Transcript GAAR In The Tax Law - Home Loyens & Loeff

ACTL Joint Conference
GAAR in Tax Law: A Comparative View
EU Experience
Beijing, 13 March 2015 – Carola van den Bruinhorst
Trend: “Fair Share” approach is gaining momentum
Apple
Amazon
Lux Leaks
EU GAAR
Media and
politicians
Fair share
Competition
for
investments
Revenue
raising from
MNE’s
EU State
Aid
BEPS
reports
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The most important EU development
• Council of the EU agreed to add general-anti abuse rules (GAAR) to the EU
Parent Subsidiary Directive (EU PSD).
• Target = “It is necessary to ensure that this Directive is not abused by
taxpayers who fall within the scope of its application”
- Member States should refrain from granting benefits under the EU PSD, if:
 arrangements are not ‘genuine’ and
 have been put in place to obtain a tax advantage that is not reflecting
economic reality.
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EU Corporate taxation legal framework and hierarchy
• No harmonized European corporate taxation regime, 28 tax systems
• Corporate taxation falls within the competence of the Member States, however
that competence has to be exercised consistently with EU law.
• EU PSD was introduced to avoid economic double taxation on dividend
distributions between EU member states.
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The EU PSD
• EU PSD provides for tax exemption for EU cross-border dividends.
• Purpose: ensure that profits realized from EU cross-border investments are not
taxed twice.
• Background: Create a level playing field between domestic investors and EU
cross border investors.
- How? Exemption on domestic dividend withholding and exemption/credit in
CIT on dividends distributed to subsidiaries to EU parent companies (>10%
shareholdings).
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Typical use of EU PSD: EU inbound investments
PRC
investor
Dividend,
exempted under
the EU PSD at
both Parent and
Subsidiary level.
EU
HoldCo
Reduced
dividend WHT
under the treaty
with China, or
domestic
exemption
>10% of the
shares
EU OpCo
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The EU PSD
• EU PSD (article 1.2 old), already allowed Member States to impose their domestic
rules in order to prevent fraud and abuse.
• Several EU countries also included Specific Anti-Abuse Rules (i.e. Spain, Italy,
France).
• Unilateral EU GAAR in the EU PSD needed?
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Tax planning, tax avoidance and tax evasion…
• Issue of corporate tax planning has become high priority in international politics.
• Introduction of a GAAR in the EU PSD is fully in line with the OECD and G20
BEPS initiatives.
• Obliges member state to provide minimum level of protection of the EU PSD of
being abused.
• Question is of course: what is abuse?
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Blurred line between Tax Evasion and Tax Avoidance
Tax Avoidance
•
•
•
•
Legal
Freedom versus morality
International planning
opportunities
(harmful) tax competition
Tax Evasion
•
•
•
Illegal: Tax Fraud
Criminal offence
Mounting international exchange
of information and coordination
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Tax planning is allowed under EU Case Law
ECJ in the Halifax Case on a VAT matter:
[…] taxpayers are in principle free to structure their activitities in a way that limits their
exposure to taxes […]
ECJ in Cadbury Schweppes Case:
[…]the fact that a company has been established in a Member State for the purpose
of benefiting from more favourable legislation does not in itself suffice to constitute
abuse […].
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Tax abuse following EU Case law
ECJ defines in Cadbury Schweppes (C-196/04) its view on ‘abuse’:
[…] wholly artificial arrangements aimed at circumventing the application of the
legislation of the Member State concerned […]
• Objective factors to support the evidence:
• ‘lack of physical existence’ of a company in terms of premises, staff and
equipment may support that the incorporation of a subsidiary (or holding
company) does not reflect economic reality, that is to say it is not an actual
establishment intended to carry on genuine economic activities.
• Example of wholly artificial arrangement is a pure ‘letterbox company’.
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Adopted Main Purpose Test (MPT) within EU PSD
•
General-anti abuse rules (GAAR) in EU PSD:
2. “Member States shall not grant the benefits of this Directive to an
arrangement or a series of arrangements that, having been put into
place for the main purpose or one of the main purposes of obtaining a
tax advantage which defeats the object or purpose of this Directive, are
not genuine having regard to all relevant facts and circumstances.
An arrangement may comprise more than one step or part.
3. For the purposes of paragraph 2, an arrangement or a series of
arrangements shall be regarded as not genuine to the extent that they
are not put into place for valid commercial reasons which reflect
economic reality.”
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EU GAAR provision
• GAAR adopted for EU PSD:
• ‘De minimis’ rule
• Subjective and objective elements
• No clear guidance on terms used in the GAAR
• To be implemented by EU jurisdictions 31 December 2015, at the latest
• Similar amendments expected to be included in EU Interest & Royalty Directive!
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Anything new …
• The definition seems roughly in line with wording used in ECJ case law but goes
one step further.
• It forces countries to implement a GAAR in their domestic legislation.
• Many EU Countries already had unilateral GAAR embedded in their national laws
and SAARs, with respect to EU PSD application.
• Unclarities may arise now jurisdictions may apply domestic GAAR and different
interpretation under national law.
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If GAAR is applied what will be the impact?
PRC
Investor
•
•
Participation exemption
EU OpCo may levy statutory
WHT rate on dividends, to be
reduced by provisions under
double tax treaties.
•
EU
HoldCo
>10% of the
shares
EU OpCo
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Reduced dividend
WHT under the
treaty with China,
or domestic
exemption
Uncertainties
• Pre-’92 structures affected?
• Does it matter whether shareholders are based in EU or in non-EU Countries?
• What kind of ‘substance’ is sufficient?
• Board activity?
• Business?
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What is an appropriate form and level of substance?
Tax residence
Beneficial owner /
no conduit
EU GAAR
Decision making
substance: board of
directors,
infrastructure, etc.
Shareholders
Economic
substance: capital,
outlook on profit
Business substance:
commercial and
economic rationale,
specific expertise, etc.
HoldCo
Investment
A
Investment
B
Investment
C
Conclusion
• Scope and purpose of the EU PSD:
“[…] ensure that profits realized from EU cross-border investments are not taxed
twice.”
vs.
• Scope and purpose of the GAAR in the EU PSD:
to prevent from misuses of the Directive and ensuring fairer corporate taxation in
the European Union.
• Future will tell which one will prevail…
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Contact details
Carola van den Bruinhorst
Loyens & Loeff
Hong Kong, Partner, Tax
T: +852 3763 9393 / M: +852 9858 0861
E: [email protected]
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