions to collect and submit information and to conduct complex audits. Thus the Bulgarian legislator complied with its EU law and international obligations for fighting against tax evasion. The TSSPC also takes into account the Common Reporting Standard for automatic exchange of financial information (CRS) of the Organization for Economic Co-operation and Development (OECD).

Against this backdrop, the TSSPC aligns with the expectations for compliance with all of the above stated pieces of legislation and should not be regarded as the elephant in the room from comparative point of view especially when put next to other national legislations in the EU.

Further below, one could find an essential overview of the newly established countering tax evasion reporting system.

II. Who is affected?

The persons affected from the new rules on Automatic Exchange of Financial Information are to be differentiated in persons whose accounts are subject to processing and provision of information (i.e. “Reportable Persons”) and the institutions that are under the obligation to collect, process and submit the relevant information for the respective Reportable persons (“i.e. “Reporting Financial Institutions”).

Reportable Persons

For the purposes of the TSSPC and the Automatic Exchange of Financial Information system a Reportable Person is (i) an individual or entity that is resident for tax purposes in one or more participating jurisdictions under the tax laws of such jurisdiction, or a hotchpot of a late that was resident for tax purposes of a participating jurisdiction. Where the tax residency of an entity such as a partnership, limited liability partnership or similar legal arrangement (except for trusts that are passive non-financial entities) cannot be determined, such entities shall be treated as resident in the jurisdiction in which their place of effective management is situated. The TSSPC provides explicitly that corporations, whose stocks are regularly traded on one or more established securities markets and its affiliated corporations, governmental entities, international organizations, central banks and financial institutions, are to be excluded from the list of persons for which reporting is made. Specific definition exists for Reportable Persons under the FATCA Agreement. A Reportable Person is any US person specified under Article 1, Paragraph (1), letter (aa) of the FATCA Agreement.

Reporting Financial Institutions

The TSSPC categorizes the persons, who are under the obligation to collect, process and submit the information. The main group of persons refers to the so called “Reporting Bulgarian Financial Institutions”. In general terms these include custodial institutions, depository institutions (i.e. banks), investment entities, and some insurance companies.

Geographic-wise the coverage of the TSSPC spreads to encompass any financial institution that is resident for tax purposes in Bulgaria (excluding branches of such financial institutions located outside Bulgaria) and any branch of a financial institution that is not resident for tax purposes in Bulgaria, if that branch is located in Bulgaria.

III. What type of information would be collected and shared?

The Reporting Financial Institutions are under the obligation to provide to the Executive Director of the National Revenue Agency certain information on individuals or legal entities and their accounts, meeting the conditions for being qualified as reportable[1]. Such information would comprise the following:

name / company name, address, the participating jurisdiction of which the respective person is a tax resident, the taxpayer identification number, date and place of birth (if an individual) for each account holder, who qualifies as a Reportable Person;
where the account holder is an entity which, after implementation of due diligence procedures, has been identified as a passive non-financial entity with one or more controlling persons, who are Reportable Persons then the following information is to be provided: name, address, taxpayer identification number and participating jurisdiction or other jurisdiction of which the entity is a tax resident, as well as for each controlling Reportable Person the name, address, participating jurisdiction of which that person is a tax resident, the taxpayer identification number, date and place of birth;
account number or, where there is no number, the functional equivalent;
name and identification number of the reporting financial institution;
account balance or value, including, in the case of a cash value insurance contract or an annuity contract – the cash value or surrender value, as of the end of the calendar year or the date on which the account is closed;
in the event of a custodial account:
1. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year, and
2. the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year, with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;
in the event of a deposit account: the total gross amount of interest paid or accrued (credited) into the account during the calendar year;
in the event of an account not specified in item 6 or item 7 above then the following information is to be provided: the total gross amount paid or accrued into the account to the benefit of the account holder during the year, with regard to which amount the Reporting Financial Institution has a reporting obligation, including the aggregate amount of any redemption payments to the account holder during the calendar year.

IV. How is it collected?

The Reporting Financial Institutions are obliged to follow specific due diligence procedures in order to acquire and process the necessary information for the Reportable Persons. The procedures for collection of complex and diverse data differ depending on whether the Reportable Person is a legal entity or a natural person and whether the accounts under examination are existing or newly created.

Individuals

For natural persons it should be noted that there is also a difference in the methods of scrutiny of low value and high value accounts. The relevant threshold for differentiating between low value and high value accounts is USD 1,000,000. Against this background, the TSSPC chose to combine both the permanent residence address test and the indicia search test. The permanent residence address test uses information on the addresses of the Reported Person stored by the Reporting Financial Institution. The indicia search test on the other hand is based on the electronic data held by the Reporting Financial Institution for low value existing accounts. The indicia search test is to be used by the Reporting Financial Institution only where the Reporting Financial Institution does not apply the permanent residence address test. On the basis of such tests the Reporting Financial Institution may qualify a Reported Person as a tax resident of any of the participating jurisdictions. The test applicable for the FATCA Agreement obligations is in fact an adjusted version of the indicia search test, which includes also a check on whether the person is an US citizen and whether the person is born in the United States.

More stringent procedures apply for high value accounts of natural persons. In these cases the Reporting Financial Institution is to use the indicia search test without application of the permanent residence address test. The more stringent review requires the Reporting Financial Institution to scrutinize the electronic dossier of the respective person and the paper dossier for the last five years where necessary (as the case may be).

For the purposes of the FATCA Agreement, the Reporting Financial Institutions have the discretion not to implement the due diligence procedures and not report on the following already existing individual accounts:

a pre-existing individual account with a balance or value not exceeding the BGN equivalent of USD 50,000 as of 30 June 2014;
a cash value insurance contract or an annuity contract with a balance or value equal to or lower than the BGN equivalent of USD 250,000 as of 30 June 2014;
a deposit account with a balance equal to or lower than the BGN equivalent of USD 50,000 as of 30 June 2014.

Finally, with regard to individuals and for their newly created accounts, as a general rule, a self-certification procedure applies, which aims at collecting the necessary information for determination of the tax residency of the respective person on the basis of a sample declaration.

Entities

Regarding existing accounts of legal entities the TSSPC introduces a threshold below which the Reporting Financial Institutions are not obliged to perform the due diligence check. Nevertheless, they retain their full right to do so. The threshold is the BGN equivalent of USD 250,000 (for the purposes of the FATCA Agreement the relevant sum is the BGN equivalent of USD 1,000,000) as of 31 December 2015 (for the purposes of the FATCA Agreement the relevant date is 30 June 2014). However, if the value of the accounts is over the threshold or exceeds at certain point in time the threshold the account would be subject to review.

With respect to accounts for which a due diligence check is performed, the Reporting Financial Institution should carry out an examination on whether the entity(ies) holding the account is a Reportable Person or a passive non-financial entity.

The Reporting Financial Institutions analyze available documentation and information in order to determine whether the entity is a Reportable Person. The TSSPC provides that the Reporting Financial Institutions could use the information kept for regulatory or customer relation purposes, including information submitted for compliance with the anti-money laundering legislation and the self-certification method.

The Reporting Financial Institution must determine whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons. This check is made on the basis of the information that the Reporting Financial Institution already has on the entity, including information provided for anti-money laundering purposes and also on publicly available information. If any of the controlling persons of the passive non-financial entity is a Reportable Person, then the reporting financial institution must treat the account as a reportable account. Specific rules for determining passive non-financial entities exist for the purposes of the FATCA Agreement.

For newly created entity accounts, a check needs to be performed by the Reporting Financial Institution whether the entity is a passive non-financial entity with one or more controlling persons who are reportable persons, similarly to the checks of existing accounts. Two of the main differences between the due diligence procedures for existing accounts and for newly created accounts are: first for the latter no thresholds apply and secondly the collection of the necessary information is made through the self-certification method (i.e. through submission of a sample-form declaration). For the purposes of the FATCA Agreement specific due diligence procedure applies.

V. Temporal Reach

From temporal standpoint 2016 is the first year for which automatic exchange of information would be effected between the National Revenue Authorities and the competent authorities of the participating jurisdictions. This, however, is subject to exceptions agreed under an international agreements for automatic exchange of financial information (i.e. in situation where such international agreements provide for other relevant dates). For instance, regarding the exchange of financial information with the competent authorities of the United States, the earliest starting year, as of which an exchange of information is to be performed, is 2014. Thus, depending on the data to be exchanged and the regime under which it is exchanged, it is possible that an exchange is performed retrospectively.

Last but not least, it should be recognized that the financial institutions providing information should complete the review of existing accounts of individuals of high value until 31st of December 2016 and existing accounts of individuals of low value until 31st of December 2017. A high value existing account under the TSSPC is an account with total amount or value that exceed the BGN equivalent of USD 1,000,000 as of the 31st of December 2015 or 31st of December of each subsequent year. For the purposes of FATCA Agreement the relevant dates for estimation of whether the threshold is met or exceeded are 30th of June 2014, 31st of December 2015 or 31st of December of each subsequent year. An existing low value account of an individual is one with total amount or value below the BGN equivalent of USD 1,000,000 as of 31st December 2015. For FATCA purposes the date is 30 June 2014.

The review of existing accounts of entities (legal entity or legal arrangement, including company, partnership, trust or foundation) with total amount or value exceeding the BGN equivalent of USD 250,000 should be completed until 31st of December 2017, and for FATCA purposes until 30th of June 2016.

The Reporting Financial Institutions should supply the collected information to the National Revenue Authorities on an annual basis in electronic manner by 30th of June of the year following the year of collection of the financial information.

VI. Conclusion

The TSSPC implements the idea of introducing a somehow uniform standard in the automatic exchange of financial information. The TSSPC relies on three main methods in the process of collection and processing of the relevant data. These are the permanent residence address test, the indicia search test and the self-certification method. The first two tests count mainly on the anti-money laundering and know your client data bases kept by the Reporting Institutions. Nevertheless, all these methods of collection and processing of information and the possibility of having the obligation to make a retrospective examination of accounts and persons in fact affect both the economic operators acting as Reporting Financial Institutions and their clients, namely the Reportable Persons. They create burdensome administrative obligations for both service providers and clients, the effectiveness of which is yet to be seen. Thus, the assessment on whether this new system is proportionate to the aim of countering tax evasion and whether the same results can be achieved through less restrictive and less burdensome measures is also yet to be made.

[1] Reportable account means a financial account that is maintained by a reporting financial institution and is held by one or more reportable persons or by a passive non-financial entity with one or more controlling persons that are reportable persons, provided it has been identified as such pursuant to the relevant due diligence procedures.

Malta – an Island of Opportunities

May 23, 2016Articles, Corporate/Commercial Law, Latest News, TaxDr. Tonio Ellul

1. Corporate Vehicles

Over the years, Malta has developed a strong reputation as a financial services centre offering an attractive and competitive environment for operators looking to set-up a business or invest in a European Union compliant jurisdiction. The benefits of selecting Malta are numerous, including a quick and efficient incorporation process, comparatively low running costs, a skilled and diverse workforce, and an extensive treaty network.

The Maltese jurisdiction recognises a variety of legal vehicles taken from both the Civil and the Common law tradition thus allowing individuals a choice of structures to fit their specific needs, whether in relation to business structuring, estate planning or other purposes. The various forms include commercial partnerships, public and private limited liability companies, trusts, foundations and associations.

2. Limited Liability Companies

The defining feature of a Limited Liability Company is the fact that the liability of the shareholders is limited to the part unpaid (if any) on their shares.

Form

A limited liability company is the preferred means of doing business in Malta, due to its separate legal personality and limited liability. Limited liability companies can be classified as either of a private nature (Limited or Ltd) or of a public nature (Plc). With the exception of single member companies (discussed below), private and public companies must have a minimum of two shareholders.

Private limited companies are formed by means of capital divided into shares and shareholder liability is limited to the amount of unpaid share capital. In a private company, the right to transfer shares must be restricted, for example through pre-emption rights, the number of members cannot exceed fifty and invitations to the public to subscribe to its shares or debentures are prohibited.

It is possible to set-up a single member private company, however, such a company may only carry out one principal activity. In addition, it must satisfy the conditions of a private exempt company, being, that it cannot have more than fifty debenture holders and that no body corporate can act as a director.

There are no restrictions regarding the nationality or the place of residence of the directors, shareholders or other officers of a Malta company. Furthermore, a Malta company may be set-up for any lawful purpose. There are, therefore, no restrictions regarding the type of activity of a company, provided that certain activities may render the company subject to license requirements such as, for example, gaming companies, telecommunications companies and financial services companies.

Shareholders in Malta companies can be either individuals or bodies corporate. It is also possible for shares in a Maltese company to be held on a fiduciary basis by an entity authorised/ licensed for such purposes allowing the beneficial owners to retain confidentiality.

The Memorandum and Articles of Association of both private and public companies must contain:-

the name of the company; which is to include Plc, Limited or Ltd, subject to the public or private nature of the company respectively,
the name and residence of the subscribers (in the case that a fiduciary is appointed, the name and details of the fiduciary are specified),
the registered office of the company, which must be located in Malta,
objects of the company,
the authorised and issued share capital of the company divided into shares of fixed nominal value,
number of directors,
name and residence of first directors, and name and registered or principal office, if the director is a body corporate,
the manner in which the company is to be represented, and the chosen representative, and
name and residence of first company secretary.

Share Capital Requirements

The minimum share capital in private limited companies is €1,165 and the minimum percentage paid up is 20%, whereas in public companies the minimum share capital is €46,588 and minimum percentage paid up is 25%.

Time

Following satisfactory completion of the KYC/due diligence process, a company can be registered by submitting the necessary documentation to the Registrar of Companies, including therefore the Memorandum of Association as well as an identification document of the subscribers and proof that the initial share capital was deposited in favour of the company-in-formation. The Memorandum and Articles of Association must be signed by the subscribers or their attorneys. Generally, registration is completed within 24 hours of receipt of all documentation required.

Cost

A registration fee is to be paid to the Registrar of Companies, the value of which depends on the amount of authorised share capital of the company being set-up but ranges between a minimum of €245 (for a share capital that does not exceed €1,500) and a maximum of €2,250 (for a share capital exceeding €2,500,000).

3. Directors (power, appointment, duties and liability)

Appointment

The business of limited liability companies is conducted by its directors. The directors are appointed by the shareholders. A private company must have at least one director, two in the case of a public company. Directors may be individuals or corporate entities. The shareholder/s may be appointed as director/s. A person shall not be qualified for appointment or hold office as director of a company if:

he is interdicted or incapacitated or is an undischarged bankrupt;
he has been convicted of any of the crimes affecting public trust or of theft or of fraud or of knowingly receiving property obtained by theft or fraud;
he is a minor who has not been emancipated; or
he is the subject to a disqualification order.

Power

Company directors are generally vested with the legal and judicial representation of the company. This authority is however limited by the Companies Act, in that, directors may not:

act or enter into transactions which go beyond the company’s objects and powers;
disregard other limitations imposed by the company’s Memorandum or Articles of Association; or
disregard instructions properly issued by the company in relation to the exercise of their powers.
The Directors have the power to appoint and remove the company secretary.

Duties and Liabilities

The directors must perform their duties with a degree of care, diligence and skill which is to be exercised by a reasonably diligent individual. They must not have a conflict of interest between the benefit of the company and their personal benefit and they must not compete with the company.

Furthermore, the Director qua fiduciaries owe fiduciary obligations towards the company which include the duty of loyalty and care of a bonus pater familias. They must keep property acquired under fiduciary obligations separate from their own personal property, they must render an account and keep records in relation to the management of the property held under fiduciary obligation, and are duty bound to return property held under a fiduciary obligation when their mandate terminates.

Directors, as officers of the company, are entrusted with keeping statutory registers and minute books such as a register of members, a register of debentures, minutes of board and general meetings’ and minute books as well as completing the annual returns and filing any changes in the company’s corporate structure with the Registry of Companies.

Directors are personally liable in damages for any breach of duty committed as well as liable to make a payment towards the company’s assets, as deemed fit by the court, upon dissolution, if the company continues to trade while said director knew, or ought to have known that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. The court may release the director from liability if it is satisfied that the director took every step he ought to have taken with a view of minimising the potential loss to the company’s creditors.

4. Filing Obligations

All companies registered in Malta must prepare financial statements which must be audited by a Certified Public Accountant who must also be a registered auditor. Audited financial statements must be presented to the tax authorities and to the Registry of Companies on an annual basis. A company is also required to prepare and submit its annual tax return and make payment of the annual tax due. If the company’s activities are subject to VAT, the company will also need to submit VAT returns every quarter and pay the relative VAT thereon. The company may also need to submit recapitulative statements depending on its activities.

5. Taxation of Malta Companies

Companies registered in Malta are very tax efficient vehicles which one can use to carry out trading activities and / or hold overseas investments. A company is considered resident in Malta if it is incorporated in Malta or, in the case of a foreign body of persons, if its management and control are exercised in Malta. Companies that are resident and domiciled in Malta are subject to income tax in Malta on their worldwide income and capital gains at the rate of 35% which is the maximum rate of tax in Malta. However, in view of Malta’s full imputation system of taxation, any income tax paid by the company is credited in full to the shareholder upon a distribution of dividends, so as to avoid economic double taxation and, in addition, entitles shareholders to a refund of any tax paid by the company which is in excess of the shareholders’ income tax liability.

Tax Refunds

Shareholders of Maltese resident companies are also entitled to a refund with respect to the corporate tax paid by the company on the profits distributed to the shareholders. The amount of refund varies depending on the type of income being distributed.

Participation Exemption

The participation exemption regime ensures that dividends and capital gains derived by companies registered in Malta from their qualifying participating holdings in any jurisdiction will not be subject to any tax in Malta, provided that the anti-avoidance measures are satisfied in case of dividend income.

Alternatively at the option of the Malta Company, income or gains derived from a participating holding may be taxed at a flat rate of 35% less any available double taxation relief. In such circumstances, however, upon a subsequent distribution of dividends by the company out of the said taxed income or gains, the shareholders of the Malta company would be entitled to a full refund (100%) of the Malta tax paid.

Double Taxation Relief in Malta

Malta does not impose any withholding tax on outgoing dividends, interest and royalties irrespective of the recipient’s tax residence and status. However, income received from foreign sources may be subject to foreign withholding tax or other foreign taxes. Consequently Malta’s fiscal legislation offers different forms of double taxation relief to ensure that double taxation is avoided. Malta has concluded more than 70 double taxation agreements, mostly based on the OECD Model Convention, which provide for the relief of double taxation.

Branches

Maltese legislation provides for companies incorporated or constituted outside Malta to conduct business in or through Malta by using a branch or a place of business in Malta. This creates a viable alternative when companies opt not to register a separate legal entity, yet carry out business in Malta by an extension of their foreign corporate vehicle. As a result, a branch qualifies to be considered as a company registered in Malta and is taxed in Malta on any income and gains arising in Malta which are attributable to the branch at a rate of 35%. Tax refunds may still be claimed in relation to dividends distributed from such branch profits.

6. Other Vehicles

Other commercial partnerships

Maltese law provides for partnerships en nom collectif where the liability of the partnership is guaranteed by the unlimited, joint and several liability of all the partners, and partnerships en commandite where the liability of the partnership is guaranteed by the unlimited, joint and several liability of the general partners, and by the liability, limited to the amount, if any, unpaid on the contribution, of one or more partners, called limited partners. The advantage with partnerships is that they can elect to be taxed as companies or can be tax transparent in which case the income of the partnership is taxed at the level of the partners.

Trusts

The Trusts and Trustees Act regulates the creation and administration of trusts. A Maltese trust may be created verbally, in writing (including by will), by operation of law or by a judicial decision. Trusts are an ideal instrument for estate planning as they allow flexibility and a degree of privacy.

Foundations

Maltese law also provides for the creation and administration of foundations (whether set-up for private or charitable purposes). A foundation, as opposed to a trust is a separate legal entity subject to registration with the Registrar of Legal Persons. Unlike the trust deed, which is kept by the trustee under confidentiality, the deed of foundation is registered with the Registrar of Legal Persons and is available for inspection by the public. However, the identity of the beneficiaries may be specified in a separate document which is not published. Foundations are the ideal structure for non-profit organisations because they enjoy the benefit of separate legal personality while having non-commercial aims.

The presence of such a wide variety of vehicles, together with an advantageous tax regime makes Malta and ideal jurisdiction to set-up a business or within which to invest.

Doing Business in New Zealand: Compliance and Regulation

February 3, 2016Articles, Banking and Finance, Competition and Anti-Trust, Latest News, TaxPeter Wyllie

Introduction

New Zealand is predominately a dual island state located in the South Pacific. During the 1980s, New Zealand underwent changes within its economic market structure. The result is a deregulated and decentralised economy engaging in international partnerships and most favoured nation agreements. Diminished import controls and subsidies establish New Zealand as a competitive international trading partner.

As a result, international trade rules, overseas investment rules, and domestic governance over commercial activities have changed.

New Zealand’s International Links

New Zealand is a member of the British Commonwealth system as well as an independent sovereign state. New Zealand’s governmental and economic policies are influenced by both its location within the South Pacific as well as its Commonwealth counterparts. Operating under a triennially, democratically elected, Westminster model political system strengthens its relationships through trade, security, and investment. New Zealand has the following international agreements in force:[1]

New Zealand-Australia Closer Economic Relations;
Australia-New Zealand Closer Economic Relationship;
ASEAN-Australia-New Zealand Free Trade Agreement;
New Zealand-Hong Kong, China Closer Economic Partnership;
New Zealand-China Free Trade Agreement;
New Zealand-Malaysia Free Trade Agreement;
Trans-Pacific Strategic Economic Partnership (P4);
New Zealand-Thailand Closer Economic Partnership; and
New Zealand-Singapore Closer Economic Partnership

New Zealand has also concluded the following agreements which are yet to be enforced:[2]

Trans-Pacific Partnership;
New Zealand-Korea Free Trade Agreement;
Anti-Counterfeiting Trade Agreement (concluded and signed, but not yet ratified);
New Zealand-Gulf Cooperation Council Free Trade Agreement (concluded but not yet signed);
New Zealand-Russia-Belarus-Kazakhstan Free Trade Agreement (under negotiation);
New Zealand-India Free Trade Agreement (under negotiation); and
Regional Comprehensive Economic Partnership (RCEP) (under negotiation)

Agreements on Economic cooperation are also in place with Taiwan, Penghu, Kinmen, and Matsu.[3]

Overseas Investments

Investments within New Zealand typically adopt either a local subsidiary model or a registry branch, and are dependent upon foreign business requirements. Other options include purchasing local businesses or the establishment of a sole trade business, or engaging within joint ventures, partnerships, or franchises.

There are no restrictions on transfer of capital, dividends, profits, royalties, or interest into or out of New Zealand. Fair competition and strict legal guidelines establish transparent frameworks in order to attain consistency and confidence-building when undertaking business in New Zealand. Operating a business in New Zealand as an overseas investor is predominately regulated by the Overseas Investment Act 2005, as well as the Overseas Investment Regulation Amendment Act 2005.

Other domestic legislation which further controls corporate activity in New Zealand includes:

Companies Act 1993;
Partnership Act 1998;
Limited Partnerships Act 2008;
Commerce Act 1986; and
Reserve Bank of New Zealand 1989

The Overseas Investment Office (OIO) is responsible for approving applications for overseas persons who wish to invest in New Zealand. An overseas person is defined by the Overseas Investment Act as, ‘a person who is not a citizen or ordinarily resident in New Zealand.’ This definition includes a Company that may be incorporated outside of New Zealand, or a partnership or other corporate body which is 25% (or possibly more) controlled by an overseas person or persons. The assessment is based on a number of factors, including the amount of the investment, the type of investment, and the proposed sector in which the investment is to be made.

Fair Competition

Business acquisition falls under the regulatory framework of the Commerce Act 1986. This Act aims to promote competition which establishes a long term benefit for New Zealand in a fair and equitable way. New Zealand sees more and more extraterritorial ventures, and as a result, the Commerce Act extends to business activities conducted outside of New Zealand by New Zealand Corporates. The Commerce Act is strict in its prohibition of business acquisitions which substantially lessen competition in the market, create safe harbours, and promote restrictive trade practices. It covers cartel behaviours, collective boycotts, and price fixing.

New Zealand also has a very well established consumer protection legal framework, which includes:

Fair Trading Act 1986;
Consumer Guarantee Act 1993; and
Sale of Goods and Services Act 1908

The above legislation oversees trade between businesses and to general consumers through regulation of business activities. If business activities are deemed to be unfair, then subject to the situation, one of the above legislative measures comes into force. Unfair business practice extends to conduct which is deemed to be misleading or deceptive, or that causes consumers or other businesses to form a mistaken belief or impression as to the product or service on offer.

Banking

The Reserve Bank of New Zealand Act 1999 empowers the Reserve Bank of New Zealand to regulate monetary policy in order to promote stability in pricing, as well as overseeing the maintenance of the financial system. It also supervises banks operating within New Zealand, including those which may be owned by overseas entities.

Most financial services are regulated within New Zealand. For example, insurance providers (domestic or overseas providers) are governed by the principles of the Insurance (Prudential Supervision) Act 2010. Domestic and overseas financial service providers fall under the ambit of the Financial Services Providers (Registration and Dispute Resolution) Act 2008. Regulatory frameworks and compliance will generally depend upon the type of investment venture.

Capital Markets

New Zealand operates three securities markets:

New Zealand stock market (NZSX);
New Zealand alternative market (NZAX); and
New Zealand Data Market (NZDX).

NZSX is the principal market for equity securities for larger Corporations; the NZAX offers securities for small or medium-sized businesses. Fixed income businesses are generally listed on the NZDX. Any offer of securities to the New Zealand public must comply with the New Zealand Securities Act 1978 and the Securities Regulations 2009. This includes primary, dual, or overseas listings.

Taxation

The Income Tax Act 2007 governs income and overseas tax for individual and corporate tax payers. Taxes are normally levied on annual gross income from all sources less annual total deductions, as well as any losses carried forward. Gross income is defined as income which includes all gains on financial instruments, and short-term or planned profits on land or shared transactions.

Deductions might be defined as expenses incurred in gaining income or in carrying out business for the purpose of gaining income. Tax is payable in New Zealand if a person is a resident in New Zealand, or if the person is non-resident but derives an income from a source within New Zealand. Worldwide income will be dependent on in which country and how that income is derived.

New Zealand resident companies are taxable on their worldwide income at a rate of 28%, unless that company has made an election with the IRD to be a look-through company (‘LTC’). This means that the shareholders themselves are liable for income tax on the LTC’s profits, rather than the company itself. They can offset the LTC’s losses against their own personal income in New Zealand. Non-resident shareholders of an LTC are not liable to pay income tax in New Zealand on any overseas sourced income, only on income sourced in New Zealand. An overseas company is taxable at the same rate if its income has a New Zealand source.

The New Zealand dividend imputation system under which tax is paid by New Zealand resident companies allocates an imputation credit to dividends paid to shareholders. New Zealand resident shareholders may offset this imputation credit against tax liabilities in respect of other dividends; however, this will be dependent upon a range of factors, i.e. the rate of non-resident withholding tax, or if a New Zealand resident company receives dividends from a foreign tax company.

In order to ensure overseas owned companies pay the appropriate level of tax on their New Zealand sourced profits, a transfer pricing regime exists. Maintenance of the appropriate pricing records and compliance with other New Zealand regulatory regimes such as PAYE, Goods and Services Tax, and Kiwi Saver (Superannuation Schemes) also apply.

Summary

The above is an overview of useful information for overseas investment within New Zealand, but does not constitute legal advice. Specific legal requirements and compliance must be assessed on a case-by-case basis, and are dependent upon business needs or plans. Doing business in New Zealand needs careful guidance through the legislative frameworks and processes in order to ensure proper compliance. Before taking steps to invest in New Zealand, we strongly suggest that you consult with legal experts.

[1] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand. www.mfat.govt.nz

[2] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand. www.mfat.govt.nz

[3] Information supplied by the Ministry of Foreign Affairs and Trade of New Zealand. www.mfat.govt.nz

Austrian taxation of private foundations in connection with profit allocations to foreign beneficiaries contrary to EU law (C-589/13)

February 2, 2016Accounting and Audit, Articles, Latest News, TaxRudolf Krickl

On 17 September 2015, the Court of Justice of the European Union (‘CJEU’) rendered its decision in the case F.E. Familienprivatstiftung Eisenstadt (C-589/13) concerning the Austrian system of interim taxation of national private foundations in the case of profit allocations made to non-resident beneficiaries. The CJEU held that the unfavorable treatment of private foundations which make profit allocations to non-resident beneficiaries as compared to those making profit allocations to local beneficiaries infringes the free movement of capital.

The Austrian system of interim taxation

In the given case an Austrian private foundation generated capital gains which fell under the Austrian system of ‘interim taxation’. Under this taxation scheme certain profit items (i.e. certain capital gains and income from the disposal of private real estate) of a private foundation are subject to an interim tax at a rate of 25 % (corporate income tax). Before the introduction of the interim tax these profit items remained untaxed at the level of the private foundation and only the profit allocations to beneficiaries made out of this income were taxed with WHT at a rate of 25%. That mechanism allowed private foundations to reinvest profits from capital investments without consideration of any tax reductions which led to higher investment income as long as no profit allocations were made (‘snowball-effect’). However, this beneficial tax treatment – due to political reasons – had to be limited which resulted in the implementation of an interim tax. Since the interim tax should not lead to a higher overall tax burden on these profit items than under the old system (overall 25% tax burden), the base of the interim tax was reduced in so far as any profit allocations were made to beneficiaries in the same assessment period, provided the profit allocations – which are in principle subject to WHT – were not fully or partly exempted on the basis of a DTC (regularly fulfilled in case of domestic beneficiaries). If profit allocations are made in the following years for which WHT has been withheld, interim tax will be credited (in the amount of 25% of the profit allocations). Upon termination of the private foundation all interim tax not credited so far, will be refunded then.

Scenario with foreign beneficiaries:	Scenario without foreign beneficiaries:

The facts of the case

In the case at hand an Austrian private foundation made profit allocations to beneficiaries resident in Belgium and Germany which requested relief from the WHT deducted from their profit allocations based on the applicable DTC’s. Consequently, the Austrian tax authorities denied the corresponding reduction of the profit subject to interim tax at the level of the private foundation in the same period. The private foundation appealed before the Federal Fiscal Court (Austrian Tax Court of 2^nd Instance) against this decision. However, the Federal Fiscal Court upheld the decision of the tax authorities by stating that exemption from WHT was granted in respect of the profit allocations on the basis of the DTCs, which meant that these profit allocations could not be deducted from the taxable amount of the interim tax. In a next step, the private foundation appealed against the decision of the Federal Fiscal Court before the Austrian Administrative High Court (VwGH). The Administrative High Court held it likely that the unfavorable treatment of private foundations, which arises only in the case of profit allocations to foreign beneficiaries but not in the case of profit allocations to domestic beneficiaries constitutes a restriction of the free movement of capital and referred the following question to the CJEU for a preliminary ruling: ‘Is Article 56 EC to be interpreted as precluding a system for the taxation of capital gains and income from the disposal of holdings of an Austrian private foundation in the case where that system provides for a tax charge to be imposed on the foundation in the form of an ‘interim tax’ in order to ensure single national taxation only in the case where, on the basis of a double taxation convention, the recipient of [profit allocations] from the private foundation is exempt from capital gains tax which in principle is chargeable on [profit allocations].’

The CJEU’s decision

According to the CJEU, profit allocations made by private foundations fall under the provisions of the Treaty on the movement of capital. Such profit allocations can be compared with gifts and therefore the application of Art 63 TFEU can be derived from the judgements in Persche[1] and Mattner[2]. Both the initial contribution of the assets to the private foundation by the founder as well as the subsequent payments made from profits generated by those assets to the beneficiaries fall within the concept of ‘movement of capital’ within the meaning of Art 63 para 1 TFEU.[3]

With regard to a possible infringement of that fundamental freedom the CJEU first argues that the different treatment of Austrian private foundations in their right to an immediate reduction of the interim tax base (depending on whether the beneficiaries of the profit allocation are or are not subject to Austrian WHT) forms – due to the associated liquidity disadvantage – a restriction of the free movement of capital. Although profit allocations for which such a right to immediate reduction or immediate reimbursement is excluded can also include profit allocations to beneficiaries residing in Austria where those beneficiaries are exempted from WHT, they cover in particular profit allocations made to non-resident beneficiaries in so far as under Art 21 DTC such profit allocations are not taxable in Austria since they are subject to the exclusive powers of taxation of the State of residence of the beneficiary.[4]

The CJEU concluded that the making of profit allocations by private foundations to resident beneficiaries is a situation objectively comparable to that where the same private foundations make profit allocations to beneficiaries residing in another Member State. Since Austria renounced the exercise of its powers of taxation over profit allocations to persons residing in other Member States, it cannot invoke a difference in the objective situation between resident private foundations which make profit allocations to domestic and those which make profit allocations to foreign beneficiaries in order to subject private foundations making profit allocations to the latter to a specific tax on the ground that those beneficiaries are not subject to its tax jurisdiction.[5]

The difference in treatment cannot be justified by an overriding reason in the public interest. As Austria, via the conclusion of DTC, has abandoned its powers of taxation on profit allocations to persons residing in other Member States, Austria cannot refer to a balanced allocation of powers of taxation in order to levy a specific tax on foundations that make profit allocations to such persons on the basis that those persons are not subject to its tax jurisdiction.[6]

The Court then went further to state that a ‘principle of single taxation’ has never been accepted as a distinct justification. According to settled case law any advantage resulting from the low taxation to which a subsidiary is subject cannot by itself authorise another Member State to offset that advantage by less favourable tax treatment of the parent company.[7] These considerations also apply to the case at hand, concerning a difference in tax treatment of private foundations according to whether the profit allocations they have made lead to their beneficiaries being taxed in Austria.

The restriction neither can be justified by the need to safeguard the coherency of the national tax regime. The coherency argument requires a direct link to be established between the tax advantage concerned and the offsetting of that advantage by a particular tax. According to the CJEU no such a direct link exists in the present case because of two reasons. First, the benefit of the reduction of the interim tax and the taxation of the beneficiaries concern different taxpayers. Secondly, whereas the tax advantage of the foreign beneficiary consists in a permanent exemption from the WHT, a private foundation suffers only a temporary disadvantage due to the interim tax. This is because all interim tax (insofar not credited till then) will be refunded upon termination of the private foundation.

Conclusion

This decision of the CJEU makes clear that the Austrian system of interim taxation, which refuses the right to deduct WHT-exempt profit allocations to foreign beneficiaries from the taxable basis of the interim tax, is not in line with EU law. Profit allocations of Austrian private foundations made to domestic and foreign beneficiaries should lead to a corresponding reduction of interim tax, irrespective of any tax treaty benefit applied to the profit allocations. Since the free movement of capital also applies to third country situations profit allocations to beneficiaries residing in countries outside the EU should qualify for a corresponding reduction of interim tax as well.

Way forward

Under a bill issued on 9 December 2015 the system of interim taxation was modified in order to address the CJEU judgement in F.E. Privatstiftung Eisenstadt. The new system came into force on 1 January 2016. Under the new system profit allocations to foreign beneficiaries should lead to a reduction from interim tax insofar as the profit allocations are definitely charged with Austrian WHT. Profit allocations that are only partly exempt from WHT tax, would then partly be recognized for the reduction from interim tax. Under the old system of interim taxation a partial reduction from WHT led to a full denial of reduction from interim tax.

In the event of termination of the private foundation it is now foreseen that not all interim tax will be refunded anymore, but also only to the extent (final) profit allocations are definitely charged with WHT. This amendment could even lead to situations were private foundations with foreign beneficiaries are tax even worse under the new system as compared to the old system.

As under the new bill a private foundation with foreign beneficiaries would still be treated less favorably than one with domestic beneficiaries also the new bill seems to violate EU law.

As already described above the justification of the old system of interim taxation based on the coherency of the Austrian tax system failed because of two reasons: (a) the benefit of the reduction of the interim tax and the taxation of the beneficiaries concern different taxpayers and (b) whereas the tax advantage of the foreign beneficiary consists in a permanent exemption from the WHT, a private foundation suffers only a temporary disadvantage due to the interim tax. By the new system of interim taxation (i.e. refund of interim tax upon termination of the private foundation only to the extent (final) profit allocations are definitely charged with WHT) only point (b) will be taken account of. However in its judgement F.E. Familienprivatstiftung Eisenstadt, the CJEU explicitly states the justification based on the coherency of the national tax system, fails ‘for several reasons’.[8] Therefore point (a) still prevents a justification of the new system of interim tax on the basis of the coherency argument.

To sum up the CJEU in its judgement F.E. Familienprivatstiftung Eisenstadt concluded that profit allocations to foreign beneficiaries should always lead to a full corresponding reduction of interim tax, irrespective of any DTC exemption. The Austrian legislator should therefore re-implement the system of interim taxation in a way that it does not differentiate between WHT-exemption anymore. For now it seems highly questionable whether the CJEU would accept the new system which came into force beginning of 2016. Therefore, Austrian private foundations with foreign beneficiaries which are subjected to significant interim tax and do not benefit from a reduction of it due to the regulation above should analyse whether it makes sense to challenge the Austrian regulation by referring to EU law.

[1] EU:C:2009:33 (Persche), para 27.

[2] EU:C:2010:216 (Mattner), para 20.

[3] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 39.

[4] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 43.

[5] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 64.

[6] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 71.

[7] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 76.

[8] EU:C:2015:612 (F.E. Familienprivatstiftung Eisenstadt), para 82.

Income Tax Law of Burundi: Overview of the Recent Reform

November 12, 2015Articles, Latest News, TaxAnatole Nahayo

For nearly half a century, Burundi maintained the income tax system that it inherited from the colonial period. Recently, this tax system has been reformed to modernise it and make it conducive to the business community. However, the reform process has been challenged by the failure to sustain enough collection of tax revenue. Some measures which had been removed to make the system friendlier to the conduct of business have unfortunately been reintroduced within one year.

BACKGROUND OF THE TAX REFORMS IN BURUNDI

Following the end of its civil war in 2005 (which lasted more than a decade) and its admission into the East African Community (EAC, comprised of Burundi, Kenya, Rwanda, Tanzania, and Uganda) in July 2007, Burundi embarked on the process of modernisation of its tax system.

Thus far, this process has led to the creation of the Burundi Revenue Authority (the Office Burundais de Recettes (OBR)) in 2009[1] (in replacement of the then Department of Tax Administration of the Ministry of Finance), the enactment of a new income tax law in 2013,[2] the introduction of the Value Added Tax (VAT) in 2009[3](and its revision in 2013, in replacement of the then tax on consumption of goods and services (or the transaction tax law)),[4] , the enactment of a new Investment Code (providing for, among other things, tax incentives) in 2008,[5] the creation of an Investment Promotion Agency (the Agence Burundaise de Promotion des Investissements ((API), charged with, among other things, the administration of various tax incentives) in 2009,[6] and the introduction of a Tax Procedures Code in 2013.[7] Two additional laws which are still in preparation include one on excise taxes and another on the fiscal system of local entities so as to support the policy of decentralization. Currently, excise taxes are provided for in the budget law, which is passed in December of each year and revised in July of the following year.

This brief paper aims at highlighting the material changes introduced to the income tax law of Burundi through those reforms. These changes relate to (1) the move from the typical schedular income tax system towards the combination of elements of global income tax system with elements of the schedular system (semi-global system), (2) the move from the source nexus as the exclusive basis for imposition of income tax to the combination of the source and the residence bases for income taxation, (3) the move from the principle of territoriality in the definition of income tax liability to the combination of the worldwide income tax liability (for resident taxpayers) and the territoriality principle (for non-resident taxpayers), (4) the introduction of measures to alleviated international double taxation, (5) the application of simplified the tax rates structure, and (6) the introduction of new anti-avoidances provisions.

1. From a typical schedular (or analytical) income tax system towards a semi-global (or semi-synthetic) system

The income tax law that was applied in Burundi until the reform of January 2013 was inherited from the Belgium colonial authority and dated back to 1963.[8] This law classified income into three categories, along with the type of activities from which it is derived, namely, (i) rental income,[9] (ii) investment income, and (iii) business income.[10] Business income was itself divided into four subcategories, (a) income from employment, (b) profits from commercial and industrial activities, (c) income from self-employment and freelance activities (also called non-commercial profits), and (d) profits from any other business (catchall subcategory).[11] The subcategory of employment income also differentiated between income derived from fulltime employment and part-time employment. For part-time employment, the income so derived was further divided between income earned from the education and health sectors and the income from all other sectors of the economy.

For an individual, each of the aforementioned categories of income constituted a separate schedule for which separate and different rules were applied in the ascertainment of the chargeable amount and the rates and the mode of tax collection, without any room for aggregation of the income from the different sources. Even for corporate tax, the capital gains were taxed separately and attracted a much reduced tax rate (20%, whereas the corporate tax was fixed at 35%). This system was a typical schedular or analytical income tax system.

The new law on taxation of income, enacted on 24 January 2013, introduced material changes towards a semi-synthetic income tax system.

Income is classified into four categories, namely, the employment income, the business income (or profit), the investment income (including capital gains), and rental income.

For individuals (personal income tax as opposed to corporate tax), the annual income tax is aggregated into two different schedules, one comprising the employment income and business income, and the other made of the investment income (including capital gains).

A progressive income tax rate structure applies on the first schedule (0%, 20%, or 30%) while the second schedule is subject to a proportional income tax rate (15%). Rental income is still taxed separately, and its proceeds are allocated to the decentralized territorial entities (called communes in rural areas) or the Bujumbura capital city authority.

For corporate tax, all its profit is aggregated from the different sources of earnings or income and taxed as its business profit. Thus, the new law introduced a semi-global income tax system.

As a collection method for tax revenues, the employment income is taxed through monthly Pay as You Earn (PAYE), the investment income (e.g. dividends, interest, or capital gains) is collected through withholding tax, and some elements of business income are also collected through the withholding method (these elements relate to the income paid by a resident person to a non-resident person who does not have a permanent establishment in Burundi). The withholding taxes apply to both individuals and companies.

2. From the source nexus as the exclusive basis for imposition of income tax to the combination of the source and the residence bases for income taxation

A basis of income taxation is understood as the ‘genuine link between the income and the taxing state.’[12] It can be a residence basis, a source basis, or a nationality/ citizenship basis.[13]

Before the enactment of the new income tax law of 2013, Burundi taxed only income derived from or accrued in Burundi, irrespective of the residence, citizenship, and/or domicile of the beneficiary of the income or taxpayer. The new income tax law still provides for the source nexus only for non-resident taxpayers, while resident persons (individuals and companies) are taxed on the basis of their worldwide income or profit.

3. From the principle of territoriality to the combination of the worldwide and territoriality principles in the definition of income tax liability

The source nexus applied before the income tax reform of 2013 provided that the tax liability of a taxpayer was assessed on the basis of the territoriality principle. This means that income tax liability was restricted to the amount of income of the taxpayer connected to the territory of Burundi, regardless of whether the taxpayer was a resident or a non-resident. Now (post reform), the principle of territoriality in the definition of income tax liability applies only to resident taxpayers, while the tax liability of resident taxpayers is assessed on the basis of the worldwide principle.[14]

4. Introduction of measures to alleviated international juridical double taxation

International juridical double taxation occurs in three different scenarios of income tax law conflicts, namely, where there is conflict between the ‘worldwide versus source,’ the ‘worldwide versus worldwide,’ and the ‘source versus source’ conflicts.[15] These are situations in which the income of the same taxpayer is taxed twice by two (or more) different jurisdictions for the same tax period as a result of conflicting tax provisions on the definition of the source of the income or the residence of a taxpayer.

Before the tax reform, Burundi did not have any provision to alleviate potential international double taxation. Following the reform, Burundi applies the limited tax credit mechanism for income tax paid abroad in order to alleviate the adverse effect of international juridical double taxation.

5. The application of simplified tax rates structure and reduced tax rates

Before the reform, the income tax structure of Burundi was very complicated and very difficult to understand for taxpayers; there were separate tax rates depending on the source and schedule of income and combination of proportional and progressive tax rates, with marginal tax rates as high as 60%, with the ceiling at 35% for individuals. For companies, the tax rate was fixed at 35% in cases where they had profits, and 1% of their annual turnover in the case of losses. Most tax revenues from businesses were collected through advanced tax and instalments.

Currently, the tax rate structures have been very much simplified.

For individuals:

The first schedule (employment income + business income) is taxed at the rates of 20% or 30% above the monthly threshold of 150,000 BIF (equivalent to approximately $93.75)[16] as follows:

If the gross remuneration comprises housing allowance, the amount of housing allowance which does not exceed 60% of the basic salary is exempted;
If the gross salary comprises transport allowance, the amount of transport allowance which does not exceed 15% is exempted;
If the gross salary comprises employee contribution to the national pension scheme, the amount of such contribution which does not exceed 18,000 BIF ( equivalent to $11.25) is deducted from the taxable amount;
If the employee makes a contribution to a supplementary pension scheme, the amount so contributed which does not exceed 20% of his or her gross remuneration is deducted from the taxable amount; and
The remaining income (chargeable income) is then taxed as indicated below:
– From 0-150,000 BIF : 0%
– From 150,001-300,000 BIF : 20%
– From 300,001 and above : 30%[17]

The second schedule (investment income, including capital gains) is taxed at the proportional tax rate of 15% [18]

For entities:

The corporate income tax rate has been reduced from 35% to 30% ;[19] and
Capital gains are treated as any other profit and subject to the same tax rate of 30%;[20]

The 1% minimum tax rate on business income (for both individuals and companies) in the case of losses has been reinstated within only one year of its removal. This was done through the budget law, and was motivated by the reduction of income tax receipts purportedly caused by the fact that many taxpayers had declared to have suffered losses.

It is also worth mentioning that a number of advanced taxes on the goods and services which had been removed by the reform of 2013 have now been reinstated through the budget law of 2014. This was due to the difficulty suffered by the Ministry of Finance to mobilize more tax revenues on business income.

Withholding taxes for Individuals and Entities:

For individuals and entities, the following withholding tax rates apply:

Dividends : 15% for individuals and non-resident entities – they are exempted from tax if they are paid and received by a resident company, but taxed as normal earnings of a company (at 30%) in other cases;
Interest: 15% for individuals and non-resident entities, but taxed as normal earnings of a resident company; and
Royalties: 15% for individuals and non-resident entities; they are taxed as normal earnings of a resident company at 30%.

6. The introduction of new anti-avoidances provisions

The other material changes worth mentioning relate to anti-avoidances provisions. These are:

Transfer Pricing Provision: The transactions that are carried out between or among related parties must be at arm’s length. The guidelines for implementation of this new provision is still under development, and the Tax Administration has been granted the power to issue legally binding advanced transfer pricing rulings.
Thin Capitalization Provision: This provision applies to interest on loans provided by related parties. This interest is excluded from deduction if the amount exceeds 30% of taxable profit, except where this amount is less than two times the capital owned by the company and its reserves and provisions.

Anti-Loss Trafficking Provision: Normally, losses are carried forward for five years (six years for mining companies). To avoid losses from trafficking, no loss will be carried forward where there has been a change in the ownership of the company of more than 25% of shares or voting rights.

General Anti-Avoidance Provision: This provision has been introduced by the tax procedures law enacted on 6 September 2013. It gives the Tax Administration the powers to requalify any transaction carried out by a taxpayer for the sole purpose of avoiding or reducing the tax otherwise due.[21]

Conclusion

The income tax system of Burundi that it inherited from the colonial period has been recently reformed. Key changes have been introduced. The reformed tax system is much simplified, modernised and conducive to the business community; however, the failure to mobilise enough tax revenues has given way to the reintroduction of unpopular tax measures, such as the minimum business tax (applied in the case of losses), and the advanced taxes on a number of goods and services.

[1] Law N°1/11 of 14^th July 2009 on the Creation, Organisation and Functioning of the Revenue Administration Agency (Office Burundais des Recettes, OBR)

[2] Law N°1/02 of 24^th January 2013 on income tax.

[3] Law N°1/02 of 17^th February 2009 on the Establishment of the Valued Added Tax (VAT)

[4] Law N° 1/12 of 29 July 2013 on the Revision of Law N°1/02 of 17 July 2009 on the Establishment of the Valued Added Tax

[5] Law N° 1/24 of 10^th September 2008 on the Investment Code of Burundi

[6] Decree N° 100/177 of 19 October 20089 on the Investment Promotion Agency of Burundi

[7] Law N°1/18 of 6th September 2013 on tax procedures

[8] Law of 21th September 1963 on income tax. This law has been repealed and replaced by Law N°1/02 of 24 January 2013 on income tax.

[9] Income derived from the rent or sublease of real estate (namely land and buildings), including the related furniture or livestock, see articles 1 and 4 of the Law of 21 September on Income Tax.

[10] See Article 1 of the Law of 21 September 1963 on Income Tax.

[11] See Article 27 of the Law of 21 September 1963 on Income Tax.

[12] Rust, Alexander, “ Double Taxation”, in Rust, Alexander (ed.), Double Taxation within the European Union, Kluver Law International BV, The Netherlands, 2011, pp. 1-2.

[13] Ibid.

[14] See Article 20 of the Law N°1/02 of 24 January on Income Tax.

[15] Alexander Rust, “ Double Taxation”, in Alexander Rust (ed.), Double Taxation within the European Union, Kluver Law International Bv, The Netherlands, 2011, pp.1-2.

[16] See Article 21 of the Law N°1/02 of 24 January on Income Tax.

[17] See Article 21 of the Law N°1/02 of 24 January on Income Tax.

[18] See Article 23 of the Law N°1/02 of 24 January on Income Tax.

[19] See Article 94 of the Law N°1/02 of 24 January on Income Tax.

[20] See Article 89 of the Law N°1/02 of 24 January on Income Tax.

[21] See Article 50 of the tax procedures law.

Jordan Income Tax Law Reform

November 11, 2015Accounting and Audit, Articles, Latest News, TaxTaxMichael Dabit

Jordan’s new Income tax law number (34) of the year 2014 (published in the official gazette) is put in force as of January 1, 2015. Major changes included in the new tax law related to capital market gains are the following:

The new tax law included some changes regarding the withholding tax related to income from investment, and any other non-exempted income paid by a resident directly or indirectly to a non-resident person. Article (12/B) of the new income tax law, states the following: “Every person responsible for the payment of a non-exempted income, directly or indirectly to a non-resident person shall at the time of payment deduct tax at the rate of (10%), He shall also prepare and submit to the Income Tax Department, and the beneficiary a declaration of the amounts generated and the tax deducted.

The amounts deducted in accordance with Para (1) above can be considered as final taxes in accordance with the instructions issued thereto”.

It is worth mentioning that the amendment to this provision raised the withholding taxes from (5%) to (10%), taking in consideration the above article includes interest income generated from investments and any other non-exempted interest income paid by a resident directly or indirectly to a non-resident person including coupon interest payments of government and corporate bonds.

Para (H) of the same article states that the person responsible for deducting taxes related to article (12/B) above shall deduct and pay the withholding taxes within (30) days of payment date, The tax that has not been deducted and paid shall be recovered and collected as if it were tax due from such person.

Para (I) of this article also referred to instructions that will be issued to set procedures and provisions necessary to enforce this article. The said instruction has not been issued yet.

The new tax law kept the following activities exempted from tax, and added to those exemptions income derived from trading of Sukuk instruments:

Profits from stocks and dividends distributed by a resident to another resident, except profits of mutual investment funds of banks and financial companies, telecommunication companies, insurance, financial services companies. Exempted from taxes.
Capital gains incurred inside the Kingdom, other than profits from assets subject to depreciation.
Income derived from inside the kingdom from trading in dividends and stocks, bonds, equity loan, sukuk, treasury bonds, mutual investment funds, currencies, commodities in addition to futures and options contracts related to any of them, except that incurred by banks, financial companies, financial intermediation and insurance companies and legal persons who undertake out financial lease activities.
Personal exemption of 12,000 Jordanian dinar (JOD) – provided they stay in Jordan for more than 183 days during the calendar year (continuous or interrupted)
Family exemption of JOD 12,000 – provided the family stays in Jordan for more than 183 days during the calendar year (continuous or interrupted.)
Monthly retirement benefit exemption of JOD 3,500 – down from JOD 4,000 under the old Law
Additional personal and family exemption of JOD 4,000 on medical expenses, university education expenses and interests paid on housing loans, housing rent, technical services, engineering services, and legal services.
For the additional personal and family exemption, supporting documents and invoices must be available, and the exemption is granted case-by-case basis following the Income Tax Department’s review of the supporting documents.

WITHHOLDING TAX CHANGES

Withholding tax for non-resident services providers is increased to 10 percent (up from 7 percent.

The 5 percent withholding tax on real estate rent has been abolished.

As of 1 January 2015, certain service providers are subject to a 5-percent retention, including doctors, lawyers, engineers, Certified Public Accountants, experts, consultants, insurance agents, custom clearing agents, arbitrators, speculators, agents and commission brokers, financial brokers, freight forwarders, and other persons specified by the Minister of Finance in related regulations.

The withholding tax on cash and in-kind prizes and Jordanian Lottery winnings in excess of JOD 1000 per each prize is increased to 15 percent (from 10%).

In-kind and in-cash dividends are not subject to withholding tax when paid by a resident to a non-resident party.

INTERIM CORPORATE INCOME TAX PAYMENTS

Corporate taxpayers that had annual total gross income over JOD 1 million (previously JOD 500,000) in the preceding tax year are required to pay interim corporate tax payments at a rate of 40 percent of the corporate income tax liability calculated based on the reported interim financial information related to the interim period (previously 37.5 percent), or 40 percent (previously 37.5 percent) of the income tax amount declared to the tax authority in the preceding tax year. These payments are due within 30 days from the end of the first half and second half of the fiscal year.

LOSSES CARRIED FORWARD

Under the new law, approved losses can be carried forward for up to 5 years (the period was unlimited in the previous law).

SOCIAL SECURITY CONTRIBUTIONS

Monthly social security contributions increased to 20.25 percent (from 19.50 percent), as of 1 January 2015, implemented as follows:

The employees’ monthly contribution increased to 7 percent (from 6.75 percent).

The employer’s monthly contribution increased to 13.25 percent (from 12.75 percent).

EXEMPTION FROM FINES AND PENALTIES

An exemption has been granted from penalties and fines related income tax, sales tax, customs duty, stamp duty and property tax1. The exemption covers penalties related to the tax years 2014 and before, provided that taxes and duties claimed have been fully settled before 31 March 2015. Such exemption is reduced to 75 percent if the amounts are fully paid during the period from 1 April to 30 June. From 1 July 2015 to 30 September 2015, the penalties are phased out at 50 percent.

EXEMPTION FOR RENEWABLE ENERGY INPUTS

Jordan’s Renewable Energy Law2 is amended to include a full exemption from sales tax and customs duty on the renewable energy inputs, including spare parts and equipment.

Treaties for the Prevention of Double Taxation

Jordan has signed agreements for the prevention of double Taxation with Austria, Bahrain, Belgium, Canada, Cyprus, Denmark, Egypt, France, Iraq, Kuwait, Libya, Malaysia, Oman, Pakistan, Qatar, Romania, Saudi Arabia, Spain, Syria, Tunisia, Turkey, United Arab Emirates, United Kingdom, the United States and Yemen.

Snapshot of the New Tax Law:

For individuals

– A tax free threshold of JD12, 000 for individuals, the same as the previous law.

– A further JD4, 000 exemptions is also added if supported by invoices of expenses related to medical services, and interest paid on housing loans.

– 7 percent tax for the first JD10, 000 above the exempted JD12, 000. In the previous law, the first JD12, 000, after the exempted amount, was subject to a 7 percent tax.

– Under the new law, a second bracket has been created with the second JD10, 000 subject to a 14 percent tax. There will further be a 20 percent tax for individuals who earn above this.

– This is compared to the previous tax law, which entailed a tax of 14 percent on any sum above the first taxed JD12, 000.

– The new law provides a tax free threshold of JD24, 000 for a household’s combined annual income, plus the JD4, 000 exemptions on expenses related to medical services and interest paid on housing loans.

For businesses?

– Banks: 35 percent income tax (up from 30 percent)

– Industrial sector: 14 percent levy on every JD100, 000 generated, which rises to 20 percent on every JD1 above that amount. (The same as the previous law)

– Telecommunications, electricity distribution, mining, insurance, brokerage, finance and companies or persons who provide rental and leasing services: 24 percent tax on every JD1 earned

– Agriculture: Totally exempt from tax (Previously 14 percent tax after the first JD75, 000)

– Other businesses and partly owned government entities: 20 percent tax (up from 14 percent tax)

Doing Business in Costa Rica: A Quick Guide to not fail!

October 28, 2015Articles, Corporate/Commercial Law, Latest News, TaxRandall Zamora Hidalgo

Costa Rica is a well know destination for investment purposes, no wonder why multinational companies such Intel, P&G, Western Union and many other had decided to establish operations in this 51,100 km2 and 4.9 million population Central America Country.

Although, one of the goals of the Costa Rican Government is to attract foreign investment, to start a business would be tricky if the home work is not done properly, not to mention the different Government Agencies to be visited in order to get fully licensed business wise.

That being said, the following list intends to give an overview of what needs to be done in order to do business in Costa Rica, while reading the list please keep in mind that if done properly, this is a onetime process.

Incorporation of a Company in Costa Rica

The most common form of incorporation is the Sociedad Anónima (Corporation). The articles of incorporation must be recorded in a notarized public instrument and registered in the Public Record Office. The Public Record Office will then provide an identification number. The Law requires a minimum of two (2) persons to register the corporation. After the incorporation, the number of shareholders may be reduced or increased, with NO limitations as to the nationality. Registration procedures usually last at least four weeks. Shell companies can be used in case of immediate application.

Basic Features of Corporations in Costa Rica

The Corporation is managed by a Board of Directors of no less than three members, President, Secretary and Treasurer, who do not need to be shareholders (there are no citizenship or residency requirements). No one can hold two office positions. The President of the Board legally represents the corporation, as well as any other member so specified in the articles of incorporation. They are able to delegate all or some of their power to other members of the Board if the articles of incorporation allows it. They may also appoint one or more managers.

One half of the members of the Board are required for meetings and a majority of those present to hold a resolution. The President has two votes in case of a tie.

The company must have a Resident Agent, an attorney with office in Costa Rica. The Resident Agent must be registered in the Mercantile Registry and will be in charge of receiving all legal notifications.

Registering a Branch in Costa Rica

Foreign corporations which have or intent to open branches in Costa Rica are required to appoint, maintain, and register a legal representative agent vested with full powers of attorney in the country for the business affairs of the branch.

Registering a representative with full powers of attorney

An unlimited power of attorney authorizes a person to act on behalf of a company. It must be given by a representative of the parent company with sufficient power, before a Costa Rican Public Notary or the local Costa Rican Consulate.

General Income Tax Office (Dirección General de Tributación Directa)

The General Income Tax Office is part of the Ministry of Treasury. Every person or entity that performs one or more economic activities in the country must register as a taxpayer. The procedure is executed at the Tax Administration offices.

Taxes

Under the Costa Rica tax system, residents and corporations are taxed only on income earned in Costa Rica. The tax year begins on October 1 and ends September 30, for both individuals and corporations. Companies may request filing returns on a different tax year, subject to the approval of the Ministry of Finance. Unless proof to the contrary exists, the Ministry of Finance establishes a presumptive net income for professionals as well as corporations, and constitutes a minimum taxable base.

Social Security (Caja Costarricense de Seguro Social – CCSS)

According to the Costa Rican law, the employer must contribute to the social security regime of its employees with a fixed percentage of the employees’ salary. The employee must also contribute a fixed percentage of its salary. Therefore, the company must first be incorporated as an employer with the CCSS; this can be done at the central office or any of the regional offices of the CCSS. The company’s incorporation as an employer and the registration of its employees must be done within the first eight days after hiring its employees.

National Insurance Institute (Instituto Nacional de Seguros)

According to the Costa Rican Labor Code, the employer must secure an occupational risk insurance policy for its employees. For this, the employer has to underwrite a policy from the National Institute of Insurance (INS). The policy has to be underwritten at the beginning of the operation and has to be in force during the operation. To underwrite an occupational risk policy, the applicant has to go to the Central Office or a branch of the INS, a commercial Insurance Agency or an authorized Insurance Agent. At the moment the policy is underwritten, the company will be automatically registered as an employer at the INS. Once the policy is underwritten, the employer has to remit to the INS on a monthly basis a status of the forms indicated: names of the workers, days and hours worked and the salaries paid.

Ministry of Public Health – Operation Certificate

In accordance with the General Health Law, companies must request authorization, or an Operation Certificate, from the Ministry of Public Health prior to the initiation of operations. This is a requisite prior to obtaining the municipal business license.

The activities that are subject to said process, as well as the requirements for obtaining the permit and the duration of such a permit, are defined in Executive Decree N° 30465 and its amendments and in the Regulations on Sanitary Registry of Establishments Regulated by the Ministry of Public Health. In this decree, activities are classified in three categories in accordance their level of environmental and health risks: A (high risk), B (moderate risk) and C (low risk).

Municipal License

All individuals or entities with business activities require a municipal license (or permit) from the canton in which the activity is developed. The license involves the payment of a tax during the time of operations. In virtue of the municipal autonomy, the forms and requisites to obtain a license may vary among municipalities, pursuant to their legislation and administrative dispositions.

The above information is useful for a company that is more likely to lease an space and focused in the service industry, ever since, when it comes to build a facility, industrial process and Free Duty Regimen other steps must be added, but this list is a good start to understand what needs to be done in order to do business in Costa Rica.