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 (4th edition)
There are no specific controlled foreign entity (CFC) rules in Angola.
There are no thin capitalization rules in Angola. Interest borne with loans granted by equity holders or shareholders loans are eligible as a deductible cost, being disallowed the portion exceeding the average annual reference rate of interest set forth by the Central Bank which shall accrue to the taxable income.
Transactions between related parties must comply with the “arm’s length” principle and the tax authorities may adjust the taxable profits of a taxpayer whenever there is a breach of such principle. The Angolan transfer pricing regime is still quite incipient – at least its enforcement – but basically follows the main rules, methods and guidelines of the OECD.
For transfer pricing purposes, two companies are deemed related whenever they engage in business transactions that represent 80% or more of the other company’s turnover and whenever one is providing funding representing 80% or more of the other company’s financial indebtedness. Also, the concept of ‘material influence’ is a key factor for purposes of defining ‘related parties’, including notably companies held in 10% or more (in terms of shares or voting rights) or with common board members, etc.
The transfer pricing methods that the Angolan Tax Authorities will accept for purposes of computing the tax base for transactions between related entities are also foreseen. Under the general provisions, there are no advance rulings or pricing agreements.
Yes, there are CFC and Thin Cap rules provided in Brazilian law. In a great number of situations, the profits earned by foreign companies may be recognized in the Brazilian entity irrespective of its remittance to the country, and such entity will then be entitled to tax credits concerning income taxes collected abroad.
Transfer pricing controls were introduced in Brazil in 1996, but its rules are unrelated to the standards in force in the world, and this is an obstacle for Brazil to become a member of the OECD. Brazilian legislation has consulting mechanisms to check if the method utilized by a taxpayer is consistent with the interpretation of the tax authorities.
The Canadian transfer pricing regime is based on the arm’s-length principle. The Income Tax Act provides for the application of this principle to transactions between Canadian residents and non-residents. It allows the Canada Revenue Agency to determine, modify and even re-characterize certain amounts (nature or quantum) for the purposes of computing tax so as to reflect arm’s-length conditions. Canada generally follows OECD principles.
The Income Tax Act also has thin capitalization rules. The current debt / equity ratio is 1.5 : 1.
The Colombian transfer pricing regime is in force since 2003, and it allows the obtainment of advance pricing agreements. Thin capitalization rules are in force since 2013, and CFC rules since 2017.
As a result of the Anti-Tax Avoidance Directive (ATAD) Cyprus introduced CFC rules as from 1 January 2019, applying retrospectively.
A CFC is defined as an entity or a permanent establishment (PE) whose income is not taxable or exempt in Cyprus if the following two conditions are met: a) In the case of a non-Cypriot tax resident entity, the Cypriot tax resident company alone or together with its associated enterprises, holds a direct or indirect participation of more than 50% in such an entity and b) The company or PE is low-taxed (i.e. the income tax it pays is lower than 50% of the Cypriot corporate income tax that it would have paid by applying the provisions of the Cypriot income tax law). Cyprus has opted for Model B since it gives states the ability to ‘carve out’ CFCs via the thresholds provided by ATAD. ‘Carving out’ would apply to entities that (i) have accounting profits of less than EUR 750,000 and nontrading income of less than EUR 75,000, or (ii) have accounting profits of more than 10% of operating costs.
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.
As to thin capitalization rules, Cyprus again follows the provisions of the ATAD as from 1 January 2019:
Limitation on the possibility of deducting interest is set at 30% of taxable income before interest, taxes, depreciation and amortization.
Taxable EBITDA is defined as the total of net taxable income calculated in accordance to Cypriot income tax laws increased by the exceeding borrowing costs.
The restriction does not apply for amounts below EUR 3 million per taxpayer. The restriction does not apply to companies not forming part of the group and do not have a related business (participation of at least 25% in the share capital or participating at least 25% in the profits).
The law also excludes financial undertakings from the scope of the interest limitation rules (i.e. credit institutions, investment firms, alternative investment fund managers (AIFMs) and management companies of undertakings for collective investment in transferable securities (UCITS)).
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.
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 exercise 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 does not operate a thin-capitalization regime, but the so-called interest barrier rule. Generally, the interest barrier rule is applicable if the annual net interest expense 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 (Bundesverfassungsgericht) 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 worldwide 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.
CFC rules have been introduced under which the non-distributed income of a company or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage must be included as income of the taxpayer for that tax period.
In order for an entity or permanent establishment to be considered as a CFC under the Regulations, two conditions must be satisfied. Firstly, in the case of an entity, the taxpayer must by itself or together with its associated enterprises, hold a direct or indirect participation of more than 50% of the voting rights or capital, or must be entitled to receive more than 50% of the profits of that entity. Secondly, the actual tax paid by that entity or permanent establishment must be lower than the difference between the tax that would have been charged on the entity or permanent establishment in accordance with the Act and the actual tax paid on its profits.
An arrangement or a series thereof is regarded as non-genuine under the Regulations to the extent that the entity or permanent establishment would not own the assets or would not have undertaken the risk 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 CFC’s income. Where there is such non-genuine arrangement, the income to be included will be the calculated in accordance with the arm’s length principle.
In order to ensure that there is no double deduction:
i) where the entity distributes profits to the taxpayer, and those distributed profits are included in the assessable income of the taxpayer, the amounts of income previously included as income of the taxpayer shall be deducted from the income of the taxpayer when calculating the amount of tax due on the distributed profits;
ii) where the taxpayer disposes of its participation in the entity of the business carried out by the permanent establishment, and any part of the proceeds from the disposal previously having been included in the income of the taxpayer, that amount shall be deducted from the income of the taxpayer when calculating the amount of tax due on those proceeds; and
iii) the Commissioner of Income Tax shall also allow a deduction of the tax paid by the entity or permanent establishment in its state of residence or location from the tax liability of the taxpayer in accordance with section 37 of the Act.
Entities or permanent establishments with accounting profits of no more than €750,000, and non-trading income of no more than €75,000 or those which the accounting profits amount to no more than 10% of its operating costs for the tax period will not be considered as CFCs under the Regulations.
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.
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.
Domestic CFC and interest barrier rules were first introduced as of 1 January 2014 and amended in April 2019, in light of the EU Anti-Tax Avoidance Directive (“ATAD”). The amended rules are set to apply for tax years starting from 1 January 2019.
The new CFC rule explicitly applies to Greek tax resident private individuals and legal entities and uses as a criterion the actual tax paid by the CFC in the state of tax residence. Greece opted to apply the “passive income” approach, by explicitly providing that CFC rules do not apply to companies or permanent establishments resident in EU/EEA Member States to the extent that such entities carry on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.
As far as the new interest barrier rule is concerned, a company’s “exceeding borrowing costs” are tax deductible in the tax period in which they are incurred only up to 30% of the company's EBITDA. The 30% limitation does not apply to exceeding borrowing costs up to the amount of Euro 3M. “Exceeding” borrowing costs are defined as the amount by which the deductible borrowing costs of a company exceed taxable interest revenues and other economically equivalent taxable revenues.
Transfer pricing provisions, initially introduced in a simplified form in 1980, have been subject to regular revisions, gradually extending their scope of application and aligning them with international taxation trends. The currently applicable backbone transfer pricing provisions (Articles 50 and 51 ITC) fully endorse the arm’s-length principle, as defined in Article 9 of the OECD Model Tax Convention and interpreted by the OECD Transfer Pricing Guidelines, following the revisions introduced as a result of Actions 8–10 of the BEPS project.
Taxpayers may apply for a unilateral, bilateral or multilateral APA on the appropriate set of criteria for the determination of transfer prices over a fixed period of time that may not exceed four years (Article 23 CTP). Rollback of the APA is not allowed.
While India do not have a CFC regime, it has the concept of POEM for foreign entities being controlled from India in which case the foreign entity is a treated as an Indian resident and its global income is taxed in India. Further, Thin Cap regime has been introduced which caps the yearly interest deduction to 30% of the EBITDA of the borrowing entity.
India does have an exhaustive transfer pricing regime in place wherein rules are prescribed to determine ALP of the intra-group transactions.
Separately, the IT Act does provide a mechanism for taxpayer to enter into Advance Pricing Agreement (“APA”) for determining ALP of a related party transaction (called ‘International Transactions’ in TP parlance). Several multinational companies have adopted the APA path which have turned out to be successful.
Under the Finance Act 2018, Ireland has introduced EU Anti-Tax Avoidance Directive (“ATAD”) compliant CFC rules with effect from 1 January 2019. A CFC charge may arise under the legislation in respect of a foreign subsidiary if and to the extent the foreign subsidiary relies on significant people functions carried on in Ireland to generate its profits. However, if those functions are remunerated on arm’s length terms, no CFC charge should apply. The CFC charge is applied at the Irish corporation tax rates (12.5% to the extent the profits of the CFC are generated by trading activities and 25% in all other cases). The CFC charge will be reduced and credit will be given for foreign tax paid by the CFC on its income and other CFC charges imposed by other countries by reference to the profits of the CFC. Irish Revenue recently published guidance on the application of the CFC rules.
Ireland does not currently have a thin capitalization regime. However, Ireland will be introducing ATAD compliant interest limitation rules in the near future. Although the Irish Department of Finance remain of the view that Ireland’s existing interest limitation rules are at least equally effective as the ATAD rules (and that the extended ATAD deadline of 1 January 2024 should apply accordingly), work has commenced on the introduction of ATAD compliant interest limitation rules which could be implemented as early as 1 January 2020.
Ireland has had transfer pricing rules since 2010. At present, the transfer pricing rules must be interpreted in a manner consistent with the 2010 edition of the OECD transfer pricing guidelines. It is expected that the 2017 edition of the OECD transfer pricing guidelines will be incorporated into Ireland’s domestic transfer pricing rules with effect from 1 January 2020. The Irish transfer pricing rules currently only apply to “trading” transactions that benefit from the 12.5% corporation tax rate. However, it is expected that the rules will be extended to non-trading transactions with effect from 1 January 2020.
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.
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.
The ITA recently published two safe harbour circulars stating the ITA's expected profit levels for marketing services and for low-risk distributorship activities carried out in Israel by multinational entities, as well as providing guidance on non-value-added services.
Controlled foreign corporation (CFC) rules may apply to Italian resident persons controlling non-resident companies, partnerships or other entities that meet the following two conditions: (i) are subject to a foreign effective tax rate lower than 50% of the effective tax rate they would have suffered if resident in Italy and (ii) more than one third of their profits are passive income.
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 as computed according to income tax provisions. 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 changed 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.
The controlled foreign company (CFC) rule was adopted in Austria transposing Art 7 of the Anti-Tax Avoidance Directive (ATAD) and is effective as of January 2019. It leads to attribution of low taxed passive income (from interest, license income, dividends, income derived from sale of shares, income from finance leasing, income from activities of banks and insurance companies) of controlled corporations and permanent establishments to the controlling domestic corporation and shall deter profit shifting to low or no tax countries. The threshold for the so called “low taxation” starts at a tax rate of not higher than 12.5%. Exceptions exist for foreign entities with significant economic activity in terms of personnel, equipment, assets and premises. As CFC rule contains many uncertainties an implementing regulation was enacted by the Ministry of Finance.
Austria used to have a switch over regime in the past, which only concerned the distribution of dividends. Under this regime dividends were excluded from the international participation exemption on dividends stemming from low taxed passive income but rather were subject to a foreign tax credit. This regime was independent 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. However, as regards the proposed interest limitation rule by the ATAD Austria applied among some other Member States for the postponed implementation as of 1 January 2024. The EU Commission considered the existing Austrian interest limitation rule as not equally effective. Consequently, the introduced interest limitation rule in the ATAD should have been transposed into national law by 31 December 2018. In July 2019 the EU Commission formally launched an infringement procedure against Austria in this respect.
Under case law of the Austrian Supreme Administrative Court debt financing has to be made at arm's length both in form and substance. In the past, the Supreme Administrative Court's case law also required sufficient equity capitalisation.
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 January 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 competent local tax office regarding 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 State 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.
A CFC regime, Thin Cap regime and transfer pricing regime are all stipulated in Japanese tax laws. It is possible to obtain an advance pricing agreement (“APA”).
To summarize briefly, Japanese CFC rules apply if: (i) Japanese resident individuals and Japanese corporations collectively hold, directly or indirectly, more than 50% of the total shares; (ii) a particular Japanese resident individual or a Japanese corporation (which is the subject taxpayer) holds, directly or indirectly, 10% or more of the total shares; and (iii) the rate of tax burden of that foreign corporation in a given fiscal year is less than (a) 30% for certain shell-company controlled foreign companies (“CFCs”) and cash-box-company CFCs, or (b) 20% for all other CFCs.
Even if all the conditions mentioned above are met, there is still an exemption for active business. The requirements for meeting such exemption are all four of the following: (a) the principal business of the CFC is other than financial investments in shares, bonds or IPs or leasing of vessels; (b) the CFC maintains physical fixed premises such as offices and factories within the jurisdiction of its incorporation that is necessary to do its business; (c) the CFC is managed and administered on its own within the jurisdiction of its incorporation, rather than from Japan; and (d) depending on the type of business, the CFC conducts 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. If all these requirements are satisfied, the CFC’s income to be aggregated with the Japanese shareholder’s income will be limited to passive income, such as dividends, capital gains from shares, interest on deposits, bonds and loans, royalties and disposition gains from IPs, etc.
B. Thin Cap Regime
Thin capitalization rules apply if the debt giving rise to the interest is owed to a foreign corporation, which is a controlling shareholder (directly or indirectly owning 50% or more of the total shares) of the Japanese corporation, and in general, 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 in the case of direct financing by the controlling shareholder as well as in other similar cases, such as financing by third parties with a guarantee provided by the controlling shareholder.
C. Transfer Pricing Regime
A transfer pricing regime is stipulated in Japanese law and the transfer pricing guidelines have been published by the NTA. The tax authority has enforced these provisions mainly against large international companies, and the amount of taxation is sometime over 10 billion Japanese yen. The transfer pricing regime in Japan closely follows the latest OECD transfer pricing guidelines, for example, introducing documentation rules, DCF methods for calculation of arm’s length price and the commensurate with income rule for hard to value intangibles.
Taxpayers may request the tax authority to issue an APA, although it takes a substantial amount of time (one to two years), cost and burden to negotiate with the tax authority to obtain an APA. There are two types of APA which may be issued; namely, a unilateral APA (an APA only with the Japanese tax authority) and a bilateral APA (an APA between the Japanese tax authority and a foreign tax authority). The APA has effect for three to five years and the taxpayer may renew a previous APA.
There is currently no legislation concerning the thin capitalisation ratio specifically but, in practice, the tax administration uses a debt-to-equity ratio of 85:15 for the intra-group financing of participations. In case a taxpayer fails to comply with this ratio, the surplus of interest may be requalified as a hidden dividend distribution. Such requalification would result in a lack of deductibility for those payments and possible application of a 15% withholding tax (subject to applicable tax treaty or participation exemption if applicable). Back-to-back financing is not subject to the abovementioned ratio.
Luxembourg transfer pricing rules are embedded in the revised Article 56 and 56bis LITL, which incorporate the concept of the arm’s length principle based on Article 9 OECD MC. The amended provision, however, goes further and reflects the spirit set out in the BEPS Actions 8–10 such as the concept of comparability analysis and a general anti abuse rule that allows the disregarding of a transaction that has been made without any valid commercial or business justification.
On 27 December 2016, the Luxembourg tax authorities issued the Circular n° 56/1-56bis/1 which has reshaped the transfer pricing framework for companies carrying out intra-group financing activities in Luxembourg. The Circular provided additional guidance in terms of substance and transfer pricing requirements in line with the OECD Guidelines. In particular, it provided substantial details on how to conduct the comparability and functional analyses in a way consistent with the OECD principles. Furthermore, the Circular requires the performance of a comprehensive risk analysis in order to determine the adequate level of equity capital.
CFC rules have been introduced into Luxembourg law as of January 2019 upon the implementation of the Council Directive (EU) 2016/1164 (“ATAD 1”).
In anticipation of the introduction of the thin capitalisation rules (“TCR”), Section 140A(4) of the ITA was introduced on 1 January 2009, although the subsequent implementation of the TCR never took place. This provision has since been repealed effective from 2018.
During the announcement of the 2018 Budget, the Malaysian government stated that in lieu of the TCR, and in line with the Base Erosion and Profit Shifting (“BEPS”) Action Plan: Action 4, a new set of rules known as the Earning Stripping Rules (“ESR”) to restrict the deduction of interest expenses and other payments by entities is expected to be introduced instead. The ESR took effect from 1 January 2019.
Under the ITA, a taxpayer could make an application under Section 138B for an advance ruling in respect of arrangements that are seriously contemplated by the taxpayer.
Concerning CFC rules, the Income Tax Law establishes that Mexican tax residents and foreign residents with a permanent establishment in Mexico could be deemed to receive income from jurisdictions considered as preferential tax regimes whenever: (i) income deriving therefrom is not subject to taxation in the relevant jurisdiction; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is less than 75 per cent of the income tax that would have been levied in Mexico for such an operation.
To this regard, Mexican tax residents or foreign residents with a permanent establishment within national territory could be required to pay income tax in terms of Title VI of the Income Tax Law (Preferential tax regimes and multinationals) on income received through foreign legal entities in which they participate, directly or indirectly (in proportion to their participation therein), as well as on income received by means of foreign legal entities deemed as tax transparent.
In general terms, taxpayers that receive income considered as subject to a preferential tax regime are required to keep specific accounting records concerning each of the legal entities through which they perceive income, and to pay the related income tax separating it from the rest of their accruable income.
Additionally, thin capitalisation rules ought to be abided in terms of the applicable Mexican tax laws. The allowed debt-to-equity ratio for Mexican resident legal entities is of 3 to 1. In general terms, interests due on contracted debt that exceed by threefold the company’s net worth would be deemed as non-deductible for income tax purposes.
Nonetheless, the Tax Administration Service could authorise a higher debt-to-net equity ratio for legal entities considered as part of specific industries, such as the financial system or other national strategic sectors.
Furthermore, it is of paramount importance to point out that Mexico, as part of the G20, has been actively participating in the development and implementation of OECD guidelines in several subjects including CFC and thin capitalisation rules, to the extent of amending the local set of laws. Therefore, more stringent requirements have gradually been incorporated to the Mexican tax system.
The Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. Accordingly, transactions between related parties are required to comply with the arm’s-length principle.
Moreover, concerning transactions between a Mexican tax resident and a non-related foreign tax resident, the first would be required to determine its accruable income and authorised deductions bearing in mind that the price and compensation for the relevant transaction should be equal to that which would have been paid to an independent party (arm’s-length principle).
It is worth mentioning that in terms of the applicable Mexican laws, it is possible to obtain an advanced pricing agreement. Nevertheless, the issuance of the corresponding resolution could take from two to three years. Generally speaking, resolutions issued by Mexican authorities with respect to advanced pricing agreements could be valid and enforceable during the tax year in which the corresponding application is filed, for the previous tax year, and up to the subsequent three tax years. Nonetheless, advanced pricing agreements could be valid for a longer period in case they resulted from an amicable procedure in terms of an international treaty subscribed by Mexico.
The Netherlands does not have thin cap rules.
In March 2019, an internet consultation was held by the Dutch government for a proposal to introduce thin cap rules for banks and insurance companies. The (final) legislative proposal is expected to be published in Q3 or Q4 2019, with effective date January 1, 2020.
Effective January 1, 2019, the Netherlands has implemented CFC rules based on the 'Model A' CFC rules of the EU Anti-Tax Avoidance Directive. Pursuant to the EU Anti-Tax Avoidance Directive all EU Member States must introduce, inter alia, CFC rules in their corporate income tax. The Netherlands has only implemented the Model A CFC rules (which include certain types of passive income in the Dutch taxable base) for controlled companies (or permanent establishments) in low tax jurisdictions that do not perform 'significant economic activities'. A CFC is considered to perform significant economic activities if it meets the Dutch substance requirements (most notably that it meets the wage sum criterion and the office space criterion).
The list of low tax jurisdictions is reviewed and/or revised annually and is based on the EU list of non-cooperative jurisdictions and on the statutory corporate income tax rate of a jurisdiction (if less than 9%, a jurisdiction is a low tax jurisdiction).
For 2019, the low tax jurisdictions are:
- American Samoa
- American Virgin Islands
- British Virgin Islands
- Isle of Man
- Cayman Islands
- Saudi Arabia
- Trinidad and Tobago
- Turks and Caicos Islands
- United Arab Emirates
The Netherlands has a long history of giving taxpayers certainty in advance in the form of advance tax rulings (ATRs) and advance pricing agreements (APAs). As of July 1, 2019, the Dutch ruling practice has been renewed. Where in the past meeting a certain number of substance requirements was enough to obtain an ATR or an APA, it is now necessary to have more activities in the Netherlands. Nevertheless, it is still possible to obtain an APA for (envisaged) transactions. It is also possible to obtain bilateral and/or multilateral APAs.
The Peruvian tax laws provide for CFC, thin cap and transfer pricing regimes, and it is possible to enter into advance pricing agreements with SUNAT, as explained below:
- CFC rules:
The Income Tax Law provides that the passive income obtained by persons resident in Peru using a controlled foreign entity are deemed to be allocated to those persons at the end of the fiscal year of their accrual. For these purposes, a controlled foreign entity is any entity resident of countries or territories of low or null taxation, or of non-cooperative jurisdictions, or that are levied with a tax rate which is less than 75% of the tax rate applicable in Peru on the same income, so long as a person or persons resident in Peru have a participation of, at least, 50% on their profits.
- Thin cap rules:
In 2019 and 2020, interest expenses incurred by entities resident in Peru will be deductible so long as a 3:1 debt/equity ratio is met. Note that not only financings among related parties (or with foreign counterparties) are comprised under the scope of this rule, but also financings with unrelated parties, even financial institutions. The rule admits exceptions to its application, as, for instance, (i) the case of interest from notes issued via a public offering under the provisions of the Securities Market Act in the Peruvian market, so long as there are, at least, 5 bondholders, (ii) interest from financings to entities the net revenues of which are less than 2,500 Tax Units (each Tax Unit equals PEN 4,200 in 2019), (iii) interests from financings granted to financial institutions and insurance companies, (iv) interest from financings to companies developing public infrastructure o utilities projects, etc.
From 2021 onwards, interest expenses from any type of financing will be deductible up to a limit equal to 30% of the EBITDA. Interest in excess of this limit could be carried forward for up to four additional years. The rule admits the same exceptions described in the immediately preceding paragraph.
- Transfer pricing rules and advance pricing agreements:
Any transaction carried out between related parties or with parties resident of countries or territories of low or null taxation, or of non-cooperative jurisdictions must be carried out at arm’s length conditions. SUNAT is entitled to challenge the value of those transactions and to adjust that accordingly, in case of noncompliance with the arm’s length principle. Peruvian transfer pricing rules follow, in essence, the OECD guidelines and recognize those as source for their interpretation.
Advance pricing agreements can be entered into with SUNAT, with effect in the year of their subscription and three additional tax years.
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.
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.
As regards CFC rules, it should be stressed out is the introduction of CFC rules to the Polish tax system revolutionized international tax planning. The Polish legislator’s aim was to tax income derived by Polish tax residents from foreign companies when such income is not taxed in the company’s country of residence or the tax is too low (lower than 14.25 per cent).
From 2018, the Polish legislator introduced the effective tax rate instead of a nominal rate. This means that a subsidiary company will be considered as CFC, when the income tax actually paid by the company is lower than the tax that it would pay in Poland. Under new provisions, an additional income tax (19 per cent) is imposed on shareholders holding at least a 50 per cent (25 per cent until 2017) direct or indirect holding in entities deriving their revenues mainly (more than 33 per cent) from passive income (i.e., dividends, interests, royalties, share disposals).
CFC rules also affect taxpayers who are shareholders of entities that have a seat or place of management in a tax haven. Polish taxpayers who own CFCs will also need to keep a register of qualifying foreign entities and a record of transactions occurring in the foreign entities, and file a special annual return in Poland.
Starting from 2019 the list of entities recognized as CFC are extended. Namely, trusts, family foundations and other entities with a trust character are treated as CFC.
Thin Cap regime
As of January 1, 2018, thin cap rules according to the ATAD Directive - interest limitation to 30 percent of EBITDA (deductibility of debt financing cost surplus over interest income – i.e. net value of debt financing up to 30 percent of "EBITDA").
Net debt value limit up to which no interest deductibility rules restrictions apply amounts to 3 mln zlotys.
Transfer pricing regime
The Polish transfer pricing rules generally follow the OECD guidelines. From 1 January 2019 transfer pricing documentation are generally not applicable to domestic transactions (with certain exceptions). Transfer pricing documentation must be prepared for related party transactions exceeding the following thresholds in a tax year:
a. 10 million zlotys in case of transactions on goods and financial transactions;
b. 2 million zlotys in case of service and other transactions;
c. 100,000 zlotys in case of transactions with entities located in a country that engages in harmful tax practices.
Master File documentation that contains additional information about the whole related party group should be prepared by the taxpayers subject to full or proportional consolidation whose consolidated revenues exceed 20 mln zlotys.
Additionally, the biggest Polish capital group whose consolidated revenues exceeded the equivalent of EUR 750 mln are obliged to provide to the Head of the National Revenue Administration country-by-country reporting.
Advance pricing agreement
Advance pricing agreement (APA) was introduced into the Polish tax system from 1 January 2006 and is not applied to be fully in line with OECD guidelines. From the Polish taxpayer’s perspective, APA is rather a tool to reduce the risk that tax authorities would challenge pricing or cost distribution rather than an instrument to jointly develop terms of pricing or cost split between related parties.
The Polish tax law foresees the possibility of entering into unilateral, bilateral or multilateral APA.
The APA decision may concern:
a. the comparability of material conditions determined between related parties with the conditions that would have been determined by independent entities;
b. the correctness of the used pricing method choice;
c. the comparability of material conditions determined in a cost distribution agreement concluded between related parties with the conditions that would have been determined by independent entities.
The APA decision may be issued for no longer than five years, which may be renewed for subsequent periods, albeit no longer than five years, upon the request of a domestic entity filed no later than six months before the lapse of the previous period of validity.
APA is deemed to be an expensive tool for the taxpayers. The statutory fee for receiving APA is rather high and amounts up to 200,000 zlotys.
Because of a lot of criticism regarding APA’s functioning in Poland (i.e. high costs, the compilation of appropriate documentation, the way of the procedure’s conducting), the Polish legislator presents new draft tax regulations that offer taxpayers a simplified unilateral procedure for obtaining APA and that would implement an EU directive on tax dispute resolution mechanisms.
The main benefit of the simplification is a decrease in the documentation required for filing an APA for specific transactions that are considered to have a low risk of eroding the tax base in Poland. Additionally, the administrative fees due for filing the application under the simplified procedure is likely to be lower than under the currently binding procedure. Simplified APA can cover maximum 3-year period and can be prolonged, each time for a maximum of 3 years.
Yes. Both the Personal Income Tax Code and the Personal Income Tax Code include CFC rules. Generally, any profits or income obtained by non-resident entities that are clearly subject to a more favorable tax regime, are imputed to the Portuguese resident taxpayers that hold either direct or indirectly, even if through a representative, fiduciary or intermediary, at least 25% of their share capital, voting rights or attribution rights over the income or the assets of those non-resident entities.
In what regards thin capitalization, the Corporate Income Tax Code used to have a rule preventing excessive debt between entities with special relations. Such rule was revoked in 2013 and was replaced by an earning stripping rule which limits the deductibility of net financial expenses to the higher of the following: (i) € 1,000,000; or (ii) 30% of EBITDA.
With respect to transfer pricing, it should be noted that Portugal has implemented since 2002 detailed transfer pricing legislation that broadly follows the guidelines of the OECD.
The Portuguese legislation follows the Organization for Economic Co-operation and Development's guidelines in respect of the taxpayers' ability to request the tax authorities to enter into unilateral, bilateral or multilateral APAs. Bilateral or multilateral APAs can only be concluded with countries with which Portugal has entered into a double tax treaty.
Under the Portuguese transfer pricing regime, when the Portuguese tax authorities make a transfer pricing adjustment for one party to the transaction, a symmetric adjustment must be made at the level of the other party. This is relevant for transactions between Portuguese resident related parties.
Please note that such provisions are in accordance with the ATAD and were amended in May 2019.
There are provisions in the Income Tax Act, 1962 that regulate the CFC, thin capitalisation and transfer pricing regimes in South Africa.
A CFC for South African tax purposes is a foreign company in which more than 50% of the participation rights or voting rights in that company are held directly or indirectly by South African tax residents. Section 9D contains the CFC provisions, which aim to prevent South African taxpayers from locating companies in low-tax jurisdictions to avoid paying tax in South Africa. The CFC rules are anti-avoidance provisions targeted primarily at certain types of passive income and also certain other income derived by foreign companies with shareholders that are resident in South Africa.
South Africa's thin capitalization and transfer pricing regimes are regulated by section 31 of the Income Tax Act, 1962. Section 31is a self-regulating provision where tax payers are required to adjust their taxable income to reflect arm's length amounts, if transitions are entered into with "connected persons" that are resident outside South Africa and the terms and conditions of the transaction are not at arm's length. South Africa uses the OECD's "arm's length principle" as the benchmark for purposes of regulating transfer pricing in South Africa.
For example, if the terms and conditions pertaining to a loan (i.e. thin capitalisation) or the interest charged of that loan (i.e. transfer pricing) from a foreign "connected person" are not in accordance with the terms and conditions that would be agreed between a lender and borrower transacting at arm’s-length, and the differences results in a South African tax benefit, the taxpayer is required to calculate its taxable income by determining what the arm’s length terms and conditions of the transaction and disregarding the excessive portion, which will be treated as a dividend in specie declared and paid by the local borrower for dividend tax purposes.
SARS also issued practical guidance on transfer pricing, which is based on the OECD Guidelines. This guidance is not binding and does not constitute law - it merely sets out the interpretation by SARS of the transfer pricing rules.
There is currently no advance pricing agreement program in South Africa and SARS advanced tax ruling regime does not permit advanced rulings for transfer pricing.
Controlled Foreign Corporations (hereinafter, CFCs) legislation applies to all resident taxable entities holding a participation in foreign entities located in low-tax jurisdictions other than EU and EEA Member States and whose income is passive income or, despite the nature of its income, the subsidiary does not have any substance, as defined in the law.
For CFC rule to be applicable, the following requirements should be met:
a) The Spanish entity, together with other related parties, should have at least 50% participation in the foreign company;
b) The foreign participated entity does not have any substance or the subsidiary income is passive as defined in the law; and
c) The income tax paid by the entity is lower than 75% of the tax payable in Spain.
When CFC rule applies, the Spanish taxpayer owning the foreign subsidiary should allocate (transparent) the latter’s income in the proportion the taxpayer participates in the subsidiary.
CFC rule does not apply when: (i) the foreign subsidiary is tax resident in an UE Member State and (ii) it is demonstrated that the foreign entity was incorporated for sound business reasons.
Last October, the Government announced a draft of law that will modify the CFC rule in order to implement CFC rule provided by ATAD.
There is not a per se a thin cap rule but, as described above a stripping interest rule, thus, after 2012 the Corporate Income Tax Law was amended introducing two main limitations to financial cost deductibility:
- Firstly, as a general anti-avoidance, rule interest paid to a group entity incurred in order to acquire shares or increase equity interests in other group members is wholly non-deductible (tainted financial expenses), unless the operation might pass a test business purpose.
- Secondly, remaining net finance cost (this is the net amount of financial income and cost, excluding the above mentioned tainted financial expenses) is deductible up to an amount equal to 30% of the operating profit
Advance pricing agreement (APA)
The transfer pricing regulations provides the possibility of getting an advance pricing agreement (APA).
These agreements have advantages both for taxpayers (they have the legal certainty that the valuation of their operations will not be subject to modification by the Tax Administration in a subsequent verification of the settlements) and for the Administration itself (avoiding the complexity of verifying the market value of these operations after they have been carried out).
APAs may be unilateral (when there is an agreement between the taxpayer and the Spanish Administration) or bilateral (when an agreement is reached with other countries’ Administrations, linking both related companies resident in different States and their Administrations).
In order to start this procedure, taxpayers who wish to close an APA with the Tax Administration should initiate it by a formal proposal, identifying the persons or entities that will carry out the transactions and describing the transactions and the basic elements of the valuation proposal that are the subject of the agreement. The application must be accompanied by the specific documentation of the group to which the taxpayer belongs, as well as the specific documentation of the taxpayer.
The APA must be set out in a document that includes: the place and date of its formalization, the identification of the taxpayers to whom the proposal refers, the taxpayers’ conformity with the content of the agreement, the description of the operations to which the proposal refers, the essential elements of the valuation method, the tax periods to which the agreement will be applicable and its date of entry into force and the critical assumptions whose existence determines the applicability of the agreement under the terms contained therein.
According to Section 25(4) of the Royal Decree 634/2015 of 10 July, the procedure derived from the formulated proposal must be completed within six months from the date on which the application has been entered in any of the registers of the competent administrative body for its resolution.
Once the six-month period has elapsed without the Administration having expressly settled the procedure, it is understood that the proposal has been rejected, however usually closing and APA takes longer than six months and APA can be approved after this dealine.
These agreements can be unilateral with the Spanish Administration or bilateral, between the Spanish Administration and a foreign one.
The APA shall take effect in respect of operations carried out after the date on which it is approved, and shall be valid for the tax periods specified in the agreement itself, but may not exceed 4 tax periods following the date on which it is approved. However, the APA can be also applied to operations of previous tax periods provided that the right of the Administration to determine the tax debt by means of the appropriate liquidation had not expired.
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 withlittle or no local substance in Switzerland but are effectively managed from Switzerland can 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
Switzerland does not have transfer pricing regulations in its domestic law. As a general rule, Swiss law states that (i) the expenses of a company must be commercially justified and (ii) the 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 made 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. These publications provide 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 advanced 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 to be negotiated with the involvement of the FTA.
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 the US 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). The IRS and Treasury are considering an exception to GILTI for income subject to a local country tax rate of at least 90% of the US corporate rate. 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 taxpayer 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.
Yes, Thin Capitalisation limit on interest deductions exceeding 30% of EBITDA has been introduced effective 1st January 2019. Our law requires that the transaction is undertaken at an arm’s length rate by reference to :
- the appropriate level or extent of the issuing company’s overall indebtedness;
- whether the amount issued would have been provided as a loan on an arm’s length basis; and
- the rate of interest and other terms that would apply to such an arm’s length loan
Yes, Zambia has the Income Tax (Transfer Pricing) (Amendment) Regulations No. 24 of 2018
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 capitalisation 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 TIOPA 2010. The UK TP regime must be considered in light of the 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 demonstrated in, for example, 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.
Belgium does not have a CFC regime for corporate entities.
A CFC rule exists for individuals, under which they may be taxed on the income gathered by their holdings (certain foreign taxed entities or legal constructions that are subject to low income tax).
The Belgian government has reached an agreement on 26 July 2017 on a large tax reform ("July Agreement"). In the said agreement, it is reiterated that a CFC-regime will be introduced in compliance with the Anti-Tax Avoidance Directive 2016/1164 ("ATAD Directive").
Belgium has two thin capitalization rules.
A 1:1 debt/equity ratio applies to interest payments made on loans granted by individual directors, shareholders, and non-resident corporate directors. Interest payments will be requalified as non-deductible dividends to the extent that the total debt exceeds the said ratio.
A 5:1 debt/equity ratio applies to loans under which the beneficial owner of the interest income is (i) a group company or (ii) a company not subject to income taxation or subject to a tax regime that is substantially more advantageous than the Belgian tax regime. Loans granted by Belgian or EEA financial institutions are not considered as debt for thin cap purposes. Equity is defined as the sum of (i) the taxed reserves at the beginning of the taxable period and (ii) the fiscal paid-up capital at the end of the taxable period. Interest payments on such loans in excess of the said ratio, is treated as a non-deductible expense.
Belgium generally follows the OECD transfer pricing guidelines. The arm's length principle therefore constitutes a basic transfer pricing principle in Belgium. Advance pricing agreements (whether unilateral, bilateral or multilateral) may be obtained. Clear guidelines to obtain such agreements are made available by the tax authority.
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.
In addition, there are no advance pricing agreement for transfer pricing matters. There is an initiative of establishing such agreements but had not been validated by the Panama Tax Authority.