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Comparative Corporate Income Taxes in Europe Prof. Dr. Geerten M.M. Michielse Technical Assistance Advisor IMF, Washington Georgetown University Law Center.

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Presentation on theme: "Comparative Corporate Income Taxes in Europe Prof. Dr. Geerten M.M. Michielse Technical Assistance Advisor IMF, Washington Georgetown University Law Center."— Presentation transcript:

1 Comparative Corporate Income Taxes in Europe Prof. Dr. Geerten M.M. Michielse Technical Assistance Advisor IMF, Washington Georgetown University Law Center

2 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Inter-company Dividends (EU Parent-Subsidiary) Inter-company Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

3 May 2003 Corporate Income Tax Systems

4 Current EU Systems Country:System: Rate (%): AUT Final Withholding 34 BEL DEU Dividend Exemption DNKClassical30 ESPImputation35 FINImputation29 FRAImputation34.33 GBRImputation30 GRC 35 IRLClassical12.5 ITAImputation38.25 LUX NLDClassical34.5 PRTImputation33 SWEClassical28

5 May 2003 Central & East European Systems Country:System: Rate (%): BGR Final Withholding 23.5 CZE Advanced Profit Tax 31 EST )1)1)1)1 HUN Final Withholding 18 LTU Advanced Profit Tax 24 LVA Dividend Exemption 25 POL Final Withholding 27 ROM 25 SVK 25 SVN Dividend Exemption 25

6 May 2003 Preliminary Conclusions Only CZE has integration on corporate level (APTS); Only CZE has integration on corporate level (APTS); GRC has moved from corporate level (DDS) to shareholder’s level (DES); GRC has moved from corporate level (DDS) to shareholder’s level (DES); DEU, IRL and LTU have moved away from integration of tax liability (APTS/IMPS); DEU, IRL and LTU have moved away from integration of tax liability (APTS/IMPS); FRA is gradually moving out of IMPS (by reducing imputation-%); FRA is gradually moving out of IMPS (by reducing imputation-%); Most countries favor FWHT. Most countries favor FWHT.

7 May 2003 Dividend Deduction and Split Rate Systems (international aspects) Non-Resident Shareholders Non-Resident Shareholders –exclusion from DDS/SRS  discrimination? –high withholding tax distribution quota distribution quota tax treaty protection tax treaty protection Permanent Establishment Permanent Establishment –moment of distribution parent company –allocation issues

8 May 2003 Lithuanian Profit Tax (before 2003) Pre-tax profits1,000 Profit tax (24%) 240 Dividend distribution 760 Withholding tax (29% of 760) 220 Profit tax 240 Less: WHT credit 220 MPT 20 At shareholder’s level: dividends taxable in full

9 May 2003 Czech Corporate Income Tax Pre-tax profits1,000 Income tax (31%) 310 Dividend distribution 690 Withholding tax (15% of 690) 104 Income tax 310 Less: 50% WHT credit 52 MCIT 258 At shareholder’s level: final withholding

10 May 2003 Advanced Profit Tax Systems (European aspects) No withholding tax on dividends paid to qualifying EU parent company; No withholding tax on dividends paid to qualifying EU parent company; No credit for withholding tax available; No credit for withholding tax available; Higher tax rate on companies owned by qualifying EU parent companies; Higher tax rate on companies owned by qualifying EU parent companies; Non-discrimination issue. Non-discrimination issue.

11 May 2003 Solution: Advanced Profit Tax Pre-tax profits1,000 Profit tax (20%) 200 Dividend distribution 800 Advanced profit tax (25% of 800) 200 Profit tax 200 Less: Advanced profit tax 200 Main profit tax 0 At shareholder’s level: dividends taxable in full

12 May 2003 Finnish Imputation System Pre-tax profits1,000 Corporate income tax (29%) 290 Available for distribution 710 Imputation credit (CIT) 290 Grossed-up dividends1,000 Personal income tax (38%) 380 Imputation credit 290 Net tax due 90

13 May 2003 French Imputation System Pre-tax profits1,000 Corporate income tax (34.33%) 343 Available for distribution 657 Imputation credit (10% of 657) 66 Grossed-up dividends 723 Personal income tax (49.58%) 358 Imputation credit 66 Net tax due 292

14 May 2003 Imputation Systems (international aspects) Distribution of foreign source profit to domestic shareholders Distribution of foreign source profit to domestic shareholders Equalization tax? Equalization tax? Distribution of domestic source profit to foreign shareholders Distribution of domestic source profit to foreign shareholders Tax credit? Tax credit? Distribution of foreign source profit to foreign shareholders Distribution of foreign source profit to foreign shareholders Equalization tax exemption? Equalization tax exemption?

15 May 2003 Cash Flow Tax Systems Croatia ( ): Croatia ( ): –Investment income is tax exempt; –‘Protective Interest’ deduction (normal rate of return on equity); –Economic rent taxable (35%). Estonia (2000-…?): Estonia (2000-…?): –Retained earnings are tax exempt; –Distribution of profit establishes profit tax (26/74 th ); –Final withholding tax (26%).

16 May 2003 Croatian Corporate Tax System Commercial profit1,000 PI deduction (5% of equity) 500 Taxable profit 500 Corporate income tax (35%) 175 Available for distribution 825 At shareholder’s level: dividends exempt

17 May 2003 Estonian Corporate Tax System Commercial profit 1,000 Dividend distribution1,000 Corporate income tax (26/74 th ) 351 Available for distribution 649 Withholding tax (26%) 169 Net dividend received 480 At shareholder’s level: final withholding

18 May 2003 Cash Flow Tax Systems (international/european issues) Croatian variant: Croatian variant: –Characterization as income tax? –FTC countries wipe out PI deduction –Harmful tax competition? Estonian variant: Estonian variant: –Characterization as withholding tax? –Harmful tax competition?

19 May 2003 Harmful Tax Competition Open only to non-residents or to transactions to non- residents; Open only to non-residents or to transactions to non- residents; Ring-fenced from the domestic market; Ring-fenced from the domestic market; (i.e. they do not have an impact on the national tax base) Granted without any real economic activity and substantial economic presence; Granted without any real economic activity and substantial economic presence; Profit determination departs from internationally accepted (OECD) standards (??); Profit determination departs from internationally accepted (OECD) standards (??); Lack of transparency. Lack of transparency.

20 May 2003 Epson case (C-375/98) Portuguese Inheritance and Gift Tax Arguments by ECJ: Arguments by ECJ: –Chargeable event = payment of dividends –Taxable amount = income from the shares –Taxable person = holder of the shares Decision by ECJ: Decision by ECJ: –WHT: any tax of whatever nature or however described, which takes the form of WHT on dividends.

21 May 2003 Athinaika Case (C-294/99) Greek dividend withholding tax under DDS Arguments by ECJ: Arguments by ECJ: –Chargeable event = distribution of profit –Tax directly related to size of distribution –No absorption of loss carry forward –DTA provision indicates withholding tax Decision by ECJ: Decision by ECJ: –WHT if tax-exempt income re-incorporated in tax basis upon distribution, whereas otherwise exempt.

22 May 2003 Profit / Corporation Tax Profit Tax Profit Tax –Distinction between Business Income and Other Income –Profit vs. Income Tax Corporate Income Tax Corporate Income Tax –Distinction between Legal Entities and Individuals –Corporate Income vs. Personal Income Tax

23 May 2003 Common Law Systems (Characteristics) Fear for strong Administration resulted in: Extensive Legislative Texts Extensive Legislative Texts (due to implementation of case law) Extensive Set of Definitions Extensive Set of Definitions (textual interpretation) Separate Set of Tax Provisions Separate Set of Tax Provisions (due to confiscatory character) Separate Capital Gains Tax Separate Capital Gains Tax (capital gains vs. ordinary income)

24 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Inter-company Dividends (EU Parent-Subsidiary) Inter-company Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

25 May 2003 Measuring Business Income How are tax laws related to accounting practice? How are tax laws related to accounting practice? What are the main issues that need to be determined in measuring the income of a business in its accounts? What are the main issues that need to be determined in measuring the income of a business in its accounts? In what areas do the principal problems arise in practice? In what areas do the principal problems arise in practice?

26 May 2003 Balance Sheet Commercial Balance Sheet Commercial Balance Sheet –information instrument e.g. to shareholders / debtors –management tool  tendency to overvalue  tendency to overvalue Fiscal Balance Sheet Fiscal Balance Sheet –state revenue instrument  tendency to undervalue

27 May 2003 Fiscal Accounts (current EU Member States) ‘Autonomy of Fiscal Accounts’ Concept ‘Autonomy of Fiscal Accounts’ Concept  Separate legal provisions  FIN, GBR and IRL  Jurisprudence (‘sound business practice’)  NLD ‘Unity of Law’ Concept (i.e. business accounts) ‘Unity of Law’ Concept (i.e. business accounts)  AUT, BEL, DEU, DNK, ESP, FRA, GRC, ITA, LUX, PRT and SWE

28 May 2003 ‘Unity of Law’ Concept (arguments pro) Sound Business Practice & Sound Business Practice & General Accepted Accounting Principles No decisive reason to deviate No decisive reason to deviate Measurement of ‘distributable’ profit Measurement of ‘distributable’ profit Juridical process can be streamlined Juridical process can be streamlined More in line with continental view More in line with continental view

29 May 2003 ‘Unity of Law’ Concept (arguments contra) End of traditional freedom to choose a fiscal system and to revoke that choice End of traditional freedom to choose a fiscal system and to revoke that choice Treasury becomes a direct interested party in the application of GAAP Treasury becomes a direct interested party in the application of GAAP Linkage is not unquestioned Linkage is not unquestioned Different objectives / purposes Different objectives / purposes

30 May 2003 ‘Sound Business Practice’ (Netherlands) Starting Point: Starting Point: –Principles of Business Economics Exceptions, when conflicting with: Exceptions, when conflicting with: –any Regulation in Tax Law; –a General Intention; or –Principle of the Relevant Tax Law.

31 May 2003 Commercial Code (Germany and Austria) ‘Maßgelichkeit’ Principle: Assets and Liabilities Assets and Liabilities –Materielle Maßgeblichkeit (DEU) Commercial Valuation Commercial Valuation –Formelle Maßgeblichkeit (AUT)

32 May 2003 General Accounting Plan (France) Accounting Boards (‘tableaux comptables’) used in Tax Declaration must be established in accordance with accounting rules Accounting Boards (‘tableaux comptables’) used in Tax Declaration must be established in accordance with accounting rulesand If no contrary tax law or regulation provides a different solution, accounting rules are applied If no contrary tax law or regulation provides a different solution, accounting rules are applied

33 May 2003 Profit-and-Loss Account Method (Latvia) Article 4(1): “The taxable income … shall be the amount of annual profit (loss) as stated in the profit and loss statement … calculated in accordance with [the provisions] of the law On Annual Reports of Enterprises, …. Taxable income shall be adjusted … in accordance with this Law.”

34 May 2003 Measuring Business Income Balance Sheet Balance Sheet –measuring of income by comparison of two financial statements Profit-and-Loss Account Profit-and-Loss Account –measuring of income for a period of time

35 May 2003 Profit-and-Loss Account General Rule: Financial Statements General Rule: Financial Statements Tax Provisions: Tax Provisions: Increased by e.g.: Non-deductible expenses Non-deductible expenses Provisions and reserves Provisions and reserves Decreased by e.g.: Exempt dividends Exempt dividends Deferred capital gains Deferred capital gains

36 May 2003 Balance Sheet Net Equity Balance Sheet Ending 2002 Net Equity Balance Sheet Beginning /- Net Equity Accretion during 2002 Profit Distributions / Private Expenses + Taxable Business Income

37 May 2003 Measuring Business Income How are tax laws related to accounting practice? How are tax laws related to accounting practice? What are the main issues that need to be determined in measuring the income of a business in its accounts? What are the main issues that need to be determined in measuring the income of a business in its accounts? In what areas do the principal problems arise in practice? In what areas do the principal problems arise in practice?

38 May 2003 Fiscal / Commercial Profit (typical areas of deviation) Non-deductible Expenses Non-deductible Expenses Depreciation Depreciation Provisions and Reserves Provisions and Reserves Bad Debts Bad Debts Losses Losses Inflation Inflation Capital Gains and Losses Capital Gains and Losses Tax Incentives Tax Incentives

39 May 2003 Non-Deductible Expenses General rule excludes private expenses General rule excludes private expenses Technical (legislative) Technical (legislative) dividend distributions, recoverable VAT dividend distributions, recoverable VAT Private Elements Private Elements representation, entertainment representation, entertainment Avoidance Avoidance thin capitalization thin capitalization Political unwanted Political unwanted bribes, penalties bribes, penalties

40 May 2003 Provisions / Reserves (EU Member States) Risks and Future Expenses Risks and Future Expenses AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRT AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRT Bad Debts Bad Debts General: DNK (limited), ESP (only for SME’s), GRC, ITA and NLD General: DNK (limited), ESP (only for SME’s), GRC, ITA and NLD Specific: all other Member States, including those above Specific: all other Member States, including those above Pensions Pensions AUT, BEL, DEU, GRC, ITA, LUX, NLD and SWE AUT, BEL, DEU, GRC, ITA, LUX, NLD and SWE Repairs Repairs FIN, DEU (substantial maintenance), ESP (if plan approved), FRA, IRL, ITA, NLD and SWE FIN, DEU (substantial maintenance), ESP (if plan approved), FRA, IRL, ITA, NLD and SWE

41 May 2003 Risks and Future Expenses (AUT, BEL, DEU, ESP, FRA, GBR, IRL, LUX, NLD and PRT) Common conditionalities: Common conditionalities: –Taxpayer’s estimation (e.g. in AUT and ESP) –Objective facts and circumstances (e.g. in AUT and ESP) –Business experience (e.g. in AUT) –Cause in current tax year (e.g. in BEL, DEU and GBR) –Mandatory under commercial code (e.g. in DEU) –Claim lodged or very possible (e.g. in BEL and DEU) Some countries (e.g. DNK and SWE) allow only a provision for guarantees Some countries (e.g. DNK and SWE) allow only a provision for guarantees

42 May 2003 Bad Debts (all EU Member States) General Provision General Provision (allowed in DNK, ESP, GRC, ITA and NLD) –Typically limited, e.g. max. 5% of trade receivables (GRC and ITA) or only available for SME’s (ESP) Specific Provision Specific Provision (allowed in AUT, BEL, DEU, DNK, ESP, FIN, FRA, GBR, IRL, LUX, NLD, PRT and SWE) –Based on loan-by-loan approach

43 May 2003 Pensions (AUT, BEL, DEU, GRC, ITA, LUX, NLD and SWE) Main Characteristics: Obligation to pay future pensions Obligation to pay future pensions Legally ‘qualified’ pension scheme Legally ‘qualified’ pension scheme Actuarial computation Actuarial computation Mandatory inclusion in commercial balance sheet (BEL) Mandatory inclusion in commercial balance sheet (BEL) Discount rate (AUT: 20%, DEU: 6%) Discount rate (AUT: 20%, DEU: 6%)

44 May 2003 Repairs (FIN, DEU, ESP, FRA, IRL, ITA, NLD and SWE) Replacement Reserve (FIN, NLD and SWE) Replacement Reserve (FIN, NLD and SWE) max. 2 years (FIN) max. 2 years (FIN) max. 3 years (SWE) max. 3 years (SWE) max. 4 years (NLD) max. 4 years (NLD) Substantial maintenance and repair (DEU) Substantial maintenance and repair (DEU) Approved Repair Plan (ESP) Approved Repair Plan (ESP) Limited to 5% of book value (ITA) Limited to 5% of book value (ITA)

45 May 2003 Ordinary Losses (EU Member States) Carry Forward Carry Forward –Unlimited: AUT, BEL, DEU, DNK, GBR, IRL, ITA (only for start-up losses), LUX, NLD and SWE –Limited: 5 years: FRA, GRC and ITA 5 years: FRA, GRC and ITA 6 years: PRT 6 years: PRT 10 years: ESP and FIN 10 years: ESP and FIN Carry Back Carry Back DEU (1 year + max), FRA (3 years), GBR (1 year), IRL (1 year) and NLD (3 years)

46 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Inter-company Dividends (EU Parent-Subsidiary) Inter-company Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

47 May 2003 Treatment of Interest Expenses Limitation of Interest related to Exempt Income Limitation of Interest related to Exempt Income Obligation to Pay Subscribed Capital in Full Obligation to Pay Subscribed Capital in Full Limitation of Interest Rate Limitation of Interest Rate Debt-to-Equity Ratio Debt-to-Equity Ratio Tax Haven Creditors Tax Haven Creditors General Anti-Avoidance Rules General Anti-Avoidance Rules

48 Thin Capitalization Rules (EU Member States) Loans Affected RatioResult BEL Directors and Shareholders1:1Re-characterization DEU Substantial shareholders (>25%) 1.5:1Re-characterization DNK Controlling shareholders (>50%) 4:1Non-deductibility ESP Non-resident related companies 3:1Re-characterization FRA Controlling shareholders (>50%) 1.5:1Non-deductibility GBR 75% non-resident parent companies 1:1Re-characterization IRL n/aRe-characterization LUXShareholdersundisclosedRe-characterization PRT Related parties (>25%) 2:1Non-deductibility

49 May 2003 Thin Capitalization Rules (Central & East European Countries) Loans Affected RatioResult BGRAll1:1Non-deductibility CZE Non-resident related parties 4:1Non-deductibility HUN Related parties 3:1Non-deductibility LVAAll2:1Non-deductibility POL Substantial shareholders 3:1Non-deductibility ROMAll1:1 Limited deductibility (50% of profits) SVK Related parties 4:1Non-deductibility SVN Substantial shareholders 3:1Non-deductibility

50 May 2003 Thin Capitalization (technical issues) Equity definition Equity definition –Revaluation reserve –Negative equity position Back-to-back loans / Guaranteed loans Back-to-back loans / Guaranteed loans Non-deductibility vs. Re-characterization Non-deductibility vs. Re-characterization Non-discrimination Non-discrimination

51 May 2003 Equity Definition (Germany) Para. 8a, Abs. 2 Kist: “Anteiliges Eigenkapital des Anteilseigners ist der Teil des Eigenkapitals der Kapitalgesellschaft zum Schluß des vorangegangenen Wirtschaftsjahrs, der dem Anteil des Anteilseigners am gezeichneten Kapital entspricht. Eigenkapital ist das gezeichnete Kapital abzüglich der ausstehenden Einlagen, zuzüglich der Kapitalrücklage, der Gewinnrücklagen, eines Gewinnvortrags und eines Jahresüberschusses sowie abzüglich eines Verlustvortrags und eines Jahresfehlbetrags (§ 266 Abs. 3 Abschnitt A, § 272 des Handelsgesetzbuches) in der Handelsbilanz zum Schluß des vorangegangenen Wirtschaftsjahrs; Sonderposten mit Rücklageanteil (§ 273 des Handelsgesetzbuches) sind zur Hälfte hinzuzurechnen. Eine vorübergehende Minderung des Eigenkapitals durch einen Jahresfehlbetrag ist unbeachtlich, wenn bis zum Ablauf des dritten auf das Wirtschaftsjahr des Verlustes folgenden Wirtschaftsjahrs das ursprüngliche Eigenkapital durch Gewinnrücklagen oder Einlagen wieder hergestellt wird.”

52 May 2003 Back-to-Back Loans Example provision: “If a loan is received from a third party and an associated person of the recipient gives a guarantee on this loan, para. … shall be applicable as if the associated person made the loan directly.” Parent Company Commercial Bank Subsidiary Company bank deposit loan or guarantee

53 May 2003 Re-characterization vs. Non-deductibility Re-characterization Re-characterization interest re-characterized as dividend interest re-characterized as dividend debt re-characterized as equity debt re-characterized as equity  profit allocation Non-deductibility Non-deductibility  profit determination

54 May 2003 International Withholding Tax Re-characterization Re-characterization Art. 10(3) OECD refers to domestic definition of source state Art. 10(3) OECD refers to domestic definition of source state Art. 23 OECD requires relief for dividend w/h Art. 23 OECD requires relief for dividend w/h  no double taxation Non-deductibility Non-deductibility Art. 11(2) OECD Art. 11(2) OECD Art. 23 OECD requires relief for interest w/h Art. 23 OECD requires relief for interest w/h  no double taxation

55 May 2003 International Economic Double Taxation Recharacterization Recharacterization OECD-Commentary: Art. 9 applicable OECD-Commentary: Art. 9 applicable IFA-Resolution: arm’s length approach preferred IFA-Resolution: arm’s length approach preferred Michielse: nonsense, Art. 9 cannot apply Michielse: nonsense, Art. 9 cannot apply Art. 9(2) OECD: no obligation for corresponding adjustment Art. 9(2) OECD: no obligation for corresponding adjustment  danger of double taxation  danger of double taxation Non-deductibilit y Non-deductibilit y profit determination is not profit allocation profit determination is not profit allocation  double taxation  double taxation

56 May 2003 Non-discrimination Article 24(4) OECD Article 24(4) OECD interest payments to non-residents shall be treated under the same conditions for tax purposes as interest payments to residents (except for Art. 9(1) and Art. 11(6) OECD) Article 24(5) OECD Article 24(5) OECD resident companies shall be treated under the same conditions for tax purposes irrespective whether its shareholders are residents or non- residents

57 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Inter-company Dividends (EU Parent-Subsidiary) Inter-company Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

58 May 2003 Intercompany Dividends (parent company) Domestic subsidiary Domestic subsidiary Qualifying EU subsidiary Qualifying EU subsidiary –At least 25% shareholding –Minimum holding period of (maximum) 2 years Other subsidiary Other subsidiary

59 May 2003 Intercompany Dividends Received (EU Member States) Exemption Method Exemption Method –Full exemption AUT, DEU(r), DNK, FIN(nr), GBR(r), GRC(r), IRL(r), LUX, NLD and SWE –95% exemption BEL, DEU(nr), FRA, ITA(nr) and PRT Credit Method Credit Method ESP, FIN(r), GBR(nr), GRC(nr), IRL(nr) and ITA(r)

60 May 2003 Intercompany Dividends Received (Central & East European Countries) Domestic subsidiaries Domestic subsidiaries –Exemption method BGR, HUN, LTU, LVA and SVN –‘Separate tax base’ method CZE, PLN, ROM(fwh) and SVK(fwh) Foreign subsidiaries Foreign subsidiaries –Exemption method HUN, LTU and LVA –‘Separate tax base’ method CZE

61 May 2003 Intercompany Dividends Paid (EU Member States) Domestic Parent Company Domestic Parent Company Exemption (except ESP: 25%) Qualifying EU Parent Company Qualifying EU Parent Company Exemption, if: - At least 25% shareholding; and - Minimum holding period (BEL, DEU, DNK, ESP, ITA and NLD: 1 year – AUT,FRA and PRT: 2 years) Other Foreign Parent Company Other Foreign Parent Company  Exemption (DNK and SWE)  25% (IRL 24%, ITA 27%, FIN 29%)

62 May 2003 Intercompany Dividends Paid (Central & East European Countries) Domestic Parent Company Domestic Parent Company –Exemption (BGR, EST, HUN, LVA and SVN) –General WHT (CZE, POL, ROM and SVK) Foreign Parent Company Foreign Parent Company –WHT rates (10-20%) apply

63 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Intercompany Dividends (EU Parent-Subsidiary) Intercompany Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

64 May 2003 Capital Gains on Shares Common Law Common Law –Separate Capital Gains Tax (basis and rate) Civil Law Civil Law –Shares are business assets –Substantial shareholding –Speculative transactions

65 May 2003 Common Law Regime (assets / liabilities) Distinction between income and capital gains Distinction between income and capital gains Capital allowances for depreciation Capital allowances for depreciation Only capital gains on assets (!) Only capital gains on assets (!) At disposal of assets: Recapture of capital allowances in Income Tax Recapture of capital allowances in Income Tax Capital Gains Tax on difference between market value and acquisition price Capital Gains Tax on difference between market value and acquisition price

66 May 2003 Civil Law Regime (assets / liabilities) Capital gains are treated as ordinary income Capital gains are treated as ordinary income Depreciation (business expense) Depreciation (business expense) Capital gains on both assets and liabilities Capital gains on both assets and liabilities At disposal of assets: Capital gain / loss taxable at normal rate on difference between market value and book value Capital gain / loss taxable at normal rate on difference between market value and book value

67 May 2003 Mergers & Reorganizations Capital Gains / Losses Capital Gains / Losses –Depreciation Basis –Transfer of Provisions / Reserves Transfer of Loss Carry Forward Transfer of Loss Carry Forward Liquidation Proceeds Liquidation Proceeds

68 May 2003 Reorganizations (covered by EU Merger Directive) Transfers of Assets Transfers of Assets Exchanges of Shares Exchanges of Shares Mergers Mergers Division Division

69 May 2003 BeforeAfter Sh R Sh T Sh R Sh T Transferringentity Receivingentity Receivingentity Transferringentity Transfer of Assets

70 May 2003 BeforeAfter Sh AG Sh AD Sh AG Sh AD Acquiringentity Acquiredentity AcquiringentityAcquiredentity Exchange of Shares

71 May 2003 Mergers into an existing company into an existing company into a newly established company into a newly established company into the parent company into the parent company

72 May 2003 BeforeAfter Sh R Sh T Sh R Sh T ReceivingentityReceivingentityTransferringentity Merger

73 May 2003 BeforeAfter Sh T ReceivingentityReceivingentityTransferringentity Division

74 May 2003 EU Merger Directive Introduction of cross-border mergers within EU Member States Introduction of cross-border mergers within EU Member States Loss carry-over facility extended – if available – to cross-border mergers Loss carry-over facility extended – if available – to cross-border mergers Roll-over-relief for capital gains realized Roll-over-relief for capital gains realized

75 May 2003 EU Merger Directive (problem areas) Issuance of new shares / Issuance of new shares / Transfer of existing shares Omission of certain valuation rules Omission of certain valuation rules –Shares received as consideration (both States) –Shares / Assets received in State of residence Interpretation issues Interpretation issues –10% cash payment –Anti-avoidance rule

76 May 2003 Transfer of Assets (valuation issues) Receivingcompany Transferringcompany PE A B C D

77 May 2003 Exchange of Shares (valuation issues) Sh AD AcquiringCompany AcquiredCompany E F G H

78 May 2003 Merger (valuation issues) Receivingcompany Transferringcompany PE Sh T Sh R F E B E A

79 May 2003 Omission of Valuation Rules Shares received in consideration [company T or shareholder AD] Shares received in consideration [company T or shareholder AD] (a) in State of residence [D] (b) in State of source [C] or [F][H] –Nonresidents (corporate entities) exempt –Tax treaty protection Shares / assets received in State of residence [company R or AG] [B] or [G] Shares / assets received in State of residence [company R or AG] [B] or [G] –(Participation) exemption

80 May 2003 France Prior approval of MoE&F in several cases Prior approval of MoE&F in several cases Reporting requirements Reporting requirements Revaluation gain [company R] Revaluation gain [company R] Business purpose test / 5 years holding period Business purpose test / 5 years holding period

81 May 2003 Germany “Buchwertverknüpfung” “Buchwertverknüpfung” i.e. double tax claim on both assets transferred and shares received PE merger questionable PE merger questionable Condition for merger = German unlimited tax liability

82 May 2003 The Netherlands Motivated by valid commercial reasons Motivated by valid commercial reasons –Restructuring –Rationalization of business activities Same tax regime requirement Same tax regime requirement 3-years holding period 3-years holding period

83 May 2003 United Kingdom No implementation of Merger / Division No implementation of Merger / Division Special EU provisions: Special EU provisions: (a) Transfers of Assets –‘ownership’ test (Sec. 343 ICTA) –‘bona fide commercial transaction’ requirement (b) Exchanges of Shares –Limited to Secs TCGA –‘business purpose’ test (Sec TCGA)

84 May 2003 What will be discussed? Corporate Income Tax Systems Corporate Income Tax Systems Measurement of Business Income Measurement of Business Income Thin Capitalization Thin Capitalization Intercompany Dividends (EU Parent-Subsidiary) Intercompany Dividends (EU Parent-Subsidiary) Corporate Reorganizations (EU Merger) Corporate Reorganizations (EU Merger) Liquidations Liquidations

85 May 2003 Corporate Liquidations Last opportunity to tax shareholders on undistributed profits Last opportunity to tax shareholders on undistributed profits Dividend distribution Occasion to tax shareholder on appreciation in value of his investment Occasion to tax shareholder on appreciation in value of his investment Capital Gain on shares

86 May 2003 Corporate Liquidations (dividend distribution) Liquidation payments Less: nominal value of shares (or – if higher) acquisition price of shares acquisition price of shares Dividend distribution Difference between acquisition price and nominal value of shares might be treated as Capital Loss


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