Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

Tax (3rd edition)

Switzerland Small Flag Switzerland

a. CFC regime
Switzerland does not have a CFC regime. However, according to the case law of the Swiss Federal Supreme Court, companies with statutory seats located abroad, but who have little or no local substance and are effectively managed in Switzerland may be subject to Swiss income tax.

b. Thin Cap regime
Swiss federal and cantonal income tax rules contain thin capitalisation safe harbour rules (or, more precisely, a maximum debt rule per asset class) as follows:

Cash 100%
Accounts receivable 85%
Inventory 85%
Other current assets 85%
Bonds in CHF 90%
Bonds in foreign currency 80%
Quoted shares 60%
Non-quoted shares 50%
Investments in subsidiaries 70%
Loans 85%
Furniture and Equipment 50%
Property, plant (commercially used) 70%
Other real estate 80%
Intellectual property rights 70%

For finance companies, the maximum debt allowed is 6/7 of their total assets.

In addition, the FTA publishes annually safe harbour interest rates for loans granted to related parties.

Interest paid on debt exceeding the maximum debt allowed and interest rates exceeding the safe harbour interest rates are requalified as a hidden dividend if paid to a shareholder or a related party. Consequently, such interest is not a deductible expense for federal and cantonal income tax purposes and is subject to withholding tax at a rate of 35% (which may be reduced under a relevant tax treaty).

However, the rules set out above are merely safe harbour rules and allow the taxpayer to prove that different arm’s length debt-to-equity ratio and interest rates apply.

c. Transfer pricing regime
Swiss codified tax law contains very few rules relating to transfer pricing questions. As a general rule, Swiss law states that (i) expenses of a company must be commercially justified and (ii) profits not shown in the profit and loss statement of a company must still be included in its taxable profit.

Based on these general rules, Swiss tax authorities can correct intra-group transactions that are not at arm’s length. In determining whether an intra-group transaction is at arm’s length or not, the Swiss administrative practice generally follows the OECD transfer pricing guidelines.

As previously mentioned, the FTA publishes yearly rules regarding safe harbour interest rates for loans and advances between related parties, in various currencies. This publication provides for maximum rates regarding loans from the shareholders or related parties to the company, and minimum rates regarding loans from the company to shareholders or related parties.

It is possible to obtain an advance pricing agreement (‘APA’) with the Swiss tax authorities. In general, the cantonal tax authorities are competent for granting unilateral APAs, whereas bi- or multilateral APAs, as well as unilateral APAs regarding Swiss withholding tax, are negotiated with the involvement of the FTA.

United States Small Flag United States

The US has comprehensive CFC rules, which have been further expanded by TCJA to include a global minimum tax of 10.5% on most CFC profits of a US corporate shareholder.

Under longstanding CFC rules, a controlling US shareholder of a CFC is subject to current US taxation on any so-called Subpart F income of the CFC. Subpart F income is intended to capture what Congress perceived to be “tax haven” income, and thus includes certain interest, dividends, rents, royalties and gains, as well as certain income from sale of property and provision of services involving related parties. An exception to subpart F income is provided for income subject to a local country tax of at least 90% of US the corporate rate (now 18.9% = 90% * 21%).

In addition, the TCJA introduced a new category of income captured by the CFC regime – so-called “Global Intangible Low-Taxed Income” (GILTI). GILTI consists of all income of the shareholders’ CFCs that is not subpart F income (or eligible for certain limited exceptions), to the extent that such income exceeds a 10% return on the CFC’s investment in tangible assets used in its trade or business (measured by tax basis). GILTI is fully included in taxable income of the US shareholder on a current basis in each year, with a 50% deduction provided for US corporate shareholders that results in an effective US tax rate of 10.5%. Foreign tax credits are allowed against US tax on both subpart F income and GILTI.

The TCJA also added the US’s first comprehensive thin capitalization test through amended Code Section 163(j). As amended Section 163(j) limits interest deductions of corporations and other businesses to 30% of adjusted taxable income. New Code Section 163(j) applies to all debt, whether third party or intercompany, whether the lender is US or foreign, and regardless of the US corporation’s debt-equity ratio. “Adjusted taxable income” is defined generally as US taxable income without regard to interest expense, loss carryforwards, and for taxable years beginning before January 1, 2022, depreciation or amortization (i.e., EBITDA). After 2022, deductions for depreciation or amortization are no longer added back, so that interest expense is limited to 30% of EBIT. Interest expense deductions that are disallowed carry forward indefinitely.

As noted above, Code Section 482 and the regulations thereunder provide a comprehensive set of transfer pricing rules. In addition, strict liability penalties apply to transfer pricing adjustments in excess of certain thresholds, unless the taxpayers has maintained contemporaneous documentation with the filing of the original tax return in a form specified by the transfer pricing regulations.

Advanced Pricing Agreements (APAs) are available from the IRS on a prospective basis. In the case of transactions between the US Company and an affiliate in a treaty country, bi-lateral and multi-lateral APAs are also available involving the IRS and the other competent authorities.

Canada Small Flag Canada

Canada has CFC, Thin Cap and, as noted above, Transfer Pricing regimes in place.

The Canadian CFC regime requires that Canadian residents include their share of the passive income (including capital gains) of a controlled foreign affiliate in income on an accrual basis. This is referred to as “foreign accrual property income” or FAPI. The intention of the FAPI rules is to eliminate any tax advantage from earning passive income through a foreign entity. The FAPI rules are notoriously complex and contain numerous deeming provisions and exclusions.

The thin capitalization rules impose a debt to equity ratio of 3:2. The rules will disallow a deduction for any interest payments on the excess amount of debt. Further, this excess interest will be deemed to be a dividend for Canadian withholding tax purposes. Back to back loan rules are in place to prevent the avoidance of the thin capitalization rules through the use of an intermediary lender.

Canada’s transfer pricing regime generally follows the OECD transfer pricing guidelines (although they are not incorporated into law by statute). It is possible to obtain an advance pricing agreement.

Austria Small Flag Austria

Austria has implemented CFC rules based on the EU Anti-BEPS Directive, effective as of 1 January 2019. These CFC rules will provide for a (proportional) allocation of non-distributed low-taxed passive income of foreign subsidiaries to the Austrian parent company as defined in Art 7 (2) (a) of the EU Anti-BEPS Directive. The new (reinforced) CFC rules will apply, if the Austrian parent company holds directly or indirectly – alone or together with associated enterprises – more than 50% of the voting rights or profit participating rights of the foreign subsidiary and if more than 1/3 of the the foreign subsidiary’s income is passive and low-taxed, i.e. subject to effective tax rate of not more than 12.5% abroad. There will be an exception for foreign subsidiairies with significant economic activity in terms of personnel, equipment, assets and premises. Austria had already a „soft“ CFC legislation in the past, which only concerned the distribution of dividends, i.e. lead to a switch-over from the international participation exemption on dividends stemming from low taxed passive income to a foreign tax credit, apart from general non-acceptance of foreign subsidiaries due to general anti-abuse provisions and the substance-over-form principle.

There are currently no thin cap rules in Austria. In case of low debt-equity ratios the tax office challenges the interest deduction and assumes under specific circumstances hidden equity.

As regards transfer pricing Austria has implemented Action 13 of the BEPS Action Plan for multinational enterprises (MNEs) in its Transfer Pricing Documentation Act. Accordingly, MNEs have to file the master file and/or their local file with the tax administration in case they exceed certain thresholds of their annual turnover (in general EUR 50 million). Large MNEs with a consolidated group revenue of at least EUR 750 million have to take part in the CbC-reporting for accounting periods beginning on or after 1/1/2016. Regardless of whether an Austrian affiliated entity falls under the increased documentation requirements for MNEs it is however necessary to keep adequate transfer pricing documentation explaining the cross-border inter-company relations.

Taxpayers may apply for a binding advance tax ruling with the local tax office in charge relating to transfer pricing matters, based on the facts and circumstances to be presented by the taxpayer prior to their implementation. To a certain degree it is also possible to reach cross-border advance pricing arrangements on a bilateral or multilateral basis, which are of a rather general level. Although the taxpayer has no formal right to request such mutual agreements, the Austrian Ministry of Finance can negotiate with the other contracting in order to clarify issues of interpretation of transfer prices on the basis of conventions for the avoidance of double taxation containing a provision that reflects Article 25 para 3 of the OECD MTC.

France Small Flag France

The FTC provides for a CFC rule that constitutes an exception to the territoriality principle: only profits derived from activities carried out in France are taxable in France. According to this rule, profits realised by an entity, which is, directly or indirectly, more than 50%, owned by a French company and which is located in a privileged tax regime country, are deemed to be received by the French company in due proportion of the shares owned and therefore, are to be taxed in France. An entity is considered to be located in a privileged tax regime country if the effective corporate tax rate applied in this country is at least 50% lower than France’s.

The French thin cap regime provides that the deductibility of interest paid by a French company to related parties is limited if the interests exceed 150,000 € and if the following criteria are cumulatively met:

  • the overall indebtedness regarding loans granted by related parties exceeds 1.5 times the company’s net equity;
  • the amount of interest paid to related parties exceeds 25% of the adjusted EDITDA;
  • the amount of interest paid to related parties exceeds the amount of interest received from related parties.

The portion of interest paid which exceeds the highest of the three set criteria is not deductible. These rules can be extended to interest borne with respect to a bank loan when certain guarantees have been granted by affiliated companies to the lender.

French tax law provides for several other rules aiming at limiting the deductibility of interest:

  • the rate applied to the inter-company loan must not exceed a specific tax rate (which is an average of the rates set for loans granted to companies by financial institutions, 1.52% in the course of 2018). If so, the exceeding portion of interest paid is not deductible;
  • 'Carrez Amendment', which provides that interest on loans raised for the purpose of acquiring shares is non-deductible if the decisions concerning the acquired shares are not actually made in France (to be removed by the tax bill for 2019);
  • 'Charasse Amendment', which provides for financial expenses paid on related-party acquisitions to be added back, to a certain extent, within the context of a French tax group;
  • a global limitation corresponding to 25% of interest expenses, known as the 'Rabot' and,
  • Anti-hybrid stipulation, which forbids the deduction of interests, if the creditor is not taxable, at least at 8.33% (i.e. 25% of the French CIT) on the financial proceeds.

The FTA applies the arm’s length principle: prices applied to transactions between related parties must be similar to prices that would have been agreed upon for transactions between independent companies. If not, the FTA may presume an indirect transfer of profits from the French company to its foreign affiliate and reassess its taxable income accordingly, that is to the extent of the amount deemed to have been unduly shifted. The burden of proof regarding an indirect transfer of profits lies with the tax authorities.

The rules aiming at limiting the deductibility of the interest should be deeply amended by the 2019 Finance Bill in order to transpose the Anti Avoidance Directive ('ATAD') into the French interest limitation regime. The Finance bill should limit the deduction of net financial charges (including debts subscribed with a Bank or a third party) to either 30 % of the entity's EBITDA or 3 million euros (if higher) with a calculation made at the group level. The "rabot" would be removed and the thin-capitalization rules would be deeply amended.

The FTC provides for the possibility of a bilateral advance pricing agreement between multinational companies and the tax authorities which would aim at fixing the transfer pricing method to be used in cross-border transactions.

The State Aid action has not dramatically changed the situation, but just increased the already thorough examination of the APA requests.

Cyprus Small Flag Cyprus

There are no CFC or thin capitalisation provisions under Cyprus law.

Article 33 of the Income Tax Law gives the tax authorities power to adjust taxable profits if they consider that they have been affected by transactions between related parties undertaken other than on an arm’s length basis, but there is no detailed guidance on how this provision is to be applied in practice.

With effect from July 2017 transfer pricing rules apply to intra-group financing arrangements. The interpretive circular issued by the Tax Department on implementation of the rules closely follows the OECD Transfer Pricing Guidelines. It is widely expected that formal transfer pricing rules will shortly be introduced for all other transactions.

The Tax Rulings Division of the Tax Department will, on application by or on behalf of a taxpayer, issue advance tax rulings regarding actual transactions (for brevity this should be understood as including a series of transactions) relating to tax years for which the due date for filing a tax return has not yet passed, and transactions proposed to be undertaken by existing or new entities. Rulings will be binding only with regard to the taxpayers specifically mentioned in the ruling request, and only to the extent that the facts and circumstances presented in the ruling request continue to be applicable and provided that there is no subsequent change in the tax law which renders the ruling inapplicable. The Tax Rulings Division will express an opinion on the applicable tax treatment of the hypothetical transaction or scenario presented to it and will not be responsible for verifying the facts presented by the applicant.

There is nothing in the wording of the circular regarding tax rulings that would prevent a ruling being applied for regarding proposed transfer prices, but given that transfer pricing rules are very much a work in progress, the Tax Department is likely to adopt a very cautious approach.

Brazil Small Flag Brazil

Brazilian thin capitalization rules were enacted by the Law 12,249/2010. According to such rules, interest paid to related parties not located in a tax haven or privileged tax regime jurisdiction may only be deducted if the interest expenses are deemed necessary and the debt is not greater than:

(i).twice the value of the lender’s participation in the net equity of the Brazilian Company (borrower);
(ii) twice the value of the borrower’s net equity, if the lender is a foreign related party with no participation in the Brazilian Company (borrower);

Interest paid to related parties located in a tax haven or privileged tax regime jurisdictions is deductible provided that the expenses are necessary and the debt with such related party does not exceed 30% of the Brazilian company’s equity.

Additionally, Brazil does also provide for CFC rules, which in general, impose taxation on undistributed profits from foreign controlled and affiliated companies. Accordingly, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year. On the other hand, provided that some conditions are met, profits derived from foreign affiliates not located in tax haven or privileged tax regimes jurisdictions are only subject to taxation in Brazil when they are effectively distributed.

Moreover, Brazilian transfer pricing rules were enacted by Law 9,430/96 and its subsequent amendments. Such rules introduced transfer pricing controls, in order to avoid undervaluation of export prices, or overvaluation of import prices, for purposes of calculating corporate income taxes (Income tax – “IRPJ” - and Social Contribution on Profits Tax – “CSLL”). Transfer pricing rules are applicable to any import or export of goods, services and rights, performed between a Brazilian company and a related party abroad, or a party located in a tax haven or privileged tax jurisdiction.

There are five methods to calculate import transfer price, as well as there are four methods to calculate export transfer price. For import transactions, if the actual import price is higher than the calculated transfer price, the taxpayer cannot deduct the difference for purposes of IRPJ and CSLL. For export transactions, if the actual price is lower than the applicable transfer price, the difference shall be computed for IRPJ and CSLL purposes.

It is worth mentioning that the Brazilian transfer pricing rules differ from the OECD Guidelines related to the referred subject. Accordingly, Brazilian rules adopt fixed margins to calculate the transfer price, instead of the arm’s length principles.

Finally, please note that the transfer pricing rules do also apply to loan transactions between foreign related parties.

Germany Small Flag Germany

a) CFC regime

Germany operates a CFC regime. Pursuant to the CFC regime, the income of a controlled foreign corporation is fictitiously attributed to the shareholder in the ratio of its shareholding and subject to German income tax if and to the extent that

(i) more than 50% of the shares are directly or indirectly held by German tax residents (reduced to 1% in case of passive income with capital investment character),

(ii) the foreign entity derives income from certain passive income sources and

(iii) the income of the controlled foreign corporation is low-taxed, which means that the tax levied is below 25%.

However, the German CFC rules provide for an exemption for corporations which have their statutory seat or their place of effective management within the EU or EEA. Such corporations may prove that their business has economic substance, they exercises genuine commercial activities and adhere to the arm’s-length-principle. In that case, the EU/EEA corporations will not be deemed to constitute a controlled foreign corporation under the German CFC rules.

b) Thin-cap regime

Germany operates a thin-capitalization regime, the so-called interest barrier rule. Generally, the interest barrier rule is applicable if the annual net interest expenses amounts to or exceeds EUR 3 Million. Under the interest barrier rule, the tax deductibility of interest expense on any debt of a company is restricted to the amount of the interest income plus 30% of the company’s EBITDA for tax purposes. The taxable EBITDA differs from the financial EBITDA because it is based on the taxable income of the company only. Therefore, any tax free income is not part of the taxable EBITDA. There are various exceptions and counter-exceptions to the interest barrier rule, e.g. for non-group companies.

There is currently a proceeding pending before the Federal Constitutional Court whether or not the interest barrier rule is in line with German constitutional law.

c) Transfer pricing

Germany operates a transfer pricing regime. As a matter of principle, transfer prices and any transaction between related parties have to be in line with the arm’s-length principle. There are several statutory rules to determine the transfer prices for products, services or the transfer of functions. According to these rules, the prevailing methods for determining transfer prices are the cost plus method, the comparable unrelated price method and the reselling method. In principle, the full range of the values calculated by the different methods can be applied.

Germany has strict rules with respect to the documentation of transfer prices. Violations of the documentation rules may lead to adverse consequences as the tax authorities are authorized to adjust transfer prices. Furthermore, there are penalties in case certain transfer pricing documentation requirements are not met.

The transfer pricing documentation generally consists of three parts if certain revenue thresholds have been exceeded:

(i) a so-called master-file under which the company has to describe its world-wide business operations and the transfer pricing policy,

(ii) a so-called local file which has to comprise of detailed information about the main group related business transactions of the respective local company and its related parties and

(iii) a country-by-country reporting (if group consolidated revenues of at least EUR 750 Million).

d) Advance pricing agreements

Unilateral as well as multilateral advance pricing agreements are available in Germany.

Ireland Small Flag Ireland

Ireland does not currently have CFC rules. In accordance with the EU Anti Tax Avoidance Directive (“ATAD”) Ireland will be obliged to introduce CFC rules with effect from 1 January 2019. Following a public consultation it is expected that Ireland will introduce a CFC regime in accordance with Option B as set out in the ATAD. It is expected that the relevant legislation will be included in Finance Act 2019 (which will be passed in December 2018). While draft legislation has not yet been published it is expected that the CFC rules will apply where a “control condition” and “taxation condition” have been satisfied (i.e. to be a CFC there should be greater than 50% control and less than half the Irish rate of taxation). The targeted income will be all types of non-distributed income arising from “non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.” According to the ATAD, arrangements are non-genuine where the CFC “would not own the assets or would not have undertaken the risks which generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income.”

Ireland does not have a thin capitalization regime.

Ireland has had transfer pricing rules since 2010. The transfer pricing rules must be interpreted in a manner consistent with the OECD transfer pricing guidelines. Somewhat unusually the Irish transfer pricing rules only apply to “trading” transactions that benefit from the 12.5% corporation tax rate. Ireland has a formal advance pricing agreement (“APA”) program. Only bilateral or multilateral APAs are possible. It is not possible to agree a unilateral APA with Irish Revenue.

Israel Small Flag Israel

There are no thin capitalisation rules under Israeli tax laws although financing arrangements are generally subject to arm’s length principles and thus should reflect market interest rates.

There is a controlled foreign corporation (a “CFC”) regime in Israel. A CFC is a foreign resident company (i) the shares of which are not listed for trading on a stock exchange (or if listed, less than 30% of the shares or other rights have been issued to the public); (ii) the majority of its income in a tax year is passive income or the majority of its profits are derived from passive income; (iii) the passive income of such company is subject to tax in the foreign jurisdiction at a rate of 15% or less; and (iv) the foreign company is controlled by Israeli residents (i.e., Israeli residents hold over 50% of the interests in the foreign company, or over 40% of the interests in the foreign company and together with the holdings of related parties, hold over 50%, or if an Israeli resident has veto power over major company decisions).

If a foreign company is a CFC, a “controlling shareholder” of such CFC (generally, a shareholder that holds 10% or more of one or more of the means of control of the CFC, taking into account certain attribution rules), is required to include in its annual income, its allocable share of the CFC’s undistributed profits.

There is a transfer pricing regime in Israel that, similar to other jurisdictions, requires related parties to a cross-border transaction, to report such transaction on the basis of its fair market value. Applicable regulations provide detailed and specific guidelines with regard to the application, establishment and documentation of the arm’s length conditions that apply, and further stipulate certain methods that should be used in order to determine fair market value such as the price comparison method, the profitability comparison method and the profit and loss allocation method.

An updated transfer pricing study along with an intercompany agreement based on such study should be readily available and, upon request, submitted to the ITA. The tax-assessing officer has the authority to demand a transfer pricing study at any time within 60 days. In addition, the taxpayer is required to describe the terms of any cross-border transaction with a party with whom it has a special relationship (price, conditions and the price and conditions of an arm’s length transaction) in a designated form attached to its annual tax return.

Generally, taxpayers may obtain a pre-ruling from the ITA before filing their tax returns. In the context of the transfer pricing rules, a taxpayer may apply for an advanced pricing agreement.

Malaysia Small Flag Malaysia

In anticipation of the introduction of thin capitalisation rules, Section 140A(4) of the ITA was introduced and came to force on 1.1.2009, though the subsequent introduction of the rules has not taken place to date. This provision has since been repealed effective this year.

During the announcement of the 2018 Budget, the Malaysian Government stated that in lieu of the thin capitalisation rules, and in line with the BEPS Action Plan: Action 4, a new set of rules known as Earning Stripping Rules (ESR) to restrict deduction of interest expenses and other payments by entities is expected to be introduced and take effect from 1.1.2019 instead.

Under the ITA, taxpayer could make an application under Section 138B of the ITA for an advance ruling in respect of arrangements that are seriously contemplated by the taxpayer.

Mexico Small Flag Mexico

The Mexican Income Tax Law provides several General Anti-Avoidance Rules, including thin cap rules, transfer pricing policies and CFC, to name a few.

CFC Rules

The Mexican Income Tax Law establishes that income obtained by Mexican residents or foreign residents with a Mexican permanent establishment through foreign entities or vehicles in which they participate, directly or indirectly, is considered to be derived from a preferential tax regime or “Refipre” and must therefore be taxed according to the Refipre rules, if such income is (i) not subject to tax abroad or is subject to tax at a rate lower than 75% of the income tax that would have been due and payable in Mexico on such income, if it had been obtained directly by a Mexican resident, or (ii) earned through foreign legal vehicles or entities that are tax transparent abroad.

For such purposes, the Refipre rules take into account income obtained in cash, in kind, in services or in credit through foreign legal entities or vehicles and those which are presumptively determined by the Mexican tax authorities, even when such income has not been distributed to Mexican residents. In general, Mexican residents who obtain income from a Refipre must recognize it as taxable in Mexico during the year in which the income was derived, even if such income is not distributed to them by the foreign legal entity or vehicle that received it.

Thin capitalization

The Mexican Income Tax Law provides, as a general rule, that interest expenses incurred by Mexican entities are deductible on an accrual basis, subject to certain limitations amongst of which is that if interest expenses are paid to a non-resident related party, a 3 to 1 debt to equity ratio must be met; otherwise, any portion of the interest payments to foreign based related parties exceeding such ratio shall be non-deductible. This rule does allow for exceptions when it comes to debt contracted by taxpayers that are part of the Mexican financial system or that are engaged in the construction, operation or maintenance of productive infrastructure linked to the development of strategic sectors or electricity generation.

Transfer Pricing

Transactions between related parties should comply with the arms’ length principle and be properly supported from a Mexican transfer pricing perspective (i.e., by a transfer pricing report), following the essential principles established under the OECD Transfer Pricing Guidelines.

Under current legislation, it is in fact possible for companies to obtain APAs with the tax authorities. These rulings may be effective in the fiscal year during which the relevant request was made, in the preceding fiscal year and up to the three fiscal years following the year in which the request was made.

Norway Small Flag Norway

CFC taxation

The Norwegian CFC regime (No.: NOKUS) is applicable to Norwegian shareholders (i.e. shareholders, corporate or individual, resident in Norway for tax purposes) that directly or indirectly own at least 50 per cent of the shares or capital of a foreign company which is resident in a low-tax jurisdiction. For the purposes of these rules a jurisdiction is considered to be a low-tax jurisdiction if the effective taxation of the company is less than two thirds of what would be the effective taxation had the company been resident in Norway. It is not the headline tax rate but the effective tax rate which is relevant. The profits of the foreign company are attributed proportionally to the Norwegian shareholders irrespective of whether any distributions are actually made. A binding black list and a non-binding white list of jurisdictions with sufficient/insufficient taxation levels are issued by the Norwegian tax administration annually.

The CFC rules are not applicable to companies resident within the the European Economic Area (EEA), provided the company is genuinely established and actually performs economic activities. The analysis must be based on an overall assessment, and the Norwegian shareholder must provide evidence to the tax authorities that the substance requirement is met. In addition, if the company is not resident in a country with which Norway has entered into a tax treaty, which contains an information exchange clause, the company must present a statement from the tax authorities in its country of incorporation which confirms that the information provided is correct.

Further, the CFC rules are not applicable in situations where the company is resident in a country with which Norway has entered into a tax treaty for the avoidance of double taxation, and the company's income is not mainly of a passive nature.

Thin cap regime

Norwegian tax law contains no specific statutory or regulatory prescriptions on thin capitalisation but refers to the arm's length principle. All interest paid is, as a main rule, deductible. The tax authorities may contest the deductibility of interest paid to a parent company if the paying company is thinly capitalised. There is no general rule or safe harbour rule prescribing when the company is thinly capitalised or not. The assessment must be based on a number of factors such as the business sector of the company, the EBITDA of the company, and the debt-to-equity ratio of the company.

The interest deduction limitation rules state that interest expenses exceeding interest income (i.e. net interest expense) could be fully deducted if the total amount of net interest expense does not exceed NOK 5 mill. during the fiscal year, or if the interest is paid to a non-related party. Otherwise, net interest expense paid to a related party is deductible to the extent that internal and external interest expense combined does not exceed 25 per cent of the taxable EBITDA of the company. Parties are considered related in cases where one party has ownership or controls 50 per cent or more of the other party.

External loans guaranteed by a related party of the borrower (tainted debt) are also covered under the rule. The interest deduction limitation rule applies to limited liability companies, and other similar companies and entities. It also applies to partnerships, shareholders in CFCs and foreign companies with permanent establishments in Norway. Financial institutions are exempt from the interest deduction rule.

The Norwegian Ministry of Finance has proposed to extend the interest deduction limitation rules to include external debt, and a consultation procedure on the proposal was completed in 2017. The proposal was expected to be followed up in the national budget for 2018. However, the ministry has announced it still worked on the proposed amendments. The rules are expected to be introduced with effect for the income year of 2019.

Transfer pricing and APA

Transfer pricing documentation rules impose an obligation for companies to prepare specific transfer pricing documentation as an attachment to their tax returns. Reporting requirements and transfer pricing documentation rules apply to companies that own or control, directly or indirectly, at least 50 % of another legal entity. A Norwegian permanent establishment with its head office in a foreign country, and a foreign permanent establishment with its head office in Norway, are covered by the rules. Furthermore, partnerships where one or more of the partners are taxable in Norway are also covered by the rules. The taxpayer must generally be prepared to file transfer pricing documentation (type and volume of the transactions, functional analysis, comparable analysis, and a report of the transfer pricing method used) within 45 days of a written notice from the tax authorities.

Norwegian tax authorities do not have a formal procedure to issue unilateral APAs. It is, however, possible to discuss the transfer pricing principles with the tax authorities. The Ministry of Finance has announced that they are considering introducing APA regulations, but they have not yet done so. In the case of sales of gas between related parties, a special APA procedure exists within the oil tax authorities, but so far this has not been used much in practice. Recently, Norway has opened up for mutual APA negotiations with other countries, but only a handful of pilot cases have so far been dealt with under such MAP/APA approach.

Panama Small Flag Panama

There are no CFC or Thin Cap rules in Panama.

Transfer Pricing regulations had been enacted since 2010. At the moment there are only applicable to transactions with related parties abroad and to those transactions that affects income, cost and expenses for the determination of the taxable base for income tax purposes.

Philippines Small Flag Philippines

The Philippines does not have statutes and regulations on CFCs and thin capitalization.

On transfer pricing, Section 50 of the Tax Code provides the legal basis for issuance of transfer pricing rules. Section 50 allows the Commissioner of Internal Revenue to allocate gross income or deductions between or among two or more organizations, trades or businesses (whether or not incorporated or registered in the Philippines), if he determines that such allocation is necessary in order to prevent the evasion of taxes to clearly to reflect the income of any such organization, trade or business.

Pursuant to this Tax Code provision, the Philippines adopted a transfer pricing guidelines (Revenue Regulations 2-2013, issued on January 23, 2013) which are based on the OECD transfer pricing guidelines. The transfer pricing methods allowed by the guidelines are the comparable uncontrolled price method, resale price method, cost-plus method, profit split method (residual profit approach and contribution profit split approach), and transactional net margin method.

Revenue Regulations No. 2-2013 requires companies to maintain transfer pricing documentation to prove that their transfer prices are consistent with the arm’s length principle. The guidelines do not require transfer pricing documents to be submitted when the tax returns are filed, but such documents should be retained by the taxpayers and submitted to the tax authorities when required or requested to do so.

Taxpayers may obtain an advance pricing agreement (APA) for their controlled transactions. If a taxpayer avails of an APA, it may choose between a unilateral and bilateral/multilateral APA. If a taxpayer does not choose to enter into an APA and its transactions are subject later on to transfer pricing adjustments, it may invoke the mutual agreement procedure article under the applicable tax treaties to resolve double taxation issues.

Portugal Small Flag Portugal

The Portuguese law foresees CFC rules both for individual and corporate taxpayers.

Under such rules, profits or income obtained by non-resident entities clearly subject to a more favorable tax regime, are imputed to Portuguese tax resident taxpayers that hold directly or indirectly, including through a representative, fiduciary or intermediary, at least 25% of their share capital, voting rights or attribution rights over the income or assets of such non-resident entities. This percentage is reduced to 10% whenever at least 50% of the mentioned share capital, voting rights or attribution rights over the income or assets of such non-resident entities are held, directly or indirectly, by Portuguese tax resident taxpayers.

An important exception to the CFC regime occurs when the non-resident entity is resident or established in another Member State of the European Union (EU) or in another member State of the European Economic Area (EEA) bound to administrative cooperation on tax matters equivalent to the cooperation established within the EU, as long as the Portuguese taxpayer is able to prove that the incorporation of the non-resident entity relies on valid economic reasons and it carries out a business activity.

The Portuguese Corporate Income Tax (CIT) Code currently foresees the limitation to the deductibility of financing expenses up to the higher of the following: (i) € 1,000,000; or (ii) 30% of EBITDA. The exceeding financing expenses of a certain tax year may be deductible on the following 5 tax years, after deducting the financing expenses of each year, provided that the previously mentioned limits are not exceeded.

Portuguese transfer pricing rules are in line with the Organization for Economic Co-operation and Development (OECD) guidelines.

The Portuguese law foresees the possibility of entering into unilateral, bilateral or multilateral APA (“Advance Pricing Agreements”) with the tax authorities, valid up to 3 years and renewable. Amongst several obligations, the taxpayers must prepare an annual report on the application of the APA, otherwise the agreement will be deemed to expire. The conclusion of an APA requires the payment of a fee to the tax authorities, based on the taxpayer’s turnover.

Italy Small Flag Italy

Controlled foreign corporation (CFC) rules may apply to Italian resident persons controlling non-resident companies, partnerships or other entities established in jurisdictions (other than EU Member States and EEA Member States) where the nominal tax rate is lower than 50 per cent of the Italian nominal tax rate. They may apply also in respect of companies, partnerships or other entities established outside the above jurisdictions if (i) the CFC is subject to a foreign effective tax rate lower than 50 per cent of the effective tax rate that would have applied if the CFC were resident of Italy, and (ii) the CFC realizes profits that qualify as passive income or profits from intra-group services for more than 50 per cent.

Italy repealed its thin cap regime as from tax year 2008. Italy applies an interest limitation regime whereby, in each tax year, companies can deduct interest expenses up to the amount of their interest income. The excess can be deducted for an amount equal to 30% of EBITDA of the relevant year. The excess 30% EBITDA as well as the interest expenses non-deductible in a given tax year can be carried forward and used or deducted in following tax years.

Italy applies transfer pricing legislation largely consistent with the OECD arm’s length standard. The legislation has been recently endorsed in order to reflect the latest changes to the OECD Transfer Pricing Guidelines and the tax authorities usually make reference to such Guidelines. As above indicated (see answer to question 1 above), a taxpayer may apply for a unilateral advance pricing agreement. If the other country involved in the cross border transactions signed a double tax treaty with Italy, the taxpayer can apply for a bilateral advance pricing agreement.

Turkey Small Flag Turkey

CFCs are covered in Article 7 of Corporate Income Tax Law No. 5520 (the CITL), and according to this law if the foreign company is controlled directly or indirectly by a Turkish resident company which has at least 50% the share capital, dividends or voting power, the foreign company is defined to be a CFC provided that the below conditions are fulfilled:

  • 25% or more of the gross income of the foreign company is composed of passive income,
  • the foreign company is subject to an effective income tax rate lower than 10% for its commercial profit in its home country, and
  • the annual total gross revenue of the foreign company in the related period in foreign currency exceeds the equivalent of TRY 100,000.

If these conditions are fulfilled, the profits of the CFC will be included in the corporate tax base of the controlling resident company, and it will be subject to taxation in Turkey without consideration of whether or not the profits are distributed.

The thin capitalization issue is covered in Article 12 of the CITL. According to this article, if the borrowings from shareholders or from persons related to shareholders exceeds three times the shareholders equity of the borrower company at any time within the relevant year, the excess portion of the borrowing will be considered to be thin capital. “Related parties” is defined as shareholders and persons who are related to the shareholders that own 10% or more of the shares, voting rights or rights to receive dividends of the company. The shareholders equity of the borrower company is defined as the total amount of the shareholders equity of the corporation at the beginning of the fiscal year, or the difference between the assets and liabilities of the company. If the company has negative shareholders equity at the beginning of the year, then any borrowings from related parties will be considered to be thin capital. If thin capitalization exists, the interest paid or accrued, foreign exchange losses and other similar expenses calculated for the loans that are considered to be thin capital are treated as non-deductible for CIT purposes. Moreover, the interest paid or accrued and similar payments on thin capital will be treated at the end of the relevant fiscal year as dividends and will be subject to withholding tax.

Specific transfer pricing rules are valid in Turkey as of 1 January 2007 under Article 13 of the CITL, entitled “Disguised Profit Distribution through Transfer Pricing”.

The regulations in Article 13 follow the arm’s-length principle established by the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), and are applicable to all financial, economic and commercial transactions and employment relations between related parties. Details on the application of Article 13 are provided in a communiqué regarding disguised profit distribution through transfer pricing.

Turkish transfer pricing (TP) legislation is part of the CITL. The arm’s-length principle, which is defined in line with OECD Guidelines and Article 9 of the OECD Model Tax Convention, is described in Article 13 of the CITL, along with a detailed definition of related parties and the introduction of methods to be applied to determine arm’s-length prices. According to the CITL, related parties must set transfer prices for the purchase and sale of goods and services equal to those they would have agreed to had they been unrelated parties. A comprehensive definition of what constitutes a related party is found in Article 13 of the CITL. The definition of related party in Turkish transfer pricing regulations is very broad, and it includes direct and indirect involvement in management or control, in addition to the existence of a shareholder/ownership relationship. In addition to transactions with foreign group companies, the scope of the law also includes transactions with entities that are based in tax havens or jurisdictions those are considered harmful tax regimes by the Turkish government.

Principles of transfer pricing documentation are covered in a TP communiqué. The communiqué introduced two different types of documentation liability for taxpayers. Accordingly, taxpayers need to fill out the form in the appendix of the corporate income tax return with information on the goods and services purchased and sales transactions they perform with their related parties in each accounting period. Furthermore, taxpayers registered with the Directorate of Major Taxpayers Tax Office are obliged to prepare an annual transfer pricing report including the information and documents stipulated by the communiqué and in the format defined in the same communiqué. These reports are completed to reflect the domestic and overseas transactions carried out with related parties in each accounting period and overseas transactions carried out in a given accounting period with other corporate income tax payers and their related parties. They need to be completed by the submission date of the corporate income tax return and to be submitted upon demand to the authority or officials authorized to carry out tax inspections after the end of these given periods.

The legislation requires documentation as part of the transfer pricing rules describing how Turkish taxpayers should keep documented evidence within the company in case of a request from the tax authorities. The documentation must show how the arm’s length price was determined and the methodology selected and applied using any fiscal records, calculations and charts available to the taxpayer.

An advance pricing agreement is a method used to determine the prices for purchases or sales of goods or services between related parties, and may be agreed upon with the Ministry of Finance upon a taxpayer request. This approved method will be fixed for a maximum period of three years within the terms and conditions of the agreement. If the administration finds the agreement interests more than one country, and if there are already APAs with another/other country/countries, the administration may consider a bilateral or multilateral agreement. In practice, the APA process changes according to the complexity and type (unilateral, bilateral or multilateral) of agreement, and the process cannot be completed in fewer than 18 to 24 months, on average.

Japan Small Flag Japan

Yes for all.

A) As for the CFC rule, Japanese tax law has “anti-tax haven” rules, or a Japanese version of the CFC rules. These rules have been overhauled by the 2017 annual tax reform in response to the BEPS Action Plan 3, and applies to Japanese shareholders from the fiscal years of the CFC beginning on or after April 1, 2018.

If the Japanese CFC rules apply, the Japanese corporation that is a shareholder of the CFC will be taxed upon its pro rata share of certain adjusted income of the CFC (to be calculated based on the CFC’s total income and gains) . In general, Japanese CFC rules apply if (i) Japanese resident individuals and Japanese corporations collectively own directly or indirectly more than 50% of the total issued shares, voting rights or rights to receive dividends of a foreign corporation; (ii) a particular Japanese resident individual or a Japanese corporation (which is the subject taxpayer) owns directly or indirectly 10% or more of the total issued shares, voting rights or rights to receive dividends of that foreign corporation; and (iii) the effective income tax burden (rather than the face or nominal tax rate) of that foreign corporation in a given fiscal year is less than (i) 30% for certain shell-company CFCs and cash-box-company CFCs or (ii) 20% for all other CFCs. Typical examples include Cayman Islands, Hong Kong and Singapore subsidiaries of a Japanese corporation. It should be noted that tax-exempt income and gains in the foreign jurisdiction will lower the effective income tax burden; for example, if a Dutch subsidiary of a Japanese corporation is exempt from substantial amount of capital gains by the Dutch participation exemption, the effective income tax burden in that fiscal year could be less than 20%, despite the Dutch statutory corporate tax rate of 25%. That will make the Dutch subsidiary a CFC for that fiscal year. However, exemption of dividends received by the Dutch subsidiary from foreign companies by the participation exemption will not lower the effective income tax burden (this treatment is only limited to dividends).

Even if the Japanese CFC rules apply because all the conditions explained above are met, there is an active business income exemption. That is, if the CFC meets all of the following criteria, the Japanese CFC rules apply only to the extent of the CFC’s certain enumerated passive income (rather than the CFC’s total income including active income): (i) the principal business of the CFC is other than financial investments in shares, bonds or IPs or leasing of vessels, (ii) the CFC is managed and administered on its own within the jurisdiction of its incorporation, rather than from Japan, (iii) the CFC maintains physical fixed premises such as offices and factories within the jurisdiction of its incorporation that is necessary to do its business, and (iv) depending on the type of business, the CFC does business principally within the jurisdiction of its incorporation (e.g., manufacturing) or deals with unrelated third parties to account for 50% or more of the total business transactions (e.g., distribution, transportation). If all these elements are met, the CFC’s income to be aggregated with the Japanese shareholder’s income will be limited to passive income, such as (a) dividends and capital gains from shares (but excluding those where the shareholding ratio is 25% or more for at least 6 months), (b) interest on deposits, bonds and loans (excluding interest from certain qualifying group-financing), (c) income from derivatives (excluding certain qualifying hedges), (d) foreign exchange gains (excluding those arising in the ordinary course of business), (e) royalties and disposition gains from IPs (excluding those where the IP is developed on its own) and (f) leasing income from real properties and fixed properties (excluding real properties located and fixed properties used in the jurisdiction of incorporation of the CFC).

The active business income exemption has been expanded to a certain qualifying regional headquarters or intermediate holding company; that is, if a foreign subsidiary incorporated in the Asian-hub low-tax countries such as Singapore and Hong Kong operates as an Asian regional headquarters or as an intermediate holding company for the Japanese parent corporation, subject to certain requirements being met, the CFC will not be disqualified from meeting the condition (i) above (i.e., the principal business of the CFC is other than financial investments in shares), merely because it is a holding company.

B) As to a thin cap regime or limitation on interest deduction, there are special rules limiting deductibility of interest as follows:

If the debt giving rise to the interest is owed to a foreign corporation, which is a controlling shareholder (owning directly or indirectly 50% or more of the total shares) of the Japanese corporation, the ‘thin capitalization’ rules apply, and, generally speaking, interest payable upon the portion of the debt exceeding three times the shareholders’ equity of the Japanese corporation will be nondeductible. The ‘thin capitalization’ rules apply not only in the case of direct financing by the controlling shareholder, but also in other similar cases, such as financing by third parties with a guarantee provided by the controlling shareholder.

Transfer pricing rules also apply to interest payable to affiliated foreign corporations of the Japanese corporation in order to require that the interest rate be arm’s length (i.e., the portion of the interest exceeding the arm’s-length rate will be denied deduction). One Japanese court precedent indicates that the arm’s-length interest rate generally refers to the rate available in the market for substantially similar finance transactions.

Further, as a result of the 2012 annual tax reform, a Japanese version of the ‘earnings stripping’ rules has been introduced, and applies from fiscal years beginning on or after April 1, 2013. There, if the ‘net’ amount of the interest paid to certain foreign related parties of the Japanese corporation in a fiscal year exceeds 50% of certain ‘adjusted income’ (substantially equal to EBITDA, i.e., taxable income before that interest deduction, depreciation, etc.) of that Japanese corporation in that fiscal year (i.e., interest paid to foreign affiliates is excessive as compared to the taxable income), the excess portion of the interest will not be deductible in that fiscal year. The excess portion will be carried forward for seven future fiscal years, however, and will be deductible to the extent the above conditions are met in the relevant future fiscal year. There is a certain de minimis exception, as well as an exception where the gross amount of interest paid to foreign related parties does not exceed 50% of the total gross amount of interest (including interest paid to third parties). The Japanese government is now reviewing whether these earnings stripping rules should be more tightened, in response to the BEPS Action Plan 4, by lowering the threshold percentage rate from 50% to some 10-30%.

It should be noted that interest deduction can be denied, even if none of the foregoing regimes is applicable, if the Japanese tax authority considers the relevant debt transaction as avoiding Japanese tax and invokes the anti-avoidance statute applicable to closely-held corporations in the corporation tax law. The Universal Music case mentioned above is an example.

C) As to the transfer pricing regime, generally, the Japanese government is of the position that Japanese transfer pricing rules as well as enforcement thereof should closely follow the OECD standards. For example, Japanese transfer pricing rules repealed priority of the three basic methods (CUP, RP and CP) over other methods (PS and TNMM), and adopted the “best method” rule. In addition, it has been made clear that the concept of a “range” of arm’s length profit level can be used for Japanese transfer pricing purposes (provided that it means a “full range” predicated upon full comparability, rather than the statistical approach of interquartile range) for the purpose of issuing a transfer pricing assessment. In addition, as a matter of enforcement or transfer pricing audit, it is very common that taxpayers make defensive arguments by referring to the OECD Guidelines along with Japanese local laws and regulations, and the Japanese tax authority generally accepts such arguments as legitimate. Indeed, some tax treaties, e.g., that with the United States, expressly provide that transfer pricing enforcement shall be made in accordance with the OECD Guidelines.

It is possible to obtain an advance pricing arrangement (APA) from the tax authority, and it is a very common practice. In an APA, there generally is even more flexibility as compared to transfer pricing audit; e.g., the statistical approach of interquartile range is very commonly used and accepted. However, as an APA requires substantial time, cost and burden to deal with the tax authority (e.g., for responding to information and document requests), taxpayers generally concentrate on intra-group transactions that have significant volume and a large amount of tax at stake in applying for an APA. It is not rare that an APA takes two or three years until concluded.

The Netherlands Small Flag The Netherlands

Currently there is no explicit CFC or Thin Cap regime applicable in the Netherlands. Dutch tax law contains one specific clause which requires an annual mark-to-market valuation of subsidiaries held by a Dutch corporate tax payer. This clause applies for a subsidiary in which the shareholder has an interest of 25% or more (stand-alone or together with an affiliated entity), the subsidiary is held as a portfolio investment, and which assets consist directly or indirectly for 90% or more of low-taxed free passive investments. Pursuant to this clause, the annual increase in fair market value (if any) of such subsidiaries must be included in the shareholder’s taxable profits and will be taxed at the general corporate tax rate of 25%.

The Dutch government published a proposal for a Thin Cap rule for banks. The thin capitalization interest deduction limitation for banks will likely become effective as of 1 January 2020. The legislative proposal is expected to be published in 2019.

Further, in September 2018 the Dutch government published a proposal for the introduction of CFC Rules as of 1 January 2019, based on the EU Anti-Tax Avoidance Directive. See question 12 for a detailed description of this proposal.

The Netherlands has a transfer pricing regime following OECD standards and which requires that transactions (supply of goods, services, financing, guarantees, etc.) between related parties take place under the same conditions as transactions that would have applied in the market between independent parties, i.e. the at arm’s length standard.

The Netherlands is well known for the cooperative attitude of the Dutch tax authorities (DTA) and the opportunity to resolve uncertainties in advance. The Dutch advance tax ruling (ATR) and advance pricing agreement (APA) practice has traditionally been an integral part of the Dutch (international) tax practice. A separate department within the DTA (i.e. the ruling team) is responsible for practically all matters relating to APAs and ATRs.

ATRs/APAs are not publicly disclosed. However, in certain cases automatic exchange of rulings may take place with respective foreign tax authorities (reference is made to question 6).

Romania Small Flag Romania

The Romanian legislation has implemented the CFC regime, further to the transposition of the Anti-Tax Avoidance Directive (“ATAD”) into local law. The CFC rules became applicable starting 1 January 2018. Basically, these state that certain types of undistributed income pertaining to (directly or indirectly) controlled low taxed subsidiaries/permanent establishments of Romanian corporate income taxpayers would be included (proportionally to the participation held in the controlled subsidiary) in the tax base of the respective (controlling) taxpayer – approach A provided by ATAD.

The Romanian tax legislation provided for Thin Cap regime until 31 December 2017 when it was replaced by the interest deductibility rules based on EBITDA, further to the implementation of the ATAD into local law. As per these rules, the exceeding borrowing costs (i.e. the amount by which deductible borrowing costs exceed taxable interest revenues) above the annual threshold of EUR 200,000 in relation to various types of financing (including e.g. bank loans, inter-company loans, finance leasing, etc.) may be deducted for corporate income tax purposes only up to 10% of the company’s EBITDA, adjusted for tax purposes. Non-deductible borrowing costs (i.e. exceeding 10%) would be available for carry forward for an unlimited period of time.

The investors should analyze the impact of these rules from two perspectives:

  • 10% EBITDA: Even if the Directive gives the possibility to the EU Member States to choose a limit up to 30%, Romania opted for only 10%. Clearly, the companies recording a small EBITDA or in the investment phase will be affected by this limit as they might not be able to deduct the entire exceeding borrowing costs during the period they are incurred.
  • Bank loans: Unlike under the interest deductibility restrictions until 31 December 2017, the interest related to bank loans is now included and subject to the same rules mentioned above. As the bank loans represent one of the main source of financing several industries, this new measure will have a significant impact for the Romanian companies.

Apart from the TP rules provided for under Romanian regulations (that also make reference to OECD TP Guidelines and contain local specific requirements), the Romanian legislation provides for the possibility to obtain advance pricing agreements (“APA”). Initially, the procedure for obtaining APAs was quite cumbersome, however, the process was streamlined in the last couple of years. In the current market environment and high focus of tax authorities on transfer pricing matters, it is strongly recommended to consider obtaining APAs, since this would mitigate TP disputes with the tax authorities on transactions subject to the APAs.

Gibraltar Small Flag Gibraltar

There are no CFC rules in Gibraltar. However, under the general anti-avoidance provision in our Tax Act, the Commissioner may disregard any CFC or transaction with such CFC where the Commissioner believes that it is fictitious or artificial.

There are specific anti-avoidance provisions in our Tax Act in areas such as thin capitalization and transfer pricing. The general provisions are as follows for each:

Thin capitalization
Interest paid on a loan by a company to related parties (which are not themselves a company) or loans where security is provided by related parties, where the ratio of the value of the loan capital to the equity of the company exceeds 5 to 1 is considered as a dividend payment and thus not a deductible expense for tax purposes.

Transfer pricing
The amount of interest payments to connected persons which is in excess of that payable at “arm’s length” is deemed to be a dividend.

Also, if the amount charged for goods and services by the connected persons is not at “arm’s length” expenses allowed shall be the least of:

(i) The amount of the expense;

(ii) 5% of gross turnover; or

(iii) 75% of the pre expenses profit.

United Kingdom Small Flag United Kingdom

The UK CFC regime is based on rules designed to prevent diversion of UK profits to low tax territories. Where UK profits are diverted to a CFC, those profits are apportioned and charged on a UK corporate interest-holder that holds at least a 25% interest in the CFC. There are a number of exemptions to reflect the fact that the majority of CFCs are established for genuine commercial reasons. The Finance Act 2004 abolished the separate thin capitalization requirements that had existed previously and subsumed them within the general transfer pricing rules in the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010).

The UK transfer pricing (TP) regime is contained in Parts 4 and 5 of Taxation (International and Other Provisions) Act 2010. The UK TP regime must be considered in light of the recently implemented Diverted Profits Tax (DPT) rules, which were introduced by the Finance Act 2015. There is also an advanced pricing agreement (APA) programme through which unilateral, bilateral and multilateral APAs can be obtained. The process by which such an agreement can be obtained is detailed in HMRC’s Statement of Practice 2/2010. HMRC will determine the taxpayer’s DPT position before agreeing to an APA.

As a result of the Starbucks and Apple decisions, any business which has secured a favourable APA could, potentially, be at risk of having those arrangements reviewed under the State Aid rules and be faced with having to make significant payments to repay tax benefits received under APAs that, allegedly, do not comply with State Aid rules.

Updated: October 12, 2018