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 (2nd Edition)
The Romanian legislation does not include a CFC regime, yet. However, it is expected to be implemented soon, further to the transposition of the Anti-Tax Avoidance Directive (“ATAD”) into local law. On the other hand, Romania tax legislation provides for a Thin Cap regime, which limits the deductibility of inter-group loans, under certain conditions. Also, in this case, it is important to note the relevance of ATAD, which provides for a new Thin Cap regime to be considered for EU countries. The implementation of ATAD and impact on the current Thin Cap rules should be monitored, including any grandfathering of the existing provisions.
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.
Australia’s income tax law includes controlled foreign company (CFC), thin capitalisation and transfer pricing regimes.
Very broadly, under Australia’s CFC regime, an Australian resident can be subject to tax in Australia on its share of certain types of income, as and when earned by a controlled foreign entity, by way of attribution.
Generally, a foreign company will be a controlled foreign entity if, in aggregate, 5 or fewer Australian entities, either directly or indirectly through associates, hold 50% or more of the interests in the company. A foreign company may also be a controlled foreign entity if an Australian entity holds 40% or more of the interests in the company.
The types of income which will be subject to attribution depend on where the controlled foreign entity is resident and whether it carries on an active business.
Despite its name, Australia’s CFC regime can also apply to controlled foreign trusts and partnerships.
Australia’s thin capitalisation regime can operate to disallow debt deductions where an entity is considered to be thinly capitalised.
Broadly, entities which are not authorised deposit taking institutions (ADIs) under Australian law are considered to be thinly capitalised if their level of debt exceeds their “maximum allowable debt”. Entities which are ADIs are considered thinly capitalised if they have less capital than the prescribed minimum capital amount.
The maximum debt an entity will be permitted to claim interest deductions on depends on whether the entity is characterised as an “outward investing entity” or an “inward investing entity”, whether the entity is a “general” investor or a “financial” investor and whether or not it is an ADI. The characterisation of the entity determines the safe harbor which applies and whether the entity is entitled to calculate and apply as its “maximum allowable debt” its “arm’s length debt amount” or “worldwide gearing debt amount” (for non-ADIs) or a minimum capital amount equal to its “arm’s length capital amount” or “worldwide capital amount” (for ADIs).
The safe harbor for non-ADI general investors is broadly equivalent to a debt to equity ratio of 1.5:1. Non-ADI financial investors are entitled to a safe harbor debt amount broadly equivalent to a debt to equity ratio of 15:1, although in some cases this may be reduced to 1.5:1. ADI investors are entitled to a safe harbor minimum capital amount that is broadly equivalent to 6% of assets.
Australia operates a complex transfer pricing regime which has recently undergone significant reform. Depending on the transaction in question, up to three different transfer pricing regimes may apply to the transaction:
- Former Division 13 of the ITAA36, which applies to income years which commenced before 29 June 2013;
- Subdivision 815-A of the ITAA97, which was introduced with retrospective effect to apply to income years commencing between 1 July 2004 and 28 June 2013 (inclusive). However, subdivision 815-A only applies to cross border transactions between Australia and a country with which Australia has a double tax agreement; and
- Subdivisions 815-B and 815-C of the ITAA97, which apply to income years commencing on or after 29 June 2013.
Unlike Division 13, Subdivisions 815-A, 815-B and 815-C explicitly require that the provisions be applied in a way which best achieves consistency with OECD transfer pricing guidance.
At the date of writing, the only case to have considered the substantive operation of Division 13 and Subdivision 815-A was Chevron Australia (Chevron Australia Holdings Pty Ltd v Commissioner of Taxation  FCAFC 62 (single judge of the Federal Court) and Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4)  FCA 1092 (Full Federal Court)). Subdivisions 815-B and 815-C have not yet been tested in Court.
Advance pricing agreements (APAs)
The ATO operates an advance pricing arrangements program. Whilst taxpayers can approach the ATO to request an APA, entry into the APA program is by formal invitation from the ATO.
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, 1.67% in the course of 2017). 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 2018);
- '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 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.
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.
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 is still not precise CFC regime.
Under the “thin capitalisation” rules, if the debt-to-equity ratio of the company exceeds 3:1, (some of) the interest expenses may not be tax deductible in the current year.
Bulgarian transfer pricing rules conform with the OECD standards. For the moment it is not possible to obtain an advance pricing agreement.
The United States operates a CFC regime. Generally, a foreign corporation is a CFC if more than 50 percent of its value or voting power is held by one (or more) 10 percent voting U.S. shareholders. Under the Subpart F rules, certain income (including, in part, certain related party income, certain passive income, and certain oil and gas income) of a CFC is includible in its U.S. parent’s taxable income. In addition, a CFC’s investment in United States property is generally taxable to its 10 percent U.S. shareholders.
The United States also has thin capitalization rules under Section 163(j) of the tax code that apply to U.S. companies and foreign companies engaged in a U.S. trade or business. Generally, if a company has a debt-to-equity ratio that exceeds 1.5 to 1, part of any interest paid to a related party that is not subject to U.S. tax may be not be deductible.
Under regulations published on October 13, 2016, debt between certain related companies issued after January 1, 2018, must meet new documentation rules effective January 1, 2019 or the debt will be presumed to be equity; however, the U.S. Treasury Department announced in 2017 that such regulations are currently pending review and will be modified or repealed. The rules as currently drafted do not apply to foreign issuers of debt. In addition, in certain instances under such rules debt instruments between related companies are automatically treated as equity.
The United States has detailed and comprehensive rules governing transfer pricing in Section 482 of the tax code and the regulations promulgated thereunder. Taxpayers may obtain a unilateral, bilateral or multilateral APA.
There are no CFC rules in Ukraine, but significant development of local legislation in this area is expected in the process of implementation of some initiatives from the Base Erosion and Profit Shifting (BEPS) Action Plan in the coming years. According to the Implementation Guidance Action Plan on BEPS, the CFC rules are not included in the minimum standards of its implementation.
As for Thin Cap regime, in the majority of developed countries, the debt-to-equity ratio should not exceed 3:1; however, in Ukraine, this ratio is 3.5:1 (10:1 – for financial institutions). In case the amount of dept received from the related party(s) exceeds the equity of the borrower by more than 3.5 times, then the borrower can deduct the interest payments as expenses by an amount that does not exceed 50% of the financial profit (before tax), financial expenses, and depreciation charges of the borrower (EBITDA). If amount of debt does not exceed the above mentioned ratio, the borrower can deduct the full amount of interest payment.
Transfer pricing rules were introduced in 2013, and since that time have been constantly changing. Transactions with affiliated non-residents, the sale of goods through non-resident agents, as well as transactions with non-residents from countries listed by the Cabinet of Ministers of Ukraine, should be deemed as controlled. However, according to the changes from 2017, the Tax Code of Ukraine foresees that if the taxpayer’s annual revenue does not exceed UAH 150 million and/or the volume of transactions with each counterparty does not exceed UAH 10 million, those transactions shall not be recognized as controlled.
The transfer pricing rules provide five permissible transfer pricing methods: the comparable uncontrolled price method, the resale price method, the cost-plus method, the transactional net margin method, and the profit-split method. Special regulations are anticipated for cross-border sales of goods, which are traded on a commodity exchange, with residents in the jurisdictions included in the Cabinet of Ministers of Ukraine list.
Taxpayers are required to submit a report of controlled transactions by the 1st of October and other transfer pricing documentation within one month of a request by the tax authorities.
Also, it is possible for great taxpayers to obtain an advance pricing agreement (APA) in Ukraine.
In order to determine feasibility of the APA conclusion and ensure proper preparation of the required documents and information, taxpayers have the right to submit an early engagement request to the State Fiscal Service of Ukraine. The State Fiscal Service of Ukraine shall review the request and respond to the taxpayer within 60 calendar days regarding the feasibility of submitting an APA application.
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.
There is no CFC regime. However, the SRI contests income tax deferral by applying the concept of economic substance to determine whether an entity exists exclusively for tax purposes. Ecuador tax system includes a definition of phantom and non- existing entities. Cost and expenses charged by these type of entities are considered nondeductible.
Ecuador does have a transfer pricing regime which requires tax payers to report transactions with related parties on a transfer pricing annex if they exceed $3MM in a fiscal year. Related party transactions in excess of $15MM a year, are required to be reported in a transfer pricing complete report. Advance pricing agreements are available with a validity of 3 years.
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.
a. CFC regime
Switzerland does not operate a CFC regime. However, according to the case-law of the Federal Supreme Court, profits of companies formally domiciled abroad with little or no local substance that are effectively managed in Switzerland may be subject to Swiss income tax.
b. Thin Cap regime
Swiss federal and cantonal income tax rules provide for thin capitalisation safe harbour rules (or, more precisely, a maximum debt rule per asset class) as follows:
Accounts receivable 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%
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 amounts of 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. As a consequence, 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 the 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 which 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 haven 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.
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.
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 tax authorities usually make reference to the OECD Transfer Pricing 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.
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.
In what regards 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.
Kenya does not have a “controlled foreign companies” regime but has a thin capitalisation regime in place. The thin capitalisation rules limit the deductibility of loan interest payments to the extent that the highest amount of loans held by the company at any time during the year of income exceeds three times the sum of the revenue reserves and the issued and paid up capital of all classes of shares of the company (3:1 debt to equity ratio). The thin capitalisation rules only apply where the company is in control of a non-resident entity alone or together with four or fewer other persons and where the company is not a bank or a financial institution licensed under the Banking Act.
Kenya has a transfer pricing regime based on the Income Tax Act and Transfer Pricing (Income Tax) Rules of 2006 which are modelled on the OECD Transfer Pricing Guidelines. The Commissioner can adjust prices in cross-border transactions involving related parties to reflect an arm’s-length price. However, even though Kenya has a transfer pricing regime, it is not currently possible under the law to obtain an advance pricing agreement with the Kenya Revenue Authority.
Polish law includes detailed regulations with respect to CFCs. Polish shareholders are obliged to pay a standard 19% tax in Poland on the income derived by a CFC and file the relevant annual return for such a company. A CFC is defined as a company in which the Polish taxpayer holds at least 25% of the shares for at least 30 days, in case at least 50% of the revenue of this company was generated from passive income and is taxed in the country of residence of the CFC at a rate lower by 25% than the Polish CIT rate (19%). CFCs are also companies located in countries treated as tax havens, or in countries which do not exchange tax information with Poland.
Polish thin capitalization rules limit the deduction of interest paid on loans granted by an entity directly or indirectly holding at least 25% of the shares, or by a company which has a common direct or indirect 25% shareholder with the borrower. Interest on these loans is not recognized as a tax deductible cost when the debt-to-equity ratio exceeds 1:1 in the portion in which the loan exceeds this ratio. It should be noted that Polish law also stipulates an alternative method for the deduction of interest on loans. In general, this method provides that interest and expenses arising from all loans (whether granted by related or non-related parties) are tax deductible based on the value of any tax assets and, as a rule, cannot exceed 50% of the operating profit (except for financial institutions). Thin capitalization rules do not apply, should the taxpayer choose the alternative method.
There is a transfer pricing regulation included in Polish law which states that the conditions at which transactions between related parties are executed can be challenged by the tax authorities if they do not meet the arm's length principle or lead to an understatement of income tax. Transfer pricing rules also impose the obligation to prepare specific and detailed transfer pricing documentation for transactions with related parties on taxpayers.
It is possible to obtain an advance pricing agreement from the Head of the National Tax Administration. However, proceedings connected with the APA is time-consuming (they can last from between six to 18 months in the case of the need to involve foreign tax authorities), and are also burdensome.
Yes for all.
(1) 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 will apply 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. 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 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 becuse it is a holding company.
(2) 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.
(3) 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 recently 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. 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.
Currently there is no explicit CFC or Thin Cap regime applicable in the Netherlands. However, the Netherlands is obliged to implement the anti-tax avoidance directive packages inspired by the BEPS Project final reports. Therefore, the Netherlands will also implement CFC and Thin Cap rules no later than January 1st, 2019.
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.
In 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 regimes are required to keep specific accounting records concerning each of the legal entities through which they perceive income, and to pay income tax due separating it from the rest of their accruable income.
Additionally, thin capitalisation rules ought to be abided by 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.
CFC rules apply where Norwegian companies or individuals, directly or indirectly, own or control at least 50 % of a company resident in a low-tax jurisdiction. According to the rules, the Norwegian resident shareholders are taxed of their proportionate share of income earned by the company in the low tax country.
The CFC legislation is not applicable to controlled EEA companies that are genuinely established in an EEA country and actually performs economic activities in the EEA (i.e. have sufficient substance). Further, the rules may generally not be applied to companies resident in a country Norway has concluded a Double Tax Treaty, provided that the company’s income is not primarily of a passive nature.
Norway does not have specific thin capitalisation rules, except for the main activities covered by the Petroleum Tax Act. In other situations the Thin Cap issue must be determined on the basis of the general arm’s length principal, laid down in the General Tax Act.
In addition to the general transfer pricing requirements, Norway has adopted rules limiting taxable deductions for interest expenses. Until now the rules have only limited interest deductions for debts within the group. The Ministry of Finance has proposed changes, including that the rules also should cover interests on external debt from 2018.
The tax legislation contains detailed rules related to transfer pricing reporting. Norwegian companies that has had related transactions of a certain level, has a reporting duty in the tax return. Companies with transactions over the reporting level, and that is a part of a larger multinational group, must also file transfer pricing documentation. The more detailed rules are based on the OECD standards for transfer pricing reporting. Country-by-country reporting is also required.
As of yet, there are no formal APA procedures enacted in Norwegian legislation, but APA’s are possible to obtain.
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.