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PKF Worldwide Tax Update | June 2017 | 1

2017

Contents

Austria » Austrian transfer pricing documentation.

Belgium » Is investment in French SCI “real estate” or

“share” for Belgium tax purposes? » Belgium adds EU anti-abuse rule to its tax law.

Bulgaria » Taxation of income from the sale of property

contributed in-kind to an entity’s capital.

Czech Republic » Online registration of sales.

France » Transfer pricing filing obligations.

Germany » New deduction limits for royalty payments.

Ghana » Amendments to the Income Tax Act.

Greece » Various changes to tax legislation.

Hungary » New corporate income tax rate of 9%.

India » Changes to the Cyprus-India double tax

treaty.

Italy » The new Italian Resident Non-Domiciled

regime. » Italian voluntary disclosure bis. » Tax ruling for new investments.

Kenya » Key tax changes.

Malaysia » Income tax (Country-by-Country Reporting)

rules 2016.

Welcome

In this second quarterly issue for 2017, the PKF Worldwide Tax Update newsletter again brings together notable tax changes and amendments from around the world, with each followed by a PKF commentary which provides further insight and information on the matters discussed. PKF is a global network with offices in over 350 locations, and operating in over 150 countries across our 5 regions, and its tax experts specialise in providing high quality tax advisory services to international and domestic organisations in all our markets.

In this issue featured articles include discussions on:

Austrian, Dutch, French and Malaysian transfer pricing and Country-by-Country Reporting (‘CbCR’) obligations;

Ghana and Kenya key tax changes; New deduction limits for interest payments in the UK and for royalty

payments in Germany; A newly introduced Resident Non-Domiciled regime in Italy; A change on loss carried forward rules in the UK.

We trust you find the PKF Worldwide Tax Update for the second quarter of 2017 both informative and interesting and please do contact the PKF tax expert directly (mentioned at the foot of the respective PKF Commentary) should you wish to discuss any tax matter further or, alternatively, please contact any PKF firm (by country) at www.pkf.com/pkf-firms. 2017/18 Worldwide Tax Guide The last PKF worldwide tax guide featured over 120 countries and over 2,500 were ordered – its resounding success is a result of the energy, time and support of individuals and firms of the PKF family – and to all we owe a big thank you. We are extremely grateful to all those that provided country submissions, and of course, to each person who purchased a guide and supported this very marketable and impressive publication. The production of the 2017/18 Worldwide Tax Guide is underway and we look forward to your continued support – an Order Form is provided at the end of this PKF newsletter. Thank you for your continuing support.

http://www.pkf.com/pkf-firms


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Contents continued…

Netherlands » Multilateral convention to implement tax treaty related

measures to prevent BEPS (Action 15). » Country-by-Country Reporting -Postponement of first

notification obligation date. » Secretary of Finance publishes possible measures for

strengthening Dutch substance requirements.

Romania » Specific tax due by taxpayers active in the tourism,

restaurant and catering sector.

South Africa » Foreign exchange voluntary disclosure update.

United Kingdom » Finance Bill 2017 – Changes to the substantial

shareholdings exemption. » Tax deductibility of corporate interest. » Reform of corporation tax relief for carried-forward losses

– draft legislation.

Austria Austrian transfer pricing documentation

Austria has legislated the OECD’s BEPS Action item 13 outcomes into its domestic law and has triggered an era of reform in the field of transfer pricing legislation.

The legal landscape is globally undergoing significant changes regarding transfer pricing documentation requirements. In 2016 Parliament has passed the Transfer Pricing Documentation Act (Verrechnungspreisdokumentationsgesetz) in light of global developments regarding transfer pricing documentation as promoted by the OECD. The main cornerstones of the new law are:

Applicable to tax years starting on or after 1

January 2016;

Austrian legal entities with revenue exceeding 50 million EUR in two consecutive years are required to prepare and submit Master File and Local File documentation for the following year;

Multinational groups with consolidated group

revenue of 750 million EUR during the previous year are required to file a Country-by-Country Reporting (“CbCR”) for the following year;

The filing period is basically the group or entity’s

tax year. The reporting deadlines are as follows: (i) for CbCR: 12 months after the end of the tax year (ii) for Master and Local File: after filing the tax returns, within 30 days upon request of the competent tax office;

The Austrian Ministry of Finance will annually

forward the CbCR to foreign tax authorities within 15 months at the latest after the tax year.

PKF Comment Austrian entities will now have to get their


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documentation, the rules for which were not very formalized until recently, in line with the new standards. One should expect that a number of definitions and details will be anything but crystal clear from the beginning as common and practical understanding will evolve over the years. Hence, the upgrade of the current documentation to the new standards should be a priority in international tax work these days. For further information or advice concerning Austrian transfer pricing documentation or any advice with respect to Austrian taxation, please contact Thomas Ausserlechner at [email protected] or call +43 1 512 87 80.

Belgium Is investment in French SCI “real estate” or “share” for Belgium tax purposes? The so-called société civile immobilière (“SCI”) is a very popular and traditional type of company to own French-based real estate. Hence, also many Belgium tax resident individuals invest in real estate situated in France by incorporating an SCI which in turn holds the real estate. As a general rule, an SCI has legal personality for French company law purposes. However, for French direct tax purposes an SCI is mostly translucide. This particular French tax notion can best be compared with the concept of “tax transparence” implying that the SCI shareholders are taxable in France on their proportional part of the SCI “real estate” income. For that reason, the profit allocation by an SCI to its shareholders does not attract French dividend withholding tax. In the event that a Belgium tax resident is an SCI shareholder, the question thus arises how this Belgium individual is taxed in Belgium on income derived from his SCI shareholding. Without entering into details, a foreign partnership is treated as either a “corporation” or a “look-through” (i.e. tax-transparent entity) for Belgium domestic direct tax purposes depending on whether or not this entity is embedded with legal

personality for foreign company law purposes, and such regardless of the foreign tax treatment. The particularity of this Belgium domestic tax law rule is that the focus is on the foreign “company law” treatment (whereas the OECD strongly advises to focus on the foreign “tax” treatment). Applied to the case of an SCI, since the latter has legal personality following French company law, an SCI should be treated as a “corporation” for Belgium tax purposes. In essence, this means that a Belgium individual is deemed to receive “dividend” income from the SCI which is subject to currently 30% Belgium personal tax. However, as the Belgium individual has already been taxed in France as well (i.e. in his capacity of shareholder of a translucide SCI) double taxation arises. It goes without saying that such double taxation results from the hybrid nature of the SCI, i.e. transparent for French tax purposes and non-transparent for Belgium tax purposes. Obviously, this cannot be tolerated.

On this point, in December 2004 the Belgium Supreme Court ruled that Belgium should align its Belgium direct tax treatment of the SCI with the SCI classification of the partnership for French “tax” purposes, i.e. a look-through in most of the cases. If such is the case and following Belgium-France tax treaty analysis, only France has levying power to tax income derived from the real estate since the latter is located in France. In other words, Belgium should thus not tax any “dividend income” entailing no double taxation should arise. Needless to say that this Belgium Supreme Court case law was highly appreciated by the Belgium tax practice, not in the least since this case law fully adheres to the guiding principles laid down in the 1999 OECD Partnership Report.

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However, on 29 September 2016 the Belgium Supreme Court came to the conclusion that, in that particular case, the SCI investment should be classified as a “share investment”. The court decision is poorly motivated, but in essence the judge did not read in French legislation that this particular SCI had “real estate” characteristics. To be consistent with the Court case decision we reasonably assume that taxation in Belgium can thus only arise “if and when” SCI formally distributes a dividend.

PKF Comment

This recent decision of the Belgium Supreme Court gives rise to a lot of confusion in Belgium about the classification for Belgium tax purposes of an SCI investment. In our view, the actual and specific characteristics of each SCI type of investment will determine whether it concerns a “share” or “real estate” investment. Possibly, the currently ongoing negotiations between Belgium and France about a new tax treaty may clear this matter. Feel free to reach out to Kurt De Haen at [email protected] or call +32 2 460 0960 for further guidance on this subject matter. Belgium adds EU anti-abuse rule to its tax law The EU Anti-Tax Avoidance Directive contains an anti-abuse of tax law rule which is very similar to the one laid down in the EU Parent-Subsidiary Directive. As of 2017, this anti-abuse of law rule has been explicitly added to Belgium tax law as well. In essence, for the purpose of both 0% Belgium withholding tax (applied to outbound dividends) and the Belgium participation exemption (applied to inbound dividends and realized capital gains), the structure should not be “artificial”. A structure is “artificial” if it is not embedded with relevant headcount, office space and/or infrastructure. This rule applies to Belgian in-country cases, to EU cross-border cases and even when non-EU countries are involved. The Belgium tax authorities have the burden of proof, be it that taxpayers are required to “fully cooperate”. Important to note is that the Belgium Finance Minister has already confirmed that holding companies that are “actively and genuinely managed” successfully pass the anti-abuse test

PKF Comment

As the EU anti-abuse rule has been explicitly laid down in Belgium tax law, the local “substance test” will become even more important to successfully implement cross-border business structures. We thus encourage taxpayers to duly and carefully live up to this substance requirement, not in the least taking into account the ongoing international trend of combatting “cross-border aggressive tax planning schemes”. Feel free to reach out to Kurt De Haen at [email protected] or call +32 2 460 0960 for further tax guidance on this subject matter.

Bulgaria

Taxation of income from the sale of property contributed in-kind to an entity’s capital As per the 2017 amendments to the Bulgarian Personal Income Tax Act, the transfer of property that has been contributed in-kind to an entity’s capital leads to a subsequent decrease of the capital and represents income at the level of the individual who has initially contributed that property. The proceeds will be treated as income received as per the date on which the capital decrease of the entity is registered at the Trade Registrar. Until now this type of transaction was not explicitly regulated in the legislation.

If a gain is generated as a result of a sale of shares that were initially received in return for an in-kind contribution to the capital of an entity and subsequently contributed in-kind to the capital of another entity then this gain will be taxable. The

acquisition price in this case represents the price substantiated by documents of the acquired property that has initially been contributed to the capital of the first company.

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PKF Comment

The tax consultancy team of PKF Bulgaria has specific knowledge and expertise to provide assistance at each stage of the Bulgarian tax planning and compliance processes, to both foreign and local individuals. We have successfully advised individuals in various fields of business notably on how to be compliant with the recent rapid changes in the tax legislation. We can assist you with tax consultancy, compliance and transaction matters. For advice concerning Bulgarian tax planning or tax compliance, please contact Venzi Vassilev on [email protected] or call +359 2439 4242.

Czech Republic Online registration of sales

Taxpayers in the Czech Republic (individual entrepreneurs and legal entities who carry out business activities) are obliged to electronically evidence sales derived

from business activities, e.g. when they are made in cash, by credit card, cheque, voucher or in any similar way. Entrepreneurs will get involved in the electronic registration of sales in four phases: • 1 December 2016: accommodation and food

services; • 1 March 2017: retail trade and wholesale; • 1 March 2018: other professions, such as

freelance, transport, agriculture; • 1 June 2018: selected crafts and manufacturing

activities. PKF Comment

A taxpayer who is obliged to register his sales is supposed to report each single transaction in real-time to the Financial Authority and to also issue a receipt to the customer. The receipt should include a so-called Fiscal Identification Code (FIC) generated by the Financial Authority. With this code (FIC) all sales are registered. A violation of the registration of sales can

be fined up to 500,000 CZK. If you would like advice or further information regarding how these rules may affect your business, please contact Jaroslava Hanková at [email protected] or call +420 267 997 721.

France Transfer pricing filing obligations The French bill on transparency, the fight against corruption and the modernization of the economy, known as "Sapin II law" was published on 10 December 2016 in the French Official Journal. This bill extends the filing obligation in respect of transfer pricing to companies whose gross assets or turnover is at least equal to 50 million EUR, as well as those holding (or being held) directly or indirectly more than half of the capital or voting rights of a legal entity meeting these conditions. This obligation also applies to subsidiaries belonging to a tax group comprising at least one legal person being in one of the preceding cases. This provision takes effect as from the financial year ending on 31 December 2016. As a reminder, the initial obligation was for companies with gross assets or a turnover of more than 400 million EUR. The same regime applied if they were held directly or indirectly (50% threshold) by or if they held companies that exceeded these thresholds. This return/declaration will have to be filed within 6 months as of the deadline for filing the French corporate income tax return for the previous financial year. We draw your attention to the fact that as from 1 January 2016, it is mandatory for the return to be filed electronically. Also, all returns of companies belonging to a tax group must be filed on their behalf by the parent company. The parent company must therefore file as many returns as there are companies belonging to the tax group that are actually subject to the reporting obligation. It should be noted that the Sapin II law introduced a Country-by-Country reporting (“CbCR”) which is publicly accessible and which contains economic and fiscal indicators for any locations of the companies

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within a group. The Constitutional Court censured this new measure because it disproportionally restricts the freedom of entrepreneurship the moment it compels French companies to disclose to the public information likely to reveal their commercial strategy. This CbCR was added to the so-called tax CbCR set up from 1 January 2016 for French companies that are members of a consolidated group with a consolidated turnover at least equal to 750 million EUR. PKF Comment

Should you require any further information or advice about the French CbCR requirements or transfer pricing in general, please contact Guy Castinel at [email protected] or call +33 611 363 516.

Germany New deduction limits for royalty payments On 25 January 2017 the German Federal Government submitted a bill that would limit the deduction of royalty payments aiming to prevent harmful tax practices in using intellectual property (IP). Deduction would then be limited both under the income/corporate tax law and the trade tax law. The new rule would be incorporated in the German income tax law as a new section 4j. In future the deduction of royalties in Germany will depend on how the related royalty income is taxed in the hands of the licenser. This rule will override any double tax treaties. However, the deduction limit only applies to licenses granted to related parties within the meaning of sec. 1 (2) of the German Foreign Tax Relations Act, i.e. in particular to investments of 25% or more. Furthermore, it only applies to royalty income eligible for preferential (low) taxation that differs from regular taxation. Therefore, the new rules mainly affect licenses granted by licensers in countries that have a so-called intellectual property box regime (IBR) in place. The bill defines low taxation as tax rates of less than

25%. In determining whether royalty income is taxed at a low rate, all rules that may affect the taxation of such income need to be taken into account including deductions, exemptions, credits or reductions available in calculating taxable income. If these conditions are met, royalties paid by German licensees are not eligible for deduction as operating expenses in part or in full. The amount of royalty payments that is eligible for deduction in Germany varies with the preferential tax rate at which the royalty income is taxed in the state of the recipient of such income. If the royalty income in the recipient's state is tax-free (preferential tax rate of 0%), royalty payments would no longer be eligible for deduction in Germany. A preferential tax rate of 10% in the recipient's state means that in Germany only 40% (10/25) of the royalty payments qualify for deduction from taxable income. However, there is an exception to this rule: Even if a preferential tax regime is in place for royalty income in the recipient's state, the deduction limit in Germany does not apply in cases where the preferential treatment is limited to IP that has been created as a result of so-called substantial business activities. The bill considers IP to have resulted from substantial business activities only if the licenser (essentially) developed the IP as part of his own business activities. This would in particular include IP acquired (either from third parties or related parties) or developed by related parties.

This exception to the rule introduces into German law the so-called nexus approach, which was developed by the OECD. Under the nexus approach the amount of IP income qualifying for preferential taxation

depends on the research and development costs incurred by the licenser in creating the IP in his state, i.e. the nexus approach aims at royalty income being taxed (potentially at a preferential rate) in the same state in which the underlying research and development costs were deducted from taxable income.

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However, this exception does not apply to trademarks that would fall under the German trademark law. If the other conditions are met, payments for the use of trademarks would still be subject to the deduction limit in Germany in cases where the royalty income passes the substantial activity test in the licenser's country. The deduction limit is intended to apply to costs incurred for the assignment of licenses and for licensing-in IP, in particular copyrights and industrial property rights, commercial, technical, scientific and similar experiences, knowledge and skills, such as plans, designs and procedures. The new rules are scheduled to apply to expenditure incurred after 31 December 2017. The next steps in the legislative procedure will be as follows. The Bundesrat is now required to comment on the bill. However, major opposition is not to be expected. Therefore, the bill is most likely to pass into law before the end of the 18th legislative period in the summer of 2017. The exact wording of the law may still be changed. PKF Comment

Qualifying enterprises should be aware that in the near future the deduction of royalty payments as operating expenses in Germany will be possible only to a very limited extent. If you would like further information or advice on how the new rules may affect your business, please contact Thomas Rauert at [email protected] or call +49 40 35552 137.

Ghana Amendments to the Income Tax Act The Income Tax Act 2015 (Act 896) has undergone some amendments by way of Acts 902, 907 and 924. Also an act of parliament and legislative instrument to regulate and administer the main law has been passed and includes the Revenue Administration Act 2016 (Act 915) and the Income Tax Regulations 2016 L.I 2244.

The object of Act 902 is to (i) revise the income tax rates for a resident individual making the first 2,592 Gh¢ per annum free from tax (ii) introduce a withholding tax of 15% for individuals

providing services (iii) indicate incentive tax rates for manufacturing entities located in regional capitals (except Accra) and elsewhere in Ghana and (iv) increase the monetary threshold for individuals to whom a presumptive tax applies from 150,000 Gh¢ to 200,000 Gh¢. The object of Act 907 is to (i) exempt individuals from the payment of withholding tax on interest received from resident financial institutions and bonds issued by the government of Ghana and (ii) reduce withholding tax for the provision of services by companies from 15% to 7.5%. The amendments of Act 924 resulted in the following changes: (i) a gift received by a person other than a gift received in respect of the investment is to be included in ascertaining the profits and gains from investment (Section 6) (ii) exempt income now includes interest paid to a non-resident on bonds issued by the government of Ghana and gains from the realization of bonds issued by the government of Ghana by a non-resident person (Section 7) (iii) the limit on deduction of financial cost is now related to 50% of the chargeable income but not of income of the person for the year from business or investment (Section 16) (iv) a lessor who leases an asset under an operating lease shall include the whole amount of rent paid under the lease and may be granted capital allowance on the asset (Section 30) (v) under Separate Mineral Operations, Subsection 4 is completely deleted (Section 78) (vi) under General Insurance Business, reserves for unexpired risk deducted in previous basis period are now to be included in the assessment of an entity doing General Insurance (Section 89) (vii) Section 97 is now amended to expunge registered football clubs from the list of Charitable Organizations (viii) final withholding tax now includes fees for examining, invigilating, supervising an examination, part-time teaching or lecturing, endorsement fees and lottery winnings (Section 119) (ix) the time for filing of

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a Return of Income is within 4 months after the end of each year of assessment (Section 124) (x) a return of Income is not required for a resident individual who does not have a tax payable (chargeable income) for the year (Section 125) and (xi) excluded expenditure now includes depreciation of a fixed asset. Act 924 also amended the First Schedule of the 2015 Income Tax Act: (i) withholding tax for the provision of services is now 7.5% instead of 15% (ii) withholding tax rate for a resident subcontractor is now 7.5% and (iii) Withholding tax rate for a non-resident subcontractor is now 15%, the Third Schedule: consideration received for the disposal of a commercial vehicle whose cost value has been restricted is to be apportioned using the historical cost and market value, and the Sixth Schedule: temporary concession of 5 years for entities in tree crop farming is now applicable to all persons but not restricted to individuals. Act 915 (Revenue Administration Act 2016) basically outlines the administration of tax laws in Ghana. Innovations are the right to representation and guidelines for tax consultants. Regarding the right to representation, the Act specifies the right of a taxpayer or an entity to be represented in dealings with the Ghana Revenue Authority (GRA). However, the GRA is not obliged to communicate with a taxpayer through the representative unless the former has received a letter appointing the representative. Regarding tax consultants, the Act prohibits an unapproved person from (i) representing a taxpayer or an entity (ii) preparing a tax return, appeal or other document under a tax law (iii) providing advice regarding the interpretation or effect of a tax law and (iv) charge fees to offer assistance with respect to the three previous points. PKF Comment

With a change of government in Ghana effective 7 January 2017, there are likely to be some changes to the Ghana tax laws. These changes might be among the 2017 Budget Statement which will be laid before Ghana parliament in March 2017. If you would like further information on how these rules may affect your business, please contact Frederick Bruce-Tagoe at [email protected] or call +233 302 221 266.

Greece Various changes to tax legislation Tax legislation has been published in December 2016 giving companies and individuals the opportunity to regularize undeclared income under favourable conditions (with a small penalty). Another provision of this new law states that individuals will need to spend an important part of their income by means of credit cards in order to benefit from specific tax free amounts. Such expenditure is required to vary from 10% to 20% of their taxable income. Another development is that starting from 1 January 2017, freelancers, partners of private companies and other categories will be obliged to pay social security contributions proportionately to their taxable income with an upper limit of about 19,000 EUR annually. PKF Comment

For a long time, Greeks had expected that they would be able to regularize undeclared assets and pay a lower tax than regular income tax. However, their expectations were not met as the new legislation refers to undeclared income and not to undeclared assets. The new social security legislation will make a considerable number of professionals pay substantially higher amounts than was the case until now. Should you require any further information or advice about the taxation of Greek individuals, or any advice concerning Greek taxation, please contact Alexandros Sfarnas at [email protected] or call +30 210 64 27 623.

Hungary New corporate income tax rate of 9%

A new, single corporate income tax rate of 9% entered into force as of 1 January 2017. Under the corporate income tax regime effective until the end of 2016 the positive tax base not exceeding 500 million

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PKF Comment

The replacement of a progressive system with a lower 9% flat rate system will certainly have positive effects, but due to the low tax rate, a Hungarian company may qualify as a controlled foreign company (CFC) according to its shareholder’s domestic tax law. For further information or advice concerning the newly enacted corporate income tax rate or for any advice concerning Hungarian tax, please contact Krisztián Vadkerti at [email protected] or call +36 1 391 4220.

India Changes to the Cyprus-India Double Tax Treaty A revised Double Tax Treaty (“DTT”) between India and Cyprus, along with its Protocol, was signed on 18 November, 2016 in Nicosia (Cyprus), which will replace the existing DTT that was signed by the two countries on 13 June 1994. Both sides have now exchanged notifications intimating the completion of their respective internal procedures for the entry into force of the DTT, with which the revised DTT shall come into effect in India in the fiscal years beginning on or after 1st April 2017. The revised DTT will enable source based taxation of capital gains on shares, except in respect of investments made prior to 1st April 2017. In addition, the DTT will also bring into effect updated provisions as per international standards and in accordance with the consistent position of Indian. In a separate development, the notification of Cyprus under section 94A of the Income Tax Act, 1961, as a notified jurisdictional area for lack of effective exchange of information, has been rescinded with effect from 1st November 2013 (Notification No. 114/2016 dated 14 December 2016). The bilateral economic ties between the two countries are expected to be further strengthened by these measures.

PKF Comment The disadvantages under the Indian tax laws notification of Cyprus as a harmful tax jurisdiction get annulled with retrospective effect. In as much as the benefits under the pre-amended tax treaties have been grandfathered, it is good news for those investors who already have used Cyprus as a jurisdiction of their choice to transact with. In fact the benefits of the non-amended DTT are available for investments up to 31 March 2017. For further information or advice on international taxation, or any advice concerning taxation in India, please contact Hariharan S at [email protected] or call +91 44 28 11 29 85.

Italy

The new Resident Non-Domiciled Tax Regime – A move to attract foreign citizens and families to Italy Executive summary The Italian Government 2017 Financial Bill includes a number of measures aimed at encouraging individuals to move to and invest in Italy. These measures are stated to be some initial steps for promoting Italy as an attractive destination for workers and investors capital. One of them is the introduction of a tax regime similar to the one currently in force in the UK, which may be of interest to high net worth individuals as well as sportsmen, artists and executives. Resident non-domiciled tax regime The new legislation introduces a key change to the general principle of worldwide taxation of Italian tax residents. According to the new provisions, an individual who meets certain conditions can be considered to be a resident but non-domiciled in Italy for tax purposes. This would allow taxpayers to pay ordinary taxes upon income generated in Italy and a flat lump-sum tax of 100,000 EUR to cover taxes due on non-Italian-source income. This optional regime would be available for individuals who:

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Transfer their tax residence to Italy and maintain their status for 15 years;

Have not been a tax resident in Italy for 9 out of

the previous 10 years preceding the year of claiming this new regime;

Obtain a formal approval from the Italian tax authorities (a ruling).

Upon approval of non-domiciled status, taxpayers will be liable to progressive tax rates on Italian-source income only (employment income from activities carried out in Italy and income from businesses/self-employed work carried out in Italy). A yearly lump-sum tax of 100,000 EUR will be due on income from foreign investments, foreign financial assets and any other foreign-source income. However, the option is revocable at any time and its exercise does not jeopardize the relief already used by the individual. The annual lump-sum tax substitutes for income tax, local tax and wealth tax. Taxpayers will also be exempt from certain tax and financial monitoring obligations. The regime can be extended to family members for an additional 25,000 EUR annually. An anti-abuse clause for capital gains is also contemplated upon under which gains on the sale of qualified shareholdings are excluded from the flat tax regime if realized in the first 5 years following the introduction of this legislation. PKF Comment

The regime of “Resident Non-Domiciled” is pretty similar to the one enforced in the UK. It is an attractive opportunity for individuals that would like to spend a long time in Italy and would also like to benefit from a very efficient tax charge on their non-Italian-source

income. If you would like further information or advice on how the new rules may affect you or your business, please contact Marco Giuliani at [email protected] or call +39 2 4398 1751. Italian Voluntary Disclosure bis Executive summary Law Decree no. 193 of 22 October 2016 has set out a new opportunity for Italian resident taxpayers who did not opt for the voluntary disclosure procedure (“VD”) originally made available by Law no. 186/2014. The VD re-opening will be eligible by filing an application by 31 July 2017 at the latest. Like the previous edition, the new VD procedure will not be open to those who have already been subject to an audit assessment in respect of assets/income held abroad and will cover: • violations for unreported foreign assets (and

relevant income) held by Italian resident private individuals and certain other private entities; and

• violations for any other unreported income (i.e. income for corporate tax, VAT, withholdings, social contributions) made by any taxpayer (including Italian and foreign corporations).

The purpose of the new VD procedure is to “obtain” full taxation of any income that has not been taxed in any year open to assessment by granting a significant discount on administrative penalties and full protection from most tax related criminal penalties, including money laundering (and self-money laundering) connected to tax crimes. Applicable tax years The new VD procedure will cover violations committed until 30 September 2016 (i.e. up until tax period 2015) and will have the following tax years covered: either 2009/2010-2015 or 2004/2006-2015 depending on whether the statute of limitations can be doubled and a tax return has been filed. A doubling of the statute of limitations will apply only if the assets where held in “blacklisted” States without an exchange of information treaty with Italy In comparison with the previous edition, there will be a

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broader range of non-“blacklisted” States, as in the meantime a significant number of States has signed effective agreements on exchange of information with Italy (therefore, aside Switzerland, Monaco and Liechtenstein, which were already considered to be “whitelisted” under the previous edition, also for example the Cayman Islands, Hong Kong, Guernsey, Jersey, the Isle of Man, the Cook Islands and Gibraltar will qualify). Such an improvement in the exchange of information treaties network might have a positive impact on the overall cost of the new VD procedure. Key Aspects of the procedure • Beneficial effect on the compliance burden for

subsequent years: the applicant will be exempt from reporting obligations related to tax periods 2016 and 2017 (for the period preceding the filing of the VD application) to the extent that the VD application gives full disclosure of the assets held and income has been taxed at source;

• It might be useful not only for Italian resident taxpayers but also for foreign expatriates to have their tax domicile transferred to Italy for work purposes. Obligation to disclose all assets and information (no partial VD admitted);

• Application of full taxes to the foreign-held assets (if assets are worth less than 2 million EUR, a simplified regime can be elected with a 27% tax on a yearly presumed yield of 5% of the year-end value of the assets). A special procedure is provided for the case of regularization of cash held outside of the banking system (that must be deposited with a bank);

• Reduction of administrative penalties as follows: - For failure to report foreign financial assets

o From 1.50% to 3% of the amount declared related to assets and income located in Whitelist countries;

o From 3% to 6% of the amount declared related to assets and income located in Blacklist countries.

- For failure to report the relevant income matured on the foreign financial asset: o Whitelist countries: from 133% to 266%

(for tax periods until 31 December 2015) and from 120% to 240% (tax period from 1 January 2016) of high tax due;

o Blacklist countries: from 200% to 400% (for tax periods until 31 December 2015) and from 180% to 360% (tax period from 1 January 2016) of high tax due;

• No criminal penalties apply accordingly;

• Introduction of specific measures to monitor

transfers abroad of individuals who did not apply for the new VD procedure.

Procedure and its effects The taxpayer who applies for the new voluntary disclosure is also relieved from most of the criminal tax penalties imposed by Legislative Decree no. 74/2000, as well as from the penalties for money laundering. Thus, any taxpayer filing a voluntary disclosure form is granted immunity from prosecution for certain fiscal penal crimes such as: misrepresentation, fraudulent misrepresentation using invoices, non-existent transactions or other mechanisms, failure to declare, non-payment of certified withholding tax and non-payment of VAT. PKF Comment The Voluntary Disclosure Part 2 is probably the last chance for Italian taxpayers to take corrective action on non-declared foreign-source income and to benefit from a very low penalties regime. The rule is also much more attractive than the previous one as the “whitelist” includes for the first time a lot of tax havens. The exchange of information between the Tax Authorities and the possible assessment of non-declared foreign income and assets should push individuals to take advantage of this opportunity. If you would like further information or advice on how the new rules may affect you or your business, please contact Marco Giuliani at [email protected] or call +39 2 4398 1751. Tax ruling for new investments Companies planning to invest 30 million EUR or more (also in different years) in Italy can submit a formal tax ruling with the Italian financial administration. The tax ruling seeks an advance decision on the correct application of Italian tax law to particular planned investments, like the creation of new economic

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activities, the expansion of existing activities, production diversification, restructuring of economic activity in order to tackle business crisis situations and operations affecting corporate investments. It can also relate to the tax aspects of envisaged operations such as mergers and acquisitions or spin-offs (application to participation exceptions, controlled foreign companies (CFC) rules and tax group schemes). In case of a positive answer by the administration, the company is allowed to adopt the tax regime indicated in the ruling and can benefit – regardless of its turnover or revenue – from the so-called “cooperative compliance”, i.e. a financial administration tutor-like mechanism, which enables large enterprises (normally reserved for companies with a turnover of more than 100 million EUR) to be guided through tax compliance. PKF Comment

Certain types of investments (e.g. IT investments) may also benefit from other incentives (tax credits, concessions or soft loans). If you would like further information or advice on how the new rules may affect your business, please contact Fabrizio Moscatelli at [email protected] or call +39 010 570 5003.

Kenya Key tax changes Income tax changes Tax amnesty on foreign earned taxable income A tax amnesty was introduced through the Finance Act 2016 on all taxes, penalties and interest to taxpayers who have undeclared foreign earned taxable income. This new provision restrains the Commissioner General of the Kenya Revenue Authority from following-up or enquiring on the sources of such income. The amnesty is on condition that: • The income in question is declared by the taxpayer

in the tax return for the year ending 31 December 2016;

• The taxpayer has submitted his tax returns and accounts for the year 2016 on or before 31

December 2017;

• The taxpayer has not been assessed by the Kenya Revenue Authority in respect of that income or any matters relating to that income; and

• The taxpayer is not under any audit or investigation by the Kenya Revenue Authority in respect of the undisclosed income or any matter relating to that undisclosed income.

The effective date for the tax amnesty was 1 January 2017 PKF Comment

The amendment lacks clarity since there are certain unanswered questions that arise, e.g. what income is subject to the amnesty, does the amnesty cover illegally acquired wealth, does it require repatriation of the declared income etc.? We eagerly await the much anticipated publication of guidelines by the Kenya Revenue Authority on the exact procedures and process to be followed. Pay As You Earn (PAYE) bands and personal relief With effect from 1 January 2017, the PAYE tax brackets have been widened as follows:

In addition, the resident personal relief has been increased from 1,162 KShs (13,944 KShs per annum) to 1,280 KShs per month (15,360 KShs per annum). PKF Comment

The amendment is aimed at easing employees’ tax burden. Tax incentive for low income Employees Income in form of bonuses, overtime and retirement benefits for individuals who fall under the lowest

Tax Bands Taxable Income per annum KShs

Taxable Income per month KShs

Rate

On the first 134,164 11,180 10%

On the next 126,403 10,534 15%

On the next 126,403 10,534 20%

On the next 126,403 10,534 25%

In excess of 513,373 42,781 30%

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income tax bracket got exempted from PAYE with effect from 1 July 2016. The lowest tax bracket as at 1 July 2016 was 11,135 KShs per month which was subsequently increased to 12,460 KShs effective 1

January 2017. PKF Comment

This measure is expected to cushion employees who currently earn at most a basic salary of 134,164 KShs per annum from being taxed on bonuses, overtime pay and retirement benefits. The amendment is a relief to low income earners as it lowers their tax burden and increases their disposable income. Withholding Tax on Rent Paid to Resident Persons With effect from 1 January 2017 withholding tax at the rate of 10% upon payment of rent, premium or similar consideration for the use or occupation of immovable property to a resident person was introduced by the Finance Act 2016. PKF Comment

This is aimed at facilitating collection of tax on rental income by appointing agents and/or tenants who occupy premises, offices and residential properties. The Kenya Revenue Authority has commenced the appointment of rental withholding tax agents, and the process of notifying those appointed as agents is currently underway. Only appointed withholding tax agents will be required to deduct and remit withholding tax on rental income. Retraction of Withholding Tax on Gaming Activities Withholding tax on winnings payable by bookmakers (both resident and non-resident) to punters (players) has been withdrawn. However, the Betting, Lotteries and Gaming Act was amended to introduce new taxes as follows:

*gaming revenue = gross turnover – customers winnings

PKF Comment

This measure is aimed at eliminating challenges and complexities in the administration of withholding tax on winnings earned by players since its introduction. Affordable Housing A company that constructs at least four hundred residential units annually will be taxed at a reduced corporation tax rate of 15% as opposed to 30% on the gains realized from the residential units’ business activities. Gains from other business activities that the company might be involved in will still be taxed at the ordinary rate of 30%. However, prior approval from the Cabinet Secretary responsible for Housing is required PKF Comment

This amendment is aimed at encouraging real estate developers to construct sufficient housing units in order to cater for the ever increasing demand for houses. For further information or advice with respect to Kenyan taxation, please contact Michael Mburugu at [email protected] or call +254 20 42 70000. Tax Procedures Act Changes Tax refunds to be repaid within 90 days The Commissioner of the Kenya Revenue Authority is now required to respond to a taxpayer’s application for tax refunds within 90 days of receiving the applications. Additionally, 1% interest per month will be charged on any overpaid tax that the Kenya Revenue Authority does not refund within a period of two years from the date of application for refund. PKF Comment

The move is welcomed by taxpayers currently having tax refunds due from the Kenya Revenue Authority. In the past there have been delays in the processing of tax refunds and this measure is aimed at speeding up payment of refunds to taxpayers. Interest is now waivable Interest charged on non-compliance with tax

Tax Rate and Basis Due Date

Betting tax 7.5% of the gaming revenue 20th day following collection month

Lottery tax 5% of lottery turn-over 20th day following collection month

Gaming tax 12% of gaming revenue* 20th day following collection month

Prize competition tax

15% of total gross turnover 20th day following collection month


2017

obligations can now be considered for waiver on application (discretional based on mitigating factors). Such interest did not qualify for waiver for the period from 19 January 2016 to 31 December 2016. The provision for waiver of interest had been deleted by the Tax Procedures Act. PKF Comment

This measure is a positive move for taxpayers who are assessed for tax liabilities by the Kenya Revenue Authority as they have a chance to mitigate tax exposures. Appointment of tax representatives The Finance Act 2016 introduced a provision requiring a non-resident person to appoint a tax representative in case he is required to register under a tax law. Further, in the event where the non-resident person fails to appoint someone, the Commissioner is empowered to appoint a tax representative on behalf of the non-resident person. The amendment became effective from 1 July 2016. PKF Comment

This provision is aimed at enhancing tax collection among non-resident persons without a fixed place of business in Kenya. For further information or advice with respect to Kenyan taxation, please contact Michael Mburugu at [email protected] or call +254 20 42 70000.

Malaysia Income tax (Country-by-Country Reporting) Rules 2016/Income tax (Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports) Order 2016

Recently, Malaysia has legislated the abovementioned rules in respect of the requirements for filing a Country-by-Country Reporting (“CbCR”) and other related requirements, in line with the recommendations of OECD base erosion profit shifting (BEPS) Action Plan 13. The abovementioned Rules

cover, among others, the conditions that require a multinational corporation group to perform CbCR, the details that should be reported in a CbCR, filing obligations, a deadline for filing as well as use and confidentiality of the CbCR information. The threshold for furnishing CbCR in Malaysia is set at a total group revenue in the financial year preceding the reporting financial year of at least 3 billion Malaysia Ringgit (RM). The abovementioned Rules came into operation on 1 January 2017. CbCR shall be filed no later than 12 months after the last day of the reporting financial year. The information provided under CbCR will assist the Malaysian Tax Authorities (MIRB) in conducting their tax audits on a more transparent basis where the financial / non-financial information of a Multinational Group (MNC Group) will be made available. However, the Rules also state that the MIRB may use CbCR for the purpose of assessing high level transfer pricing risks and other BEPS related risks in Malaysia but it cannot be used as a substitute for a detailed transfer pricing analysis for the purpose of transfer pricing adjustments. To facilitate the filing of CbCR and to ensure proper compliance by taxpayers, new penalties and fines are introduced, i.e. a fine of not less than 20,000 RM and not more than 100,000 RM, or imprisonment for a term not exceeding six months or both, in case of (i) failure to furnish CbCR (Section 112A), (ii) incorrect returns, information returns or reports (Section 113A) and (iii) failure to comply with rules made by the Ministers on mutual administrative assistance (Section 119B). PKF Comment

The transfer pricing landscape in Malaysia has continued to evolve over the last few years where the MIRB becomes increasingly proactive and vigilant in scrutinising controlled transactions of a MNC Group of companies. Hence, moving forward, the maintenance

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of transfer pricing documentation is crucial in order to ensure compliance and to mitigate the exposure of tax audit risks. For further information or advice concerning Malaysia taxation, please contact Ai Chen, Lim at [email protected] or call +603 6203 1888.

Netherlands Multilateral convention to implement tax treaty related measures to prevent BEPS (Action 15)

On 24 November 2016, more than 100 jurisdictions have concluded negotiations on a multilateral instrument (MLI) that aims to efficiently implement tax treaty related BEPS measures (address hybrid mismatches, prevent treaty abuse, prevent artificial avoidance of the permanent establishment status and improvements of the dispute resolution system) into potentially more than 2000 tax treaties worldwide, subject to the ratification process. Existing tax treaties will be supplemented by the MLI by adding new provisions or by modifying or replacing existing provisions. The MLI consists of certain mandatory minimum standards and certain optional provisions. Optional provisions will only apply in case both treaty countries have chosen matching provisions. The MLI provisions have to be read and applied in conjunction with the existing bilateral tax treaties. As such, no amendment of specific treaties is necessary.

The MLI will enter into force after ratification of at least 5 countries. In order for the MLI to have an impact on a specific tax treaty, both treaty partners should have ratified the MLI. The OECD

has to be notified of which treaties are covered, which options are selected and which reservations were made by the governments involved.

The Dutch government has set out its implementation preferences in a recent position paper. The Netherlands intends to implement the MLI in its treaties as broadly as possible, with a preference for the inclusion of a principal purpose test (PPT) as anti-abuse provision, the amended PE definition and mandatory binding arbitration. PKF Comment

The MLI can potentially have a large impact on tax structures, particularly when the tax effectiveness relies on older Dutch tax treaties. Companies should therefore carefully review the impact of the MLI for their own group structure. For further information or advice on any aspect of the MLI, or if you would like to have your tax treaty position reviewed, please contact Ruud van der Linde at [email protected] or call +31 15 261 31 21. Country-by-Country Reporting – Postponement of first notification obligation date On 21 November 2016, the Dutch Secretary of Finance published a Decree by which the ultimate date for Dutch constituent entities to make the first notification under the CbC Reporting rules is postponed to 1 September 2017 (applicable for reporting years ending up to and including 31 August 2017). The notification should be submitted on the last day of the reporting year in all other cases. PKF Comment

The OECD also postponed the MCAA notification obligation to 1 July 2017. As such, Dutch taxpayers should be able to better assess which entity will need to report after 1 July 2017. For any information or advice on Country-by-Country Reporting, or any other transfer pricing related matter in the Netherlands, please contact Ruud van der Linde at [email protected] or call +31 15 261 31 21.

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Secretary of Finance publishes possible measures for strengthening Dutch substance requirements

On 4 November 2016, the Secretary of Finance presented 3 possible measures to complement measures already in place (GAAR from the EU Parent-subsidiary directive, international exchange of information and

other transparency related measures, substance requirements for intragroup financing companies or international holding companies) to prevent tax treaty abuse. These envisaged measures have been published following discussions in the Dutch parliament regarding the possible abuse of Dutch bilateral tax treaties by Dutch resident companies. Such abuse could possibly arise in case companies lacking substantial presence in the Netherlands claim certain (source tax related) treaty benefits. The three possible measures: 1. Exchange of information (extend exchange of

information in case of so-called service companies to international holding companies that do not meet the Dutch substance requirements, or strengthen the substance requirements);

2. Additional requirements for obtaining rulings (require more substance for obtaining a ruling than the current Dutch substance requirements);

3. Raise equity requirements (currently, interest and/or royalty expenses and income are not taken into account for Dutch tax purposes in case the Dutch financing company does not meet the minimum equity requirement (1% of the outstanding loan amount or 2 million EUR). It is envisaged to increase the amount of 2 million EUR.

PKF Comment

These possible measures may not come as a big surprise: the Dutch government continues to emphasize that it will protect the Dutch tax system, but not for companies lacking substance. The Dutch

substance requirements are published and clear. With careful tax planning, those requirements should not cause any trouble. For any information or advice on the applicable substance requirements in the Netherlands, or a review of your Dutch tax treaty position, please contact Ruud van der Linde at [email protected] or call +31 15 261 31 21.

Romania

Specific tax due by taxpayers active in the tourism, restaurant and catering sector As from 1 January 2017, Romanian tax legislation has introduced a “specific” annual tax to be applied to companies that carry out activities in the field of tourism, restaurants, bars and catering. It will be calculated based on different indicators such as the town rank where the unit is established, its surface and its seasonality coefficient, irrespective of whether a profit is registered or not. This law is applicable to companies that were liable to corporate income tax and not to microenterprises. For companies that also perform activities other than the aforementioned sectors, corporate income tax will be calculated and applied only to the other activity while the specific tax will be applied to tourism, bar, restaurant and public food service related activities. Taxpayers liable to this specific tax should notify the Romanian tax authorities by 31 March 2017. PKF Comment

The specific tax will have a negative impact on small companies. Irrespective of whether they register a profit or not, this tax will be due. Therefore, only large companies holding a big number of units or large surfaces and making consistent profit will be favoured

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by this law while small companies will face the risk of registering losses. For further information or advice concerning Romanian legislation on the specific tax or any advice with respect to Romanian taxation, please contact Alina David at [email protected] or call +40 21 317 31 96.

South Africa Foreign exchange voluntary disclosure update

A Special Voluntary Disclosure Programme has been introduced to allow South Africans to regularise any undisclosed foreign assets. The programme will run for a period of 11 months commencing on 1 October 2016 and ending on 31 August 2017. The legislation in this regard had been finalised by parliament on 16 December 2016 and was promulgated on 19 January 2017.

Whilst this programme is only applicable to South African individuals and companies, settlors, donors, deceased estates and beneficiaries of foreign discretionary trusts may participate if they elect to have the trust’s offshore assets and income deemed to be held by them. Applications are also open to taxpayers who do not have assets situated abroad post 1 March 2010 but are concerned that they may be identified by the South African Revenue Service. Tax Implications - South African Revenue Service • The undeclared income, in other words the

amount used to fund the foreign asset will be

exempt from income tax, donations tax and estate duty;

• Only 40% of the highest aggregate value of all assets outside of South Africa between 1 March 2010 to 28 February 2015 that were derived from the undeclared income will be taxable in the 2015 tax period;

• For the purposes of determining capital gains or losses, the asset held and not disposed of on the last day of the year ending on or before 28 February 2015, will be deemed to have been acquired on that day at a cost equal to market value resulting in a “step-up” of base cost. However please note that upon ultimate disposal of the asset the base cost will be limited to the proceeds on disposal less any allowable expenses;

• Investment earnings prior to 1 March 2015 will be exempt from tax; Interest on tax liabilities arising from the disclosure will commence from the 2015 year of assessment.

Exchange Control Implications – South African Reserve Bank • Applicants who are granted relief in respect of

unauthorised foreign assets are subject to a levy based on the market value as at 29 February 2016;

• The levy will be 5% if the assets or the proceeds are repatriated to South Africa and 10% if the assets are kept offshore;

• The levy must be paid from foreign-sourced funds. Where insufficient liquid foreign assets are available, the levy is increased by a further 2%, to the extent that local assets are utilised to settle the levy.

PKF Comment South African taxpayers should take advantage of this programme to regularise their foreign assets as the automatic exchange of information agreements will come into effect from September 2017 and will allow the South African Revenue Service to obtain full details of assets held by South Africans in various countries. For further information or advice concerning South African taxation please contact Kubashni Moodley at [email protected] or call +27 31 573 5000.

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United Kingdom Finance Bill 2017 – Changes to the substantial shareholdings exemption The draft Finance Bill 2017 published on 5 December includes changes to the substantial shareholdings exemption (“SSE”) regime and extends availability of relief from corporation tax on chargeable gains to many more companies. Broadly speaking, SSE is currently available on gains arising on the sale of shares in a trading company. The relief is only available

where the company making the disposal has owned at least 10% of the shares and is itself a trading company or the holding company of a trading group both before and after the sale.

The latter requirement means that SSE is generally not available when a holding company with a single trading subsidiary disposes of that subsidiary, because immediately after the disposal the holding company is no longer the holding company of a trading group (there was a view that SSE would arise if such a holding company was liquidated immediately following the sale of its trading subsidiary, but the availability of exemption was not beyond doubt). Relaxation of disposing company requirements The proposed changes remove the trading requirement in relation to the company making the disposal, meaning such holding companies will be able to obtain SSE on a disposal of a trading subsidiary. The availability of SSE in these cases could make a holding company structure more attractive where a trading company is currently held by individual shareholders. Under the present regime, the benefit of a holding company for asset protection and potential tax grouping purposes has to be weighed against the likely corporation tax charge arising on sale of a subsidiary. In future, a holding company structure will offer additional flexibility for exiting a business

and reinvesting cash in another activity without immediate tax cost, while still allowing the same freedoms to benefit from entrepreneurs’ relief through a liquidation of the holding company if desired. However, the reforms do not extend beyond SSE and as such do not affect the trading-related qualifying criteria that are applicable for entrepreneurs’ relief, for EMI and EIS purposes, or the availability of business property relief in relation to inheritance tax. The need to take into account the qualifying criteria for some or all of these regimes may limit a group’s ability to take advantage of the SSE changes, for example by consolidating all activities into a mixed trading/investment group. This will differ from case to case: for example, there may be instances where access to entrepreneurs’ relief becomes less important where the proceeds of disposing of a business can be realised tax-free in a holding company prior to reinvestment in a new business activity and a long term plan of deferral is in place. Other changes Another key change is an exemption for qualifying institutional investors (“QIIs”). These include pension schemes, life assurance businesses, charities and various investment vehicles. Where 80% of the share capital of the company making the disposal is owned by QIIs, SSE is available regardless of the trading status of the company disposed of. Partial relief (calculated pro rata to the proportion of the disposing company’s share capital held by QIIs) is available provided that QIIs own less than 80% but more than 25% of the share capital. For completeness, SSE will also become available where a company has spent more than £50m acquiring shares in a company even if those shares do not meet the usual 10% holding test. There is also a

relaxation of the time period in which the qualifying threshold must be met prior to disposal (12 months in a 6-year period rather than a 2-year period), and the requirement for the company disposed of


2017

to be a trading company immediately following disposal will be removed except in relation to situations where the disposal is to a connected party. PKF Comment

The changes will take effect from 1 April 2017, but given the 12 month holding period required to qualify for SSE it is worth considering whether new holding structures should be implemented in advance of the legislation coming into force. Taxpayers may wish to consider deferring changes to their group structure or other transactions which could benefit for SSE under the new regime until after 1 April. It’s important to recognise that the changes will apply from the effective date subject to the Finance Bill receiving Royal Assent following its passage through Parliament. This process is unlikely to be completed before July 2017. The changes are not considered to be controversial but given the Government’s small (and shrinking) majority and the unstable post-referendum political climate, where commercially possible it could be prudent to defer final execution of transactions until Royal Assent is given. If you would like further information or advice on how the new rules may affect your business, please contact Merryn Marsh at [email protected] or call +44 1392 667 000. Tax deductibility of corporate interest Under current UK tax legislation tax relief for interest is restricted to an arm’s length amount with a number of targeted rules to supplement the arm’s length test. The UK government is committed to implementing the recommendations set out in Action 4 of the OECD BEPS project and has been in the process of legislating a Fixed Ratio Rule limiting a group’s UK tax deductions for interest and associated finance costs to 30% of earnings before interest, depreciation and amortisation (EBITDA).

Following the release of initial draft of the legislation on 5 December 2016, a full draft of the corporate interest restriction legislation was released on 26 January 2017. There is no change to the previously announced commencement date of 1 April 2017 and all groups continue to be able to benefit from the 2 million £ de minimis amount. Although the overall operation of the legislation remains broadly unchanged from the December draft there are some new measures. One of the key new measures is the ability to increase carried forward capacity by the amount of a group’s aggregate net UK interest income, enabling groups to take advantage in future years of net interest income, the benefit of which would have been lost under the previous draft. PKF Comment

Companies that are impacted by the new rules now have around two months to get to grips with the new legislation which is complex. We expect the compliance burden for companies that are impacted to be significant in both the first year and on an ongoing basis. The application of the 2 million £ de-minimis will take many companies outside the scope of the new rules although concern remains on loss-making or struggling UK groups/sub-groups, which will be carrying forward interest expense, restricted by the lack of tax-EBITDA in years where there are performance issues, or in start-up periods. This carried forward interest expense will in some cases be inaccessible in later, profitable periods. If you would like advice or further information regarding how these rules may affect your business, please contact Suki Kaur at [email protected] or call +44 7973 657 815. Reform of corporation tax relief for carried-forward losses – draft legislation Under current UK tax law carried-forward losses can only be used by the company that incurred the loss, and not used in other companies in a group. Additionally, certain losses can only be set against certain types of income, for example trading losses can only be used against trading profits. In addition,

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companies can currently reduce all their eligible taxable profits to nil with brought-forward losses. This can lead to a company paying no tax in a year that it makes substantial profits. The government announced the intention to change the loss carried forward rules in 2016 with draft legislation being issued in December 2016. The key changes are: • An expansion of the type of profits against which

brought forward losses incurred on or after 1 April 2017 can be offset against, and

• A restriction, in relation to profits incurred on or

after 1 April 2017, of the utilization of brought forward losses to 50% of profits (above a 5 million £ allowance per group)

The new rules will apply to all losses arising on or after 1 April 2017. Losses arising before that date will remain subject to the existing rules and cannot benefit from the expansion of the type of profits which they can be offset against but they will be subject to the restriction on the amount of profit that can be relieved by brought-forward losses.

HMRC published further revisions to the draft legislation on 26 January 2017. There is no change to the previously announced commencement date of 1 April 2017 and all groups continue to be able to benefit from the 5 million £ group allowance before losses are restricted. The revised draft introduces further specific rules for insurance companies, the creative industries and anti-avoidance provisions. PKF Comment

The new proposals will come into effect in a matter of months and will have a significant impact on the utilization of losses, both from a cashflow and a profitability perspective. The reforms will also have an impact on the deferred tax position of companies with loss carry forwards. If you would like further information on how these rules may affect your business, please contact Stephen Bryan at [email protected] or call +44 7881 502 903.

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IMPORTANT DISCLAIMER: This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within it and all information within this document should be regarded as general in nature. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions or inactions which are undertaken or not undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, firm, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited administers a family of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.

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