international taxation basics - bge · agenda i. fundamental questions of int’l taxation ii....
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International Taxation Basics
Dilbert about int’l taxation
2március 2011
Agenda
I. Fundamental questions of int’l taxation
II. Avoiding double taxation, double tax treaties, the OECD modellconvention
III. EU directives
IV. A few practical examples
V. Hungary in the int’l taxation
3március 2011
Fundamental questions of int’l taxation
4március 2011
Fundamental questions of int’l taxation
• Assessing tax is each states sovereign right: each state can independentlydecide:
- How it formulates its internal and external taxation rules;
- How it demarcates its tax claim from other state’s claims.
Existence or absence of tax liability!
• Different methods can lead to juridical multiple or under taxation.
5március 2011
• In the case of direct and property taxes, for tax payers
- Principle of residency
- Principle of territory (source principle)
• Tax subjects
Fundamental Questions of Int’l Taxation –Demarcation of Tax Claims
• Tax subjects
- Principle of universality
- Principle of territory
• In the case of indirect taxes
- Principle of destination country
- Principle of country of source
6március 2011
Fundamental Questions of Int’l Taxation – Principle ofResidency
• Based on personal bond.
• Results in unlimited tax liability, tax payer is taxed on its world income, not takinginto consideration the source of the income.
• Definition of personal bond:
Entities Individuals
7március 2011
- Place of incorporation
- „real seat”
a. place of centralmanagement and control(Anglo-Saxon countries)
b. place of management(Continental countries)
- Permanent residence
- Habitual place of abode
- Center of vital interest
- Citizenship
Fundamental Questions of Int’l Taxation – sourceprinciple
• Based on economic bond.
• Results in limited tax liability, the tax payer is taxed only on itsincome derived from and assets located in the given country.
• Usually no distinction is made between individuals and companiesfor defying the source of income.
8március 2011
• Typical withholding tax incomes:
- dividend;
- interest;
- royalty;
- capital gains; etc.
Fundamental Questions of Int’l Taxation– DoubleTaxation
• Issue: different countries use different taxation principles andmethods.
- Conflict of taxation principles (residency vs. source)
- Different definitions of residency (residency vs. residency)
- Different definition, understanding of source (source vs. source)
9március 2011
- Different definition, understanding of source (source vs. source)
Double taxation (juridical and/or economical)!
Fundamental Questions of Int’l Taxation –Residency vs. source
Seat
Income: HUF 100
X state – residency
19%
10március 2011
Factory
Income: HUF 100
Y state – source
25%
∑ tax: HUF 44No int’l activity, ∑ tax: HUF 25 or 19
Fundamental Questions of Int’l Taxation – DoubleTaxation
• Solution: self-confinement, distribution of taxing rights.
• 3 possible methods:
- Unilateral, based on internal rules (e.g. corp. tax, PIT)
- Bilateral, based on bilateral conventions
a. OECD Model convention
11március 2011
a. OECD Model convention
b. USA Model convention
c. UN Model convention
- Multilateral
a. Multilateral int’l conventions
b. EU directives
• Techniques of avoiding double taxation.
Agenda
I. Fundamental questions of int’l taxation
II. Avoiding double taxation, double tax treaties, the OECD modelconvention
III. EU directives
IV. A few practical examples
V. Hungary in the int’l taxation
12március 2011
Forms and tax consequences of foreign activities
• Basically there are two ways an enterprise can expand its activities abroad (individual?):
- Sets up a branch office (premises, same person, PE): branch income is taxed in thecountry of residency, since this is the part of the world wide income (same person); and thesource country based on the principle of source.
- Establishes a subsidiary (separate person): in the country of the subsidiary taxed basedon residency, country of the parent company taxes the dividend that is distributed.
13március 2011
Company
PE
Parentcompany
Subsidiary
‘A’ country: 30% CIT
‘B’ country: 20% CIT
Dividend
Residency
Source
Residency
Residency
Company
PE
Parentcompany
Subsidiary
‘A’ country: 30% CIT
‘B’ country: 20% CIT
Dividend
Residency
Source
Residency
Residency
Forms and tax consequences of foreign activities
14március 2011
PE Subsidiary
‘B’ country income: 100 100
‘B’ CIT (20%): 20 20 1. tax level
‘B’ profit after tax: 80 80
Distribution of dividend: - 80
‘A’ CIT (30%): 30 24 2. tax level
Net income 50 56
JDT EDT
Company
PE
Parentcompany
Subsidiary
‘A’ country: 30% CIT
‘B’ country : 20% CIT
Dividend
Residency
Source
Residency
Residency/Source
PE Subsidiary
Forms and tax consequences of foreign activities
15március 2011
PE Subsidiary
‘B’ country income: 100 100
‘B’ CIT (20%): 20 20 1. tax level
‘B’ profit after tax: 80 80
Distribution of dividend - 80
‘B’ withholding tax (eg. 15%) - 12 2. tax level
Net distr. dividend: - 68
‘A’ CIT (30%): 30 24 3. tax level
Net income: 50 44
JDT EDT
JDT
Methods of Avoiding Double Taxation
• It is the duty of the state of residence to eliminate double taxation (ifit arises or may arise).
• Methods:
- Credit
16március 2011
Income exemption
Tax exemption
- Credit
- Exemption
- Deduction
- Tax sparing
Methods of Avoiding Double Taxation - Example
Credit Exemption
„A” country subsidiary (PBT): 1.000 1.000 1.000 1.000
„A” country CIT rate: 16% 16% 16% 16%
CIT: 160 160 160 160
PAT (dividend): 840 840 840 840
Dividend rate: 5% 20% 5% 20%
Dividend withholding tax: 42 168 42 168
17március 2011
Dividend withholding tax: 42 168 42 168
„B” country, parent co. (PBT): 840 840 840 840
„B” country CIT rate: 14% 14% 14% 14%
Calculated CIT: 118 118 118 118
Taxes paid abroad: 42 168 42 168
Credited tax -42 -118 - -
Taxes payable in „B” country: 76 0 0 0
Total tax liability: 118 168 42 168
Income vs Tax Exemption
• Income exemption: foreign income (loss) is not taken into consideration (disregarded).
• Tax exemption: tax is calculated based on world wide income, then the part attributable to theforeign income is exempted (on a pro rata basis).
Income exempt. Tax exempt.
World wide income 300 300
Foreign income 100 100
Taxable income in residence 200 300
Calculated tax (40% CIT) 80 120
Tax calc. on foreign income - (100/300)x120=40
Payable tax 80 120 – 40 = 80
• Different results:
- Progressive tax rate
- Foreign loss
18március 2011
Tax exempt. Income exempt.
100A: 40% CIT 100
Income vs Tax Exemption (foreign loss)
19március 2011
-20B: 30% CIT
Ww income.: 80Residency tax: 32Tax exempt. -Tax 32
-20
80 :Ww income-20 :Foreign income100 :Tax base40 :Tax
Tax Exemption – Timing (foreign loss)
Without ‘Recapture’
100
-20
A: 40% CIT
B: 30% CIT
1. year 2. year
70
50
+ = 68(170x0,4)
20március 2011
-20B: 30% CIT
Ww income: 80 120Residency tax: 32 48Tax exempt. - (50/120)x48=20Tax 32 28 60
50
+ =
(170x0,4)
‘Recapture’
100
-20
A: 40% CIT
B: 30% CIT
1. year 2. year
70
50
+ = 68(170x0,4)
Tax Exemption – Timing (foreign loss)
21március 2011
-20B: 30% CIT
Ww income: 80 120Residency tax: 32 48Tax exemption: - [(50-20)/120]x48=12Tax 32 36 68
50
+ =
(170x0,4)
Foreign income cannot be carried forward
-20
70
A: 40% CIT
B: 30% CIT
1. year 2. year
30
70
+ = 4(10x0,4)
Tax Exemption – Timing (domestic loss)
22március 2011
Ww income: 50 100Residency tax: 20 40Tax exempt. (50/50)x20=20 (70/100)x40=28Tax 0 12 12+ =
20 unit foreign income is lost,because the country ofresidence will not provide taxreimburssement (quotientcannot be > 1)
Foreign income can be carried forward
-20
70
A: 40% CIT
B: 30% CIT
1. year 2. year
30
70
+ = 4(10x0,4)
Tax Exemption – Timing (domestic loss)
23március 2011
Ww income: 50 100Residency tax: 20 40Tax exempt. (50/50)x20=20 [(70+20)/100]x40=36Tax 0 4 4+ =
20 unit of foreign inc. is carriedforward
Country vs. Aggregated Exemption
• Distinction by source country.
• Countries often differentiate by income types as well.
Tax rate Income
Residency state (‘R’ state) 40% 100
S1 state 30% 60S1 state 30% 60
S2 state 25% -40
Ww income - 120
Calc. Tax ‘R’ state 48
- Exempt. by country
(Not on S2, because it’s negative) 48-(60/120)x48=24
- Aggregated exempt. 48-[(60-40)/120]x48=40
24március 2011
Credit
• Credit: the tax (same type) paid in the source state can be deducted from the taxpayable in the country of residence.
• Limits:
- Max. in the amount of tax calculated on the given income based on domesticrules
- Max. in the amount of foreign paid tax.
• If the activity in the source state is loss making, it makes the same result as taxexemption.
• Problem: if the foreign tax exceeds the local Excess Foreign Tax Credit (EFTC)
25március 2011
Credit - Example
Ww income: 300
200
100
A: 40% CIT
B: 30% CIT
Ww income: 300Residency tax: 120Credit (min):• Source tax: 30• „A” tax on foreign income: 100/300x120=40 30Tax payable: 90
26március 2011
Credit - EFTC
Ww income: 60 160
-40
100
A: 40% CIT
B: 30% CIT
60
100
1. year 2. year
Ww income: 60 160Residency tax: 24 64Credit (min):• Source tax: 30 30• „A” tax on foreign income: 60/60x24=24 100/160x64=40EFTC: 6 1. year EFTC=6Credited tax: 24 36
Payable tax: 0 28
27március 2011
+
Credit vs. Exemption
• Credit vs. tax exemption
- If loss is arising in the source country, the result will be the same.
- If profit is generated in the source country and the local tax rate < foreign taxrate, the result will be the same.
- If profit is generated in the source country, tax exemption is more favourable inthe case of local tax rate > foreign tax rate.the case of local tax rate > foreign tax rate.
• Credit vs. income exemption
- If loss is generated in the source country, credit is more favourable.
- If profit is generated in the source country and the local tax rate < foreign taxrate, the result will be the same.
- If profit is generated in the source country, income exemption will be morefavourable in the case of local tax rate > foreign tax rate.
28március 2011
Agenda
I. Fundamental questions of int’l taxation
II. Avoiding double taxation, double tax treaties, the OECD modelconvention
III. EU directives
IV. A few practical examples
V. Hungary in the int’l taxation
29március 2011
Tax treaties – the OECD Model Convention
• Aim of tax treaties:
- Support international trade exempt from tax obstacles (avoidance of double ormultiple taxation)
- Mainly to avoid juridical double taxation.
- Resolve conflicts of residency- and source principles.- Resolve conflicts of residency- and source principles.
- Resolve conflict of residency- and residency principles.
- Distribute taxation right between the contracting parties.
- Prevent international tax evasion, under taxation.
30március 2011
Tax treaties – the OECD Model Convention
• Benefits for the contracting parties:
- Treaties limit the gross based withholding taxation.
- Harmonize the source taxation and the method for avoiding double taxation inthe residence state (i.e. distribution of taxing rights)
- Define the methods for avoiding double taxation- Define the methods for avoiding double taxation
- Enhance exchange of information, provide support in the collection of taxes(battle on offshore locations).
• Treaties override the domestic law.
31március 2011
The OECD Model Convention
1. Persons covered
2. Taxes covered
3. General definitions
4. Resident
5. Permanent establishment
6. Income from immovable property
7. Business profit
16. Directors’ fee
17. Artistes and sportsmen
18. Pensions
19. Government service
20. Students
21. Other income
22. Capital7. Business profit
8. Shipping, inland waterways transport andair transport
9. Associated enterprises
10. Dividend
11. Interest
12. Royalties
13.Capital gain
14.[Deleted]
15. Income from employment
22. Capital
23. Avoidance of double taxation
24. Non-discrimination
25. MAP
26. Exchange of information
27. Assistance in the collection of taxes
28. Diplomatic bodies, consulates
29. Territorial extension
30. Entry into force
31. Termination32
March 2011
Application of tax treaties – „6 step approach”
33március 2011
Tax treaties – How to interpret them?
• They are concluded between countries and therefore, due consideration is to begiven to the Vienna Convention (Vienna Convention on the Law of Treaties – 1969).
• Do not create additional tax liability, only distribute the taxing right between thecontracting states.
• Commentary to the OECD Model Treaty:
- Can a 2012 amendment to the Commentary be applied when interpreting anOECD Model based tax treaty that was concluded in 1996?OECD Model based tax treaty that was concluded in 1996?
- Specification vs. novelty.
• Applicable article: more than one article may apply to a given income it has to beinvestigated which one prevails over the other(s)!
• Definitions:
- Who is the state applying the treaty?
- Which definition is to be applied?
- OECD solution?
34március 2011
The OECD Model Convention – personal scope
• Personal scope: the convetion applies to persons (natural, legal or other)who are residents of on or both of the contracting states
- Has to be person: question of partnerships (can execute rights, assumeliabilities, may sue or be sued).
- Must have unlimited tax liability in at least one of the contracting states.
• Personal scope decides which treaties is applicable (triangular cases).
35március 2011
The OECD Model Convention – personal scope
US
Interest
What is the applicable wht?
5%
36március 2011
BHU
CH
InterestA
10%
10%
The OECD Model Convention – personal scope
What is the applicable wht?
e/m Inc.
W L
37március 2011
S
10% 5%
The OECD Model Convention – residency
• Resolving conflicts
- Residency vs. source
- Residency vs. residency
• In the application of the convention: any person who under the laws of acontracting state is liable to tax therein based on its worldwide incomecontracting state is liable to tax therein based on its worldwide incomedue to any criterion.
• The conracting state, any political subdivision of local authority thereof isper definition resident (usually they are tax exempt)
• Does not inlcude persons who are only subject to tax based on incomesourced or property located in the given state.
38március 2011
The OECD Model Convention – residency
India UAE
Disposition of thesub after migration
39március 2011
Subsidiary
20% capital gain tax 0% captal gain tax
The OECD Model Convention – residency
• What does worldwide tax liability mean?
- Loss in a given tax year?
- Exempt income?
- Exempt persons (REITs)?
- What does tax liability mean (tax payment liability)?
• Tie-breaker rule for dual residence cases:
40március 2011
Entities
- Place of effective management
- HU: strategic and day-to-day seniordecision making
- MAP
Individuals
- Permanent home
- Centre of vital interests
- Habitual abode
- Nationality
- MAP
The OECD Model Convention – residency
• Application of the tie-breaker rule:
- What is a permanent home?
- When assessing the centre of vital interests economic or personal ties aremore important?
- Pavarotti case- Pavarotti case
• Habitual abode: „a period that is sufficiently long considering thecircumstances of the given case”
- 6 months
- interruptions?
41március 2011
• Applies only to income and property taxes.
- In Hungary to personal- and corporate income taxes (in the past itapplied to special profit tax as well);
- Does not apply to indirect taxes (i.e. VAT)
- Local business tax?
The OECD Model Convention – subject
- Local business tax?
- Innovation contribution?
- Austerity taxes?
• Exhaustive list, taxes of a similar nature introduced later on.
• Contracting parties have to notify each other about the introduction of anynew, for the purposes of the convention, relevant taxes.
42március 2011
• Most treaties do not contain specific provisions in this respect.
• The territory of contracting parties: applies to persons that are resident ineither or both of the contracting states
• Kosovo, Channel Islands, Gibraltar, French Guyana, etc?
• Can be extended to:
The OECD Model Convention – territorial scope
• Can be extended to:
- Any other state or territory whose international affairs are handled byone of the contracting states, and
- That levies taxes that are in substance the same as the taxes covered bythe convention.
43március 2011
The OECD Model Convention – entry into force
• Both contracting states ratification is necessary for the treaty to enter intoforce.
• Process of ratification is subject to domestic law.
• Only enters into force after the contracting states have notified each otherabout the fact of ratification.about the fact of ratification.
• Special provisions may apply to the effective date of certain articles.
44március 2011
The OECD Model Convention – Allocation of TaxationRight
1. Taxable without limitation in the state of source. (e.g.):
- Income of permanent establishment;
- Income from immovable property;
- etc.
2. Limited taxation in the state of source.2. Limited taxation in the state of source.
- dividend;
- Interest;
- Royalty?
3. Taxed only in the state of residence. (e.g.)
- Business profits;
- Capital gain;
- Other income;
- etc. 45March 2011
The OECD Model Convention – methods for avoidingdouble taxation
• It is the state of residency’s obligation to avoid double taxation, if it mayarise.
• Treaty methods:
- Credit
- Exemption- Exemption
• The exact calculation method is not defined in detail, it is left to domesticlaw (especially in the case of exemption).
• Problem: domestic method may result in additional tax liability in aninternational situation compared to a pure domestic one it may be inconflict with the general purpose of the treaty!
46március 2011
The OECD Model Convention – business profits
• Taxable only in the state of residence.
• Does not solely apply to legal entities or other persons (i.e. it applies toprivate entrepreneurs as well).
• No other method is necessary to avoid juridical double taxation (noexemption or credit is needed).exemption or credit is needed).
• Exception: PE income!
47március 2011
The OECD Model Convention – PE
• Definition: „Fixed place of business through which the business of anenterprise is wholly or partially carried on”.
• Extremely important in int’l taxation.
• Unlimited taxation right to the source country.
• May be created easily and in certain cases its not straightforward whether it• May be created easily and in certain cases its not straightforward whether itexists or not!
• Has to be investigated on a case-by-case basis.
• UN Model deviation: „Force of attraction”
48március 2011
The OECD Model Convention – PE
• Definition: „Fixed place of business through which the business of anenterprise is wholly or partially carried on”.
• What does it really mean:
- Existence of a place of business, i.e. a facility such as premises or incertain cases machinery or equipment.
- Must be fixed, i.e. it must be established at a distinct place with a certain- Must be fixed, i.e. it must be established at a distinct place with a certaindegree of permanence rule of thumb: 6 months
- The carrying on of the business of the enterprise through this fixed placeof business. This means usually that persons who in one way or the otherare dependent on the enterprise (personnel) conduct the business of theenterprise in the State in which the fixed place is situated.
49március 2011
The OECD Model Convention – PE
• PE especially:
- place of management;
- branch;
- office;
- factory;Purpose?
- factory;
- workshop;
- a mine, an oil and or gas well, a quarry or any otherplace of extraction of natural resources.
• Conclusion: the detailed list of examples can andshould be disregarded.
50március 2011
The OECD Model Convention – PE
• Special rule: Project PE
- Building site
- Construction or installation project
• PE retroactively
> 12 months
• PE retroactively
• What about interruptions: 1 May – 1 November , 1 January– 1 June
• Main contractor and subcontractors?
51március 2011
The OECD Model Convention – PE
• Do not qualify as PE:
- Warehouse, exhibition gallery, freight equipment;
- Stored goods, exhibited and conveyed resources;
- Resources manufactured by other enterprises;
- Business place for gathering information and purchasing goods;- Business place for gathering information and purchasing goods;
- preparatory, auxiliary character activities;
- Combination of the above.
• Should be investigated on a case-by-case basis what qualifies as e.g.auxiliary!
52március 2011
The OECD Model Convention – PE
• Independent (broker) and dependent agent.
• Subsidiary.
• Substance over form!
• Definition of the income of the permanent establishment: „arm’s lenghtprinciple”. AOA!principle”. AOA!
• Technique of the avoidance of double taxation: exemption.
53március 2011
The OECD Model Convention – Dividend
• Sharing of taxation right.
• Most countries tax them at source Hungary?
• Method of avoiding double taxation: credit
• Dividend:
- Max. 5%, if the beneficial owners has min. 25% direct interest.
- Max. 15% in other cases.- Max. 15% in other cases.
- Capital interest is what matters, not voting right.
• Defines dividend overrides domestic law (see USA)!
• Method of collecting tax.
• Has a bilateral reach: it only applies to dividend paid by resident of onecontracting state to a resident of the other contracting state triangularcases and their problems!
54március 2011
The OECD Model Convention – Dividend
• Aim of the beneficial ownership clause is to prevent abuse of the treaty(treaty shopping).
CC
Wht:0%
• Not paid to beneficial owner: full wht applies (30%)
• B – C convention’s applicability?
55március 2011
A
B
A
dividend
Wht:30% Wht:0%
The OECD Model Convention – Dividend
• Bilateral reach:
ParentParent PE
56március 2011
Sub
Dividend
Bankaccount
HU
CH
Sub
Dividend
No CH wht No CH wht
HUCH
The OECD Model Convention – Dividend
• Triangular cases:
ParentHU
CH
Parent
Dividend
DE
PE
57március 2011
Sub
Dividend
CH
Sub PE
CH is not limited to wht Only CH wht, no HU wht
HUCH
PE
The OECD Model Convention – Dividend domestic law
• Income shrinks
D
CCIT: 28%
CIT: 25%
38 dividend
ATP: 29!
58március 2011
ETR: 71%
C
B
ACIT: 19%
CIT: 35%
100 income
81 dividend
53 dividend
The OECD Model Convention – Dividend – domesticlaw• „Participation exemption”
D
CCIT: 28%
CIT: 25%
81 dividend
ATP: 81
Exempt income
Exempt income
59március 2011
ETR: 19%
C
B
ACIT: 19%
CIT: 35%
100 income
81 dividend
81 dividend
Exempt income
Exempt income
The OECD Model Convention – Dividend – domesticlaw
• Dividend is not tax exempt:
- At the level of the individual owner.
- If the sub is a controlled foreign corporation.
• CFCs are typically created to allocate income to low tax jurisdictions.
• If distributed dividend is tax exempt income, the domestic tax liability• If distributed dividend is tax exempt income, the domestic tax liabilitywould be avoided.
• If the CFC does not distribute the income, the domestic tax liability isdeferred.
Taxation of deemed distributions
60március 2011
The OECD Model Convention – Dividend
• CFC regulations are typically aimed at passive income. Why?
• Typical CFC regulations:
- Controlled and foreign resident entity in most cases.
- Targets low tax countries (HU) or has a global view (US, CA).
- The previous compares the domestic tax level to the foreign (nominalrates, average effective rates or amount of tax actually paid).
- The latter is justified by the fact that many tax systems provide forbenefits to passive income. Thus, only passive income is allocated to theowner level as tainted income.
- Safe harbour regulations: real economic presence; de minimisexemption; distribution exemption; listing on stock exchange.
61március 2011
The OECD Model Convention – Dividend
HU Parent
35 refund
• Cirumventing the CFC regulations of Parent country.
• Maltese DTTs apply to the royalty income.
62március 2011
MT Sub
CIT: 35%
100 royalty
65 dividend
Tax Authority35 CIT
35 refund
0% wht
The OECD Model Convention – Interest
• Sharing of taxation right between state of source and residence.
• Most countries levy wht on itHungary?
• Method of avoiding double taxation: credit.
• Very similar to the article regulating dividends.
• Interest:
- Max. 10% wht, if paid to beneficial owner (see dividend).- Max. 10% wht, if paid to beneficial owner (see dividend).
- New definitions: „arises” and „arm’s length”
• Defines interest overrides domestic law!
• Method of collecting tax: withholding
• Has a bilateral reach triangular issues!
63március 2011
The OECD Model Convention – Related parties
• Deals with economic double taxation.
• Applicable:
- There is a special relationship between the contracting parties thatenables one to influence the other, and
- The transaction is not at arm’s length.- The transaction is not at arm’s length.
• Contracting states may adjust the tax bases.
• Adjustment has to be simultaneous.
64március 2011
The OECD Model Convention – Royalties
• Only taxable in the state of residence.
• Most countries still levy wht deviation from the OECD Model
• ENSZ Model.
• Hungary?
• Method of avoiding double taxation: taxing right is allocated solely to the• Method of avoiding double taxation: taxing right is allocated solely to thestate of residence (in practice: credit).
• Defines royalty overrides domestic law
• Works like the articles applicable to dividends/interests.
65március 2011
The OECD Model Convention – Real estate
• Income derived from utilizing/disposing real estate may be taxedunlimitedly in the state of source.
• State of residence may also tax!
• Overrides other articles (e.g. Art. 7) it does not need to be a PE for thesource state to be able to tax!
• Method of avoiding double taxation: generally exemption• Method of avoiding double taxation: generally exemption
• Has a limited scope just like the articles applicable to dividends orinterests.
• Defines real estate.
66március 2011
The OECD Model Convention – Real estate
• Limited scope: the place of residence of the person earning the income andthe place where the real estate is located are the factors that count.
NL
67március 2011
PT
IT Lease fee
PT-NL: NL may tax, PT may tax, but shall give relieffor double taxation.
PT-IT: PT may tax, IT may not tax real estate is notlocated there!
The OECD Model Convention – Real estate
Farm
68március 2011
Market
Sale
The OECD Model Convention – Capital gain
• Only taxable in the state of residence, except
- Real estate
- PE property
- Ships, aircrafts, etc (see later).- Ships, aircrafts, etc (see later).
- Real estate holding companies (not in all treaties, it is a SAAR).
• Method of avoiding double taxation?
69március 2011
The OECD Model Convention – Capital gain
• Sale of shares in real estate companies
A Co.Sales price Offshore
Co.
Sales price
Sales priceOffshore
70március 2011
A Co.
Sales priceCo.
Agenda
I. Fundamental questions of int’l taxation
II. Avoiding double taxation, double tax treaties, the OECD modelconvention
III. EU directives
IV. A few practical examples
V. Hungary in the int’l taxation
71március 2011
EU Directives
• Multilateral.
• Only within the EU.
• Mandatory for all the member states.
• Pursuit of aims, implementation is free.
• Double tax treaties vs. directives.• Double tax treaties vs. directives.
• Most important from the direct taxation point of view:
- Parent-subsidiary directive
- Merger directive
- Interest-royalty directive
- Code of Conduct.
72március 2011
EU Directives – Parent-Subsidiary Directive
• Aim: exemption of dividend taxation from withholding tax and corp.income tax.
• Methods of exemption:
- Exempt from tax base, or
- Full credit method in respect of tax payable after dividend (withholding- Full credit method in respect of tax payable after dividend (withholdingtax and CIT payed by subsidiary too).
• Conditions of implementation:
- Persons covered (companies)
- Minimum 10% of the shares
- Possiblity of 2 years holding provision.
• Newest developments.
73március 2011
EU Directives – Merger Directive
• Aim: int’l mergers, asset deals, tax exemption of share exchanges.
• Types:
- Merger („upstream” and „downstream” )
- De-merger (spin off)
- Preferential transfer of assets (business unit, max 10% cash)
- Share exchange (max 10% cash).- Share exchange (max 10% cash).
• Pursuit of tax exemption: deferring of tax liability
- Base of the depreciation remains unchanged
- No significant cash movement
- Does not aim to avoid taxation
74március 2011
EU Directives – Interest + Royalty Directive
• Aim: withholding tax exemption of interest and royalty payments betweenrelated parties.
• Conditions:
- Holding of 25% of shares directly
- „Arm’s length” interest- „Arm’s length” interest
- Actual beneficiary
- Taxable at the beneficiary.
75március 2011
Thank you for the attention!