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PKF International Tax Alert February 2009 1

Issue One – Europe, Middle East and India Regions February 2009

Chairman’s Note

Welcome to the first edition of the PKF International Tax Alert, a publication designed to summarise key tax changes from around the world. This publication will be issued three times per year in soft copy format only and can also be found on the PKF International website www.pkf.com

This version of the International Tax Alert only contains all the updates for the Europe, Middle East and India Regions. To get tax alerts for other or all regions please download the alternative versions of the International Tax Alert available on www.pkf.com.

Mark Pollock, Chairman, PKF International Tax Committee

[email protected]

Tel: + 61 8 9278 2213

In this edition

Czech Republic - Income Tax 2009 changes David Cervinka comments on some of the changes announced in the Income Tax Law.

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Finland – Tax Update Tom Hoffstrom outlines some of the recent changes in the Income Tax Act.

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Germany – Changes in Corporate Taxation Dr Dirk Altenbeck and colleagues describe the impact of new thin capitalization rules and tax implications of ownership change in corporates.

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Hungary – Ideal place for holding companies Vadkerti Krisztian gives an overview of tax benefits available on holding companies operating in Hungary.

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India – Tax Update S Hari Haran discusses some of the important rulings given by India’s tax authorities on issues related to International Taxation, and also outlines the recently signed tax treaties with other countries.

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Israel – Income Tax Ordinance Amendment 169 Shahul Tabach summarises the recent amendment to Israeli tax laws that are likely to benefit foreign investors.

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Jordan – Tax Update Mohammed Khattab recapitulates the incentives provided for both foreign and domestic investors while doing business in Jordan.

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Kuwait – New Taxation Law Tomy Thomas outlines the main features of the new tax laws in Kuwait.

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Latvia – Tax Update Maruta Zorgenfreija summarises changes to VAT, Corporate and Personal taxes.

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Luxembourg – Major developments in tax law for 2009

Ralph Bourgnon highlights the major developments in tax laws for the year 2009. 25

Netherlands – Radical reform of tax treatment of Interest Ruud van der Linde describes the reforms that are under investigation, regarding corporate income tax treatment of interest, and highlights the main features of union budget 2009.

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Poland – Tax Update Michal Piotroswki and colleagues highlight the recent changes in the Income Tax Act which have an impact on business.

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Portugal – Government Budget for 2009 José Ramos looks at major changes to the tax system.

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Romania – Fiscal Measures Florentina Susnea discusses the changes in Tax Laws introduced by Budget 2009.

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Slovak Republic – Introduction of the Euro Richard Clayton Budd discusses the impact of the replacement of the Slovak Crown by the Euro on the various tax regulations.

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Spain – Tax Reform in 2009 Aischa Laarbi discusses the major tax developments and reforms in 2009 that have major impact in various areas.

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United Kingdom – Tax Update Jon Hills summarises important changes to UK tax law.

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Czech Republic Information on Income Tax 2009 changes The key points arising from the introduction of Income Tax Law No. 586/1992 Collection are as follows.

The 2009 rate of the income and withholding tax for individuals finally remains on the same level as 2008 being 15 per cent, despite previously announcements of a planned drop to 12.5 per cent. The corporate income tax rate is reduced for 2009 from 21 per cent to 20 per cent with further reduction to 19 per cent for 2010. There is a small reduction of social security insurance rate paid by employee and self-employed persons (12.5 per cent down to 11.5 per cent of a gross wage). Due to the worldwide financial crisis, the government intends to lower social security insurance paid by employers, which is currently on the level of 26 per cent. More strict capitalization rules Already for the 2008 period, more strict thin capitalization rules are applied, in particular for capital or other way related parties. The Income Tax Law Amendment for 2009 enables the omission of thin capitalization rules for unrelated parties with the possibility of retroactive application for the 2008 year. In 2009, financial expenses (interest and other financial costs such as loan arrangements and guarantee fees) are non-deductible where related party loans and credits exceed two times of the borrower's equity (three times if the borrower is a bank or insurance company). Financial expenses coming from loans subordinated to another debt as well as those coming from loans where interest, gains or the fact that these expenses become due depends on debtor´s profit are both non-tax deductible.� There are also small changes in the tax exemption for dividend income and business share transfer income of parent company derived from a subsidiary company. The tax exemption is valid for dividend or other profit share income paid out by Czech subsidiary company (either resident or non-resident) to parent company (either resident or non-resident) under the conditions that: • the parent company holds at least 10 per cent of the capital of the subsidiary • both companies are resident in EU or its permanent establishment is resident on Czech territory. A similar exemption is valid for income derived by the parent company for a share transfer in its subsidiary. From 2009, dividend income tax exemption applies for tax residents of Norway, Iceland and Switzerland. In relation to Switzerland, the tax exemption previously valid for dividend income of the Czech parent company coming from Swiss subsidiary is not valid any more while vice versa still remains. Based on the conditions of the double taxation agreements, the dividend and business share transfers income of the parental company in subsidiary in a third country is subject to tax exemption from 2008.

Income coming from Czech-source company business share transfer is newly considered as Czech-sourced income (previously just income paid by tax resident). The tax exempt described under the point 4 remains valid. For more details, please contact: David Cervinka PKF Czech Republic Tel: +420 602 208 528 Email: [email protected]


Finland Tax Update Business Income Taxation The Business Income Tax Act has been amended from the beginning of the year 2009. The purpose of the amendment is to reduce the differences between the tax legislation and the IFRS and to correspond to the amendments of the Finnish Bookkeeping Act (FAS). The reform did not, however, eliminate all differences between the financial statements in accordance with the IFRS and the taxation. Therefore, a Finnish company also needs to work out the financial statements in accordance to the FAS. Reclaiming foreign withholding tax The Act on the Taxation of Non-residents´ Income and Capital has been amended. As amended, the provisions concerning final withholding tax of dividends correspond to the legal praxis of European Court of Justice. No tax is withheld of dividends paid by a Finnish company to a non- resident company if the dividend would be exempt from tax if it would be paid to a Finnish company. Dividends from non-listed companies are exempt from tax. Dividends from public companies are taxed at a rate of 19.5 per cent. The company that receives the dividend must have its domicile in EEA. Dividends to non-resident individuals living in EEA can also be paid without withholding tax if the dividend would be exempt from tax if it would be paid to a resident individual. Dividends from public companies are taxed at a rate of 19.5 per cent. Dividends from non-listed companies are wholly or partly exempt from tax. The Finnish Tax Administration has given instructions for non-resident companies and individuals in accordance to which they can request for tax exemption from dividends received from Finland. It is required that the dividend would have been exempt from tax if it would have been paid to a resident company or individual and the dividend has been received after 1 Januaryt 2005. The amended Controlled Foreign Companies Act enters into force The amended Controlled Foreign Companies Act (“CFC Act”) entered into force in Finland on 1 January 2009. The CFC Act regulates taxation of foreign companies located in low tax jurisdictions. The current law is amended to be compatible with the freedom of establishment and free movement of capital established by EU Law. VAT Since 1 January 2009, remunerations paid to or by an organization representing copyright holders, on the basis of rights referred to in the Copyright Act are not exempted from tax. The tax rate is 8 per cent. From 1 October t2009, the tax rate will be 12 per cent of the taxable amount in respect of the sales, intra-Community acquisitions, removals from warehousing arrangements and importation of foodstuffs and animal feeding stuffs. For more details, please contact: Tom Hoffström Tax Lawyer, Head of department Tuokko Auditing Ltd Tel: +358 (0)9 4366 140 Fax : + 358 (0)9 4366 1440 Email: [email protected]


Germany Changes in corporate taxation In the last two years, significant changes in German tax law have come into force. We will comment particularly on two which may be of interest to foreign investors. New thin capitalization rules From 1 January 2008, the prior thin capitalization legislation was replaced with a general restriction on the deduction of interest payments. Under the old rules, only interest payments on long-term loans by companies to their shareholders with substantial interest were under specific circumstances classified as non-deductible. Under the new rules, all types of excessive interest expenses are included in the thin capitalization rules. The Interest expenses of a business are entirely deductible up to the amount of its interest income of the same year. Interest expenses exceeding interest income (net interest expenses) are deductible only up to 30 % of earnings before interest, taxes, depreciation and amortization (EBITDA). Non-deductible net interest payments may be carried forward without time limit and set off against interest in future tax years. The new rules also apply to non-resident companies subject to tax in Germany on German-source income calculated using the net income method. However, the new law includes some exemption clauses. Interest expenses may be deducted without limitations if one of the following conditions is met: • The total amount of net interest expenses is less than the exempt threshold of EUR 1 million. If the net

interest payments exceed the threshold, the limitation applies to the full net interest payments. • The company does not belong to a group of related companies, or belongs to such a group only partially

(stand-alone clause). • A company is deemed to belong to a group, if the company is or could be part of the consolidated

group's accounts under German generally accepted accounting principles or the financial and business policy of the company can be determined in uniformity with that of one or several other companies.

• The company belongs to a group of companies and either its ratio of equity over total balance sheet

assets is higher than the overall ratio for the whole group, or the deviation of its ratio of equity over total balance sheet assets is not lower than 1 % compared to the overall ratio for the whole group (escape clause).

The ratios are determined according to the separated financial statements of the business and the consolidated group's financial statements, which have to be prepared under the international financial reporting standards (IFRS). If financial statements under IFRS are not available, financial statements prepared under the commercial code of an EU Member State or the generally accepted accounting principles of the United States (US-GAAP) may be used. Other financial reporting standards are not considered. In case the financial statements of the business and the consolidated group are prepared under different standards, a reconciliation statement reviewed by an auditor is required.


The rules for partnerships and corporations are in general the same. But for corporations additional requirements concerning the stand-alone and escape clause apply. On the basis of the previous rules, interests to substantial shareholders and closely related persons are considered more precisely. If more than 10 % of the net interest payments are paid to shareholders who hold directly or indirectly more than 25 % in the capital of the company, a person closely related to such shareholder or a third person with recourse against such shareholder or related person, the stand-alone clause, does not apply. The same applies concerning the escape clause. The exemption can not be used if more than 10 % of the net interest payments are paid to a substantial shareholder, a person closely related to such shareholder or a third person with recourse against such shareholder or related person. New rules for loss carry forward when ownership changes For transfers made after 31 December 2007, new rules for loss carry forwards for corporate tax apply. If more than 25 % of the capital or participation, membership or voting rights in a company are transferred within five years to a purchaser or a person related to the purchaser, the loss carry forward will be disallowed pro rata. The rule applies for direct and indirect changes in ownership. If more than 50 percent of the shares or voting rights in a company are transferred within five years, the loss carry forward disclaims completely. All share transfers within a period of five years have to be summed. Any additional subsequent transfer will cause a new five-year period. Example: 15 % of a corporation is sold to a new shareholder in current year. Two years later, another 15 % is sold to a new shareholder. Following 30 % of the losses arising until the second selling cannot be set off against profits in future years. In the following year, 25 % of the shares are sold to a new shareholder and, from that moment, all losses arising expire. The same applies to the loss carry forward for business tax. The rules apply also to comparable statements of affairs which include: • acquisition of profit-participation certificates • shareholder agreements and waiver of voting rights • a merger of a company into a loss company • increase or decrease in share capital or purchase of own shares if the shareholding quota changes.


For more details please contact: Dr. Dirk Altenbeck Email: [email protected] Dr. Matthias Heinrich Email: [email protected] Julia Meyer Email: [email protected] PKF Issing Faulhaber Wozar Altenbeck OHG Tel: +49-931-355 78-32 Fax: +49-931-355 78-36


Hungary Ideal place for holding companies Tax exemption for sale of company shares Sale of company shares is exempt of corporate income tax provided that: • it represents at least 30% share of a company (excluding controlled foreign companies) • the taxpayer notifies the tax authority about the acquisition of the shares within 30 days of the acquisition • the shares were held for minimum of one year. No withholding tax on distribution of dividends No withholding tax arises on dividends payable to other corporations (neither domestic nor foreign). Change of CFC definition The definition of controlled foreign company has changed. From 1 January 2008 the companies resident in the EU, OECD-members or other countries with which Hungary has a double taxation treaty are excluded, regardless of whether there is corporate income tax payable and the rate applicable. Companies resident in countries other than the ones mentioned above are considered controlled foreign companies if the corporate income tax rate is below two third of the Hungarian rate (2/3 x 16%). Double taxation treaties The new countries which have double taxation treaties with Hungary since 2005 are the following: • Belarus • Latvia • Lithuania • Estonia • Iceland • India • Slovenia • Azerbaijan • Uzbekistan

Accounting in foreign currencies More companies are allowed to prepare their annual reports in foreign currencies, which is a good way to avoid risks of unforeseeable changes of the tax base due to unexpected exchange rate movements and it also facilitates reporting to parent companies. From 1 January 2009 the condition is that at least 50% of the company’s income, expenses, costs and financial assets and liabilities for the current and previous year are denominated in that currency. This ratio will decrease to 25% in 2010. Easier VAT refund pre-conditions The procedure of VAT refund has become much easier since 1 January 2008, as the previous restrictions were abolished (it is no longer necessary to report revenues or purchase of fixed assets). Consequently, the


holding companies may reclaim the input VAT on expenses, even before reporting income. (The proper documentation and the financial settlement of the charges still remain to be the pre-condition of the refund.) For more details, please contact: Vadkerti Krisztián PKF Hungary Tel.: +36 1 391 4220 Fax: +36 1 391 4221 Email: [email protected]


India Tax Update Legislative Changes In India, legislative changes are generally proposed in February, through introduction of the Finance Bill. The next round of legislative changes would be introduced in February 2009 only. Hence, there are no immediate changes to report. New Double Taxation Avoidance Agreements (DTAA) DTAA between India and Botswana: Recently, the Central Board of Direct Taxes of India (CBDT) has notified that provisions of the Agreement between India and Botswana will be applicable with effect from 1 April 2009. In the Agreement, the tax rates on the different types of Income are mentioned, some of them are given below: Types of Income

Tax Rates

Technical Fees 10% of Gross amount of Technical Fees

Royalties 10% of Gross amount of Royalties

Dividend 7.5% if beneficiary is holding 25% of share capital, otherwise 10%

Interest 10% of gross amount of interest

DTAA between India and Luxembourg In June 2008, the Government of India signed a DTAA with the Luxembourg Government. The provision of this Agreement will be effective on a date which is yet to be notified by the CBDT of India, ie, it has not come into operation yet. In case of India, the DTAA will cover income tax and wealth tax, including any surcharge thereon, and also the tax treatment of dividend, interest, royalties and fees for technical services - both in the country of residence as well as the country of source. In case of Luxembourg, it will cover income tax on individuals, corporation tax, capital tax, and the communal trade tax. As per the Agreement, the rate of tax in the country of source shall not exceed 10% of the gross amount of payment where the beneficiary of the payments is a resident of the other contracting state. The DTAA also provides that capital gains from alienation of shares of a company shall be taxable in the country where the company is a resident. The incidence of double taxation shall be avoided by one country giving credit for taxes paid by its residents in the other country. DTAA between India and Syria


In June 2008, the Government of India signed a revised DTAA with the Government of the Syrian Arab Republic. The effective date of this Agreement has not yet been notified by the CBDT of India so it has not come into operation yet.

The revised DTAA covers all taxes imposed on total Income or on elements of Income, including taxes on gains from alienation of movable or immovable property, and taxes on the total amount of wages or salaries paid by enterprises. The DTAA provides that business profits may be taxed in the source country if the activities of an enterprise constitute a permanent establishment in the source country. Profits of a building site, construction, assembly, or installation projects may be taxed in the source country, if the site, project or activities continue in that country for 270 days or more. Profits from the furnishing of services including consultancy services may also be taxed in the source country if activities of this nature continue within that country for more than a period of 183 days within any 12-month period. Profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. The Agreement provides for a maximum rate of tax to be charged in the source country on dividends: at five per cent of the gross amount of dividends if the beneficiary of the dividends is a company which holds at least ten per cent of the share capital of the company paying the dividends; and at ten percent of the gross amount of dividends in all other cases. The Agreement further provides for maximum rate of taxation in the source country at ten per cent in the case of interest and royalties. Capital gains from the sale of shares may be taxed in the country of source. Far-reaching decision on territorial nexus for tax liability Off-shore sale of controlling stake – Vodafone case - a Capital Gain related issue: (Vodafone International Holdings B V Vs Union of India 175 Taxman 399). Transactions involving purchase and sale of shares between two companies incorporated outside India, which hitherto were considered not resulting in any tax liability in India, now run the risk of being caught in tax net in India. The facts of this case are as follows: In this case, British telecom giant - Vodafone, bought 100% shareholding of CGP Investments (CGP) a Cayman Island based investment company, from Hutchison Telecom (‘HTIL’) of Hong Kong. CGP, in turn held the shares of Hutchison Essar Limited, an Indian telecom company. Though the transaction was between two non-resident companies in India, namely Vodafone and HTIL, the Income Tax department of India has taken a stand that such transaction results in transfer of the interest in the share holding in an Indian company. Accordingly, a tax demand of approx INR 10,000 Crores (equivalent to approx. USD 2.1 billion) has been raised. (In India a person who is responsible for payment of money containing element of income taxable in the hands of a non-resident is under an obligation to withhold tax and remit the same to Government). The matter was taken by Vodafone to the High Court complaining the lack of Jurisdiction. The writ petition has been dismissed by the High Court; further appeal to Supreme Court has also been lost. The demand if confirmed is likely to raise a lot of new issues hitherto not faced by the Tax Payer Community. Tax decisions involving Interpretation of Tax Treaties Tax on Overseas professionals: The decision in the case of Clifford Chance Vs DCIT 2008 TIOL 650 of the Bombay High Court involved interpretation of the provisions of India-UK tax treaty. The assessee is a firm of solicitors,


tax resident of UK whose services were hired for four power projects in India. All the partners in the JVs are non-resident except one. The firm filed a return of income for income arising out of operations in India as it fulfilled 90 days condition. The said figure of Rs.5,08,87,950/- was arrived at on the basis of the income of the Appellant, which was attributable to its operations in India in respect of the four Projects. The Assessing Officer, however, held that the entire fees received by the Appellant from the Clients engaged in the above four Projects was taxable in India. The issue traveled to the High Court on appeal. The Bombay High Court held that income arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income "accrues or arises" in each of the jurisdictions. The Income tax Act envisages the fulfillment of two conditions: services, which are source of income sought to be taxed in India must be (i) utilized in India and (ii) rendered in India. Since in the present case, both these conditions have not been satisfied simultaneously, the Bench held that only that part of income of the assessee which is charged on hourly basis in India and utilized in India, shall be chargeable to tax in India and the firm’s appeal was allowed. Non-resident firms rendering professional services can therefore breathe easy. Fees for Technical Services In the case of Mannesman Demag Sack AG (MDS), 119 TTJ 543, the Delhi Income Tax Appellate Tribunal had to deal with the tax impact of two contracts. One contract was for supply of equipment, components and spares; and second was for engineering design, supervision of erection and commissioning, and performance guarantee test. MDS had entered into these two contracts with a public sector company - Steel Authority of India Limited (SAIL). MDS was obligated to render supervisory services and that resulted in Permanent Establishment (PE) in India. The question was related to the taxability of the consideration payable under the contract for supplies, and under the contract for designs and drawings etc. In so far as the contract for supplies of plant and machinery, it was held that the consideration would not be liable to tax in India. In regard to the second contract involving supplies of drawings and design, and also rendering of services, the Tribunal did not accept the plea that no income was liable to tax in India. The argument that the designs and drawings were made in Germany and the PE of MDS had no role to play was not accepted. The Tribunal attributed an amount of 10% of the amount payable under the second contract as fees, for technical services liable to tax in India. Permanent Establishment The facts in the case of Fugro Engineers B.V.(Fugro) (in Fugro engineers B V Vs ACIT 174 Taxman 9 – breaking news) involved interpretation of the provisions of the DTAA between India and the Netherlands, to conclude whether the non-resident company had a Permanent Establishment (PE) in India. In this case, Fugro had an office in India and used it for rendering services. Treaties for avoidance of double taxation generally define PE as covering a place of business of the non-resident through which the business of the non-resident is carried on. No specific length of time is normally defined. However, there is another definition which deals with instances where there might not have been an independent office but still a PE could be considered to have existed. Normally, these have a certain threshold period of activity defined. In this case, an independent place of business having existed, the Tribunal concluded that there was a PE and hence there was no requirement to look into the period of operation of the place of business to decide the issue.


There was another interesting decision rendered by the Authority for Advance Ruling (AAR) in the case of Golf in Dubai LLC in Golf in Dubai LLC In re 219 CTR 513. The non-resident in this case was an UAE company. It organized two tournaments in India for a week and there was no further activity. Its employees also stayed in India for only nine months out of 12 months. The Company did not render services to anybody but only organized the tournament in India and made some income out of it. The query was whether there was any PE in India. The AAR ruled that there was no PE in India of the UAE Company on the basis that only one tournament was organized and there was no successive event. Transfer Pricing related decisions Transfer pricing law in India is consistent with the law in most other countries. However, there is no mechanism of Advance Price Agreements. The disputes in relation to transfer pricing are post facto and could involve situations where unforeseen tax costs could befall the tax payer. The decision in the case of Philips Software Centre Pvt Ltd (Philips Software Centre Pvt Ltd Vs ACIT 174 Taxman 5 - breaking news) is helpful to the tax payers who enjoy tax holidays provided to the certain units dedicated to promotion of exports. The Tribunal ruled that where the income is not taxable as per the provisions of the Income Tax Act, the question of applying provisions of transfer pricing should not arise. While this is a welcome decision, there could be further litigation on this point. In another case pertaining to Transfer Pricing, the Tribunal at Delhi (in the case of Sony India (P) Ltd Vs DCIT 118 TTJ 865 dealt with various transactions that the tax payer (Sony India Pvt Ltd) had with associated enterprises in India. The ruling established the following principles: • Reimbursement of expenses to Associated Enterprises (AE) outside India would be included in the

operating income of the assessee for computation of Arm’s Length Price (ALP).

• Insurance claim received by the tax payer would be included in the operating profits under Transactional Net Margin Method (TNMM).

• In case of export sale to AE, if the price charged to AE was comparable to the local sale price (after

adjusting excise duty, sales tax and other taxes which are not applicable in case of export sale and export benefits), then no other adjustment is required to calculate ALP under Comparable Uncontrolled Price (CUP) method.

• Companies which have different features, different products as compared to the assessee, which affect

the price of the product and performance considerably, cannot be considered as comparables. • In case there is a difference between financials of the tax payer and the comparables on account of

working capital, risk factors etc., then up to 20% deduction is allowed, after determining the mean margin of comparables to compute ALP of the tax payer.

• The assessee has an option to take the ALP which may vary from the arithmetical mean by not more

than 5% of the mean as per provisions of the Act. This option is available to all tax payers, irrespective of whether price of international transaction shown by it exceeds the margin provided as above, or not.

For more details, please contact: S. Hari Haran, Partner PKF Sridhar & Santhanam Tel: + 91 44 28478701 – 04 Fax: + 91 44 28478705 Email : [email protected]


Israel Income Tax Ordinance Amendment 169 The Knesset has passed the above tax amendment which forms part of Israel’s own economic stimulus plan. It is part of the measures announced by the Finance Ministry on November 2008 for expanding the credit supply amid the international financial crisis. The amendment is effective from the beginning of 2009. The principle measures enacted are summarized below. Bond Interest paid to foreign investors To help revive the corporate bond market, an exemption is granted to foreign residents regarding interest, discount premiums, indexation and exchange differences on bonds traded on the Tel Aviv Stock Exchange. This exemption does not apply to: 1) Income from a permanent establishment being a fixed place of business in Israel. 2) Shareholders holding 10% or more in the shares of the bond issuer company.

3) Related companies, being a 25% or more parent or subsidiary of the bond issuer.

4) Employees, service providers, product suppliers and other parties having a special relationship with the

bond issuer - unless the Assessing Officer is satisfied that the rate of interest or discount premium was fixed in good faith.

Capital Gains derived by foreign investors To encourage foreign investment in securities of Israeli resident companies, (public or private), an earlier limited exemption from Israeli capital gains tax has been expanded. The exemption is now available to any foreign resident investor not only to persons who have resided for 10 years in a country that has a tax treaty with Israel. Also, there is no longer a requirement to notify the Israeli Tax Authority of the investment within 30 days after acquiring the securities.

As before, the exemption does not apply to: (1) Gains from securities in companies whose main assets are Israeli real estate interests

(2) Gains attributable to an Israeli permanent establishment of the foreign investor.


Foreign Dividends paid to Israeli multinational corporations To encourage Israeli multinational groups to repatriate money to Israel, they may elect a 5% rate of company tax (instead of 25%) for dividend income from a foreign source, which is "used in Israel" in 2009, or within one year after actual receipt of the dividend, whichever is later. "Used in Israel" means the dividends cannot be paid to any 5% or more shareholder, but can be used for any of the following:

(1) Payment to Israeli residents for services or work performed in Israel

(2) Purchase or lease of assets from an Israeli resident, or for assets used in Israel

(3) Improvement or maintenance of assets in Israel

(4) Research and development in Israel

(5) Debt repayment to an Israeli resident (if a related entity, it must use the money in Israel).

(6) Interest or discount premium on a bond traded on the Tel Aviv Stock Exchange, or purchase of such a bond

(7) Deposit at an Israeli resident bank for at least a year, or if sooner reinvestment in securities traded on

the Tel Aviv Stock Exchange for the remainder of the year

(8) Purchase of securities traded on the Tel Aviv Stock Exchange and holding them or replacement securities for at least a year

(9) Payment of dividend to another Israeli resident company for use in Israel. Dividends eligible for the 5% rate are reduced if the Israeli parent company effectively repays them to the dividend payer or its 25% affiliate in the period from 1 December 2008 to 31 December 2010, by way of loan, share investment or loan guarantee which is called. If the election is made, the Israeli parent company cannot credit "underlying" corporate tax paid by the group abroad, nor can it carry forward any excess (unutilized) foreign tax credit under the regular Israeli tax rules. The 5% tax rate overrides the 25% tax generally imposed on income of a "controlled foreign company" in 2009 if it is distributed in the same year to the Israeli parent company and the 5% tax is paid. The election is not available to Israeli parent companies which are "house property companies" or " family companies" (where shareholders are taxed instead of the company). The 5% tax rate resembles the "American Jobs Creation Act of 2004", which offered American multinationals a 5.25% tax rate if they repatriated their overseas earnings and reinvested them in their business. To sum up, the above amendment contains some useful Israeli tax benefits for foreign investors in Israeli bonds and other securities, and Israeli multinational groups. For more details, please contact : Shaul Tabach Reuveni Hartur Tepper & Co. Tel: +972 3 625 4545 Email: [email protected]


Jordan Tax Update For many years Jordan has been promoting the country as a place to do business through establishing Free Zones, Industrial Estates and Qualifying Industrial Zones (QIZs). The following paragraphs recapitulate the incentives provided for both foreign and domestic investors doing business in Jordan. Free Zones Jordan’s Free Zones were established to promote export-oriented industries and transit trade; to attract domestic and foreign direct investment; and to spur economic growth and job creation. Free Zones accommodate processing industries, in addition to trading, warehousing, and other activities. Commodities and goods of various origins are deposited in the Free Zone areas for storage and manufacturing, without payment of the usual excise fees and taxes. Free Zones accommodate enterprises that introduce new industries, utilize modern technology, complement domestic industries, use local raw materials or manufacturing parts, upgrade the skills of local workers, and produce goods with limited availability in the domestic market. Incentives offered by Free Zones include: • Exemption from income taxes for exported goods, goods in transit trade, as well as profits gained from

the sale or transfer of goods inside the Free Zone. • Exemption from income and social service taxes on salaries and allowances of non-Jordanian

employees involved in projects established in the Free Zones. • Exemption from custom duties, taxes, and other fees on imported goods, or on those goods which have

been exported (with the exception of services and rent charges). • Exemption from licensing fees and taxes on land and buildings, and other construction set-ups in the

Free Zones. • Full repatriation of capital and profits generated from operations in the Free Zones. • Exemption from custom duties for goods produced in the Free Zones and offered for domestic market

consumption. This exemption is limited to the cost of materials and manufacturing expenses, provided this value is approved by the Free Zone Committee

Industrial Estates:

The Jordan Industrial Estates Corporation (JIEC) is a semi-governmental corporation that was established in 1984 with both public and private ownership. Its catalytic role is to contribute to the development of small and medium-sized industries (SMIs) by providing comprehensive and integrated industrial estates. In 1996, the JIEC inaugurated its Centre of Excellence which will function as an incubator for new enterprises and as a catalyst for the interaction between industry and academia. Three of the operating public industrial estates also hold QIZ (see the Qualifying Industrial Zones paragraph) status, which allows exporters of goods manufactured in these zones to benefit from duty-free and quota-free access to the US market.


Industrial estates offer the following incentives to investors:

• 100% exemptions for two years of income and social services tax for industrial projects located within industrial estates owned and managed by JIEC.

• Total exemption from buildings and land tax. • Exemption or reduction on most municipal fees. • 100% exemption of taxes and fees on fixed assets for the project, fixed assets for expansion or

modernization, and on spare parts Qualifying Industrial Zones (QIZs): QIZs are areas that have been accorded a special status designated by the governments of Jordan and the US, whereby products manufactured in these zones can be exported to the US with payment of duty or excise taxes, and without the requirement of any reciprocal benefits. In addition, there are no quotas on products manufactured in Jordan and exported to the US as a result of these and other facilities offered by the government of Jordan. Investors are able to economize between 15%-35% on the cost of production.

Classes of Free Zones The free zones in Jordan categorized into two classes as follows: Public Zones: the following free public zones are currently in existence in Jordan:

• Al – Hassan Industrial Estate • Al – Hussein Bin Abdullah II Industrial Estate • Aqaba Industrial Estate • Ma an Industrial Estate.

Private Zones: the following free private zones are currently in existence in Jordan:

• Ad – Dulayl Industrial Park • Al – Tajamouat Industrial Park • Cyper City Park • Al – Qastal Industrial Park • Al – Zay Ready Wear • Al – Mushatta Qualifying Industrial Estate • Jordan Gateway Project • Al – Hallabat Industrial Park.

Corporate Income Tax In case the investor(s) decided to do business in Jordan and was not subject to any tax exemption, then the investor will be subject to one of the following Corporate Income Tax Rates (per sector): • 15% for Mining, Industry, Hotels, Hospitals, Transportation and Contractual Contracting. • 35% for Banks and Financial Institutions. • 25% for Leisure and Recreational Compounds, Conventions and Exhibition Centers, Insurance

Companies, Exchange Companies and Financial Service, Telecommunication, Business Services, Trade Companies and Other Companies which do not fall under one of the above categories.


For further details please contact: Mohammed Khattab Pro Group Auditing & Consulting Tel: + 962 795572746 Fax:+ 962 6 5606344 Email: [email protected]


Kuwait New Taxation Law A. Overview 1. Corporate Income Tax The Tax Decree of 1955 (Amiri Decree No 3 of 1955) as amended by Law No. 2 of 2008 and the Executive Bye Law issued by the ministerial order no 29 of 2008 governs taxation in Kuwait along with various tax treaties with a number of foreign nations. These decrees and bye-laws are supplemented by Directives issued by the Director of Income Taxes. Under the above, foreign companies described in the decree as 'bodies corporate' which carry on business or trade in Kuwait are taxable. The term 'bodies corporate' refers to an association that is formed and registered under the laws of any country or state and is recognized as having a legal existence entirely separate from that of its individual members. Partnerships fall within this definition. No income tax is imposed on companies incorporated either in Kuwait or in other Gulf Cooperation Council (GCC) countries and wholly owned by nationals of Kuwait or other GCC countries. The members of GCC are Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia and United Arab Emirates. Under Law No 19 of 2000, a 2.5% tax is imposed on the annual net profits of Kuwaiti companies listed on the Kuwait Stock Exchange as National Labour Support Tax. Foreign companies can carry on business in Kuwait either through an agent or joint venture or as a minority shareholder in a locally registered shareholding company. Tax is levied on the foreign company's share of the profit plus any amounts receivable for interest, royalties, commissions, technical services, management fees. Upon commencement of business, foreign companies are required to register themselves with Tax Department within 30 days and apply for a Tax Card. A taxpayer may follow one calendar year comprising consecutive 12 months as the first accounting period. For the first and last accounting periods, it is possible to obtain approval for a period shorter or longer than 12 months up to a maximum period of 18 months. A tax declaration is to be submitted in Arabic to the Director of Income Taxes in a specified format, accompanied by audited financial statements and other specified documents. The Director of Income Taxes requires that the declaration and the supporting statements to be certified by an accountant in practice in Kuwait who is also registered with the Ministry of Commerce and Industry. If a foreign company has more than one activity in a similar line of business in Kuwait, either directly or indirectly through subsidiary companies, income from all activated is to be aggregated for tax purposes. Business losses cannot be carried forward for more than three years. The applicable flat tax rate is 15% on taxable income. However, no tax is payable if taxable income is below KD 5,250. It is possible to pay the tax due in four equal installments if not paid as one deposit along with the tax declaration.


2. Personal Tax There is no personal income/wealth tax in Kuwait. B. Determination of taxable income

Tax liabilities are generally computed on the basis of profits disclosed in audited financial statements adjusted for tax depreciation and other deductions of all expenses and costs spent on realizing such income. The tax inspector has a right to disallow any expense that seemed excessive on inspection conducted during assessment. Gross income Gross Income will include: • Income derived from rendering of services in Kuwait. • Income from leasing of property located in Kuwait. • Income from operating any manufacturing, industrial or commercial enterprise in Kuwait. • Income from purchasing & selling of property, goods and maintaining a permanent office in Kuwait where

contracts of purchase & sale are executed. • Income earned from selling, renting etc., any trade mark, design, copyright etc. • Profits from disposal of assets. • Commissions from representation or brokerage. • Profits from any contracts to be wholly or partially performed in Kuwait. Deductions Tax depreciation: The permissible rates of depreciation, applied using the straight-line method, include 4% a year for building, 20% for plant and machinery, 15% to 20% for motor vehicles and 15% for office furniture. Business expenses For expenses to be deductible, they must be incurred in the generation of income in Kuwait. Such expenses must be supported by adequate documentary evidence. Such expenses include: • Salaries, wages and end of service benefits • Taxes and fees except Income Tax • Grants, donations and subsidies paid to licensed Kuwaiti public or private Agencies • Head office overheads at prescribed rates.

The following expenses are normally disallowed for tax purposes: • Personal and private expenses or any other expense not related to business. • Criminal penalties • Reimbursable Losses • Provisions as opposed to accruals are not accepted for tax purposes. Thus terminal benefits are only

deducted when paid out, and debts are only being written off for tax purposes, once they are proved irrecoverable.

• Interest is accepted if it is paid directly by the branch to a bank in Kuwait and is reasonable in relation to

the activities of business in Kuwait.


• Salaries paid outside Kuwait to staff working abroad, except where the contract specifically

requires technical work to be performed abroad. • Transfer pricing of materials and equipment imported. The tax authorities deem the following profit

margins for the imported materials which are normally deducted from the cost of materials and equipments claimed in the tax declaration:

10 to 15% of related revenue; 6.5 to 10% of related revenue; 3.5% to 6.5% of related revenue.

1. imports from head office 2. imports from related parties 3. imports from third parties.

Head office overheads The tax authorities allow the following deductions from income as a contribution towards expenses incurred by the head office of a foreign company: • for contractors and consultants operating through an agent: 1.5% of revenue, reduced by any amounts

paid or payable to sub-contractors • for foreign companies participating with Kuwait companies in the execution of a Contract: 1% of the

foreign company's share of the contract revenue reduced by amounts paid to sub-contractors • for insurance companies: 1.5% of the net premiums. • for banking institutions: 1.5% of direct revenue realized in Kuwait.

C. Retention

There are no withholding taxes in Kuwait. There are, however, retentions made on payments due to foreign companies until such time as they satisfy their Kuwait customer that they have dealt with their Kuwaiti tax obligations. Under Ministerial Order No 44 of 1985, all government departments, public bodies and privately owned and government owned companies are required to withhold final payments due to entities, which should not be less than 5% of the total contract value, until such entities present a tax clearance from the DIT. Failure to comply with these rules could result in disallowance of the related contract costs by DIT. D. Tax treaties

Kuwait has entered into tax treaties with several countries, for avoidance of double taxation. Kuwait is a signatory of the Arab Tax treaty and the GCC Joint Agreement, both of which allows for avoidance of double taxation in most areas. Comprehensive double taxation treaties are available with Austria, Belarus, Belgium, Canada, China, Cyprus, Croatia, Ethiopia, France, Germany, Hungary, Indonesia, Italy, Jordan, Korea, Lebanon, Mauritius, Mongolia, Netherlands, Pakistan, Poland, Romania, Russia, Serbia and Montenegro, Singapore, Switzerland, Syria, Tunisia, Turkey, Ukraine and United Kingdom. With Algeria and South Africa, treaties are under finalization. Kuwait has also concluded limited double taxation agreements in respect of income arising from international sea and/or air transport with several countries. E. Tax incentives Kuwait has a number of tax incentives as follows:


• Leasing and Investment Companies Law No 12 of 1998 allows the formation of investment and

leasing companies having their principal place of business in Kuwait, with Kuwaiti or foreign shareholders. The law grants a five-year tax holiday to non-Kuwaiti founders and shareholders of such companies, beginning on the date of establishment of the companies.

• Direct Foreign Capital Investment Law (DIFCL) No 8 of 2001 provides a tax holiday up to ten

years with respect to non-Kuwaiti shareholders shares of the profits from the qualifying projects. An additional tax holiday for a similar period is granted for further investment in an already approved project.

• Businesses set up in the Kuwait free trade zone for carrying on specified operations are exempt from taxes on operations conducted in the zone and foreign entities can own 100% of such businesses.

• Kuwait has begun to use build, operate, and transfer (BOT) method in respect of some large infrastructure projects. Tax and tariff concessions may be built into a BOT contract.

As per circular No 50 of 2002, issued by the DIT regarding treatment of exempted companies, the exempted companies shall, however, comply with the provisions of submission of tax declaration, inspection and assessment procedures like other companies in order to be eligible for exemption. For more details, please contact: Tomy Thomas PKF Bouresli & Co. Tel: +965 226 55 777 Fax: +965 226 59 100 Email: [email protected]


Latvia Tax Update In December 2008, the Latvian Parliament adopted new amendments to the Law “On VAT” taking effect from 1 January 2009. The adopted amendments to the law establish that from 1 January 2009 standard VAT rate is 21% instead of 18% (which was the rate applicable till 2009). The reduced rate has been increased from 5% to 10%. The list of supplies that are eligible for the reduced rate has been considerably curtailed. The reduced rate now applies to the following goods and services: • Medicines, medical goods and equipment • Infant products • Supply of heating, electricity and natural gas to households • Domestic public transport services • Mass media products.

The reduced VAT rate is cancelled and further on the VAT rate of 21% will be applicable to such supplies as books, hotel services, water supply and sewerage services, household refuse collection services, entrance fee to sports events and cinema, and certain others. Corporate income tax (CIT) At the end of 2008 the Latvian Parliament amended the Corporate Income Tax Act with effect from 1 January 2009. Some of the important changes are outlined below: Tax loss carry forward Tax loss carry forward period has been extended from five to eight years from the tax period beginning in 2010. According to the transition rules, in tax years beginning in 2008 and 2009 taxpayers will be able to use tax losses they were entitled to but unable to use in 2007 due to insufficient taxable income. This means that tax losses of 2002 (expiring in 2007 according to previous rules) can now be used in subsequent eight years (up to 2010 inclusive). Incentives for shareholders to reinvest profits in companies According to the recent changes in the CIT Act, companies will be able to reduce taxable income (adjustment in income tax return) by a notional amount of interest that a taxpayer would have to pay on a loan equal to his prior year undistributed profit. This amendment would apply to undistributed profits earned after 31 December 2008. The applicable interest rate would be the annual weighted average interest rate on loans in Latvian national currency (lats) issued to Latvian businesses as determined by the Bank of Latvia. Residence certificate Starting from 1 January 2009, to be able to pay dividends to an EU or EEA resident company free of tax, or to pay royalties to an EU or EEA resident company at reduced rate, or interest to related EU or EEA resident company at reduced rate (from 1 July 2009), the company making payments must hold at the time of payment a certificate issued by the tax authorities of the shareholder’s country of residence. The certificate must confirm that the company receiving dividends (or interest, or royalties) complies with certain sections of the CIT Act; the certificate is valid for five years from the date of issue. Deferred income tax on fixed asset replacement


From tax period beginning in 2009 the companies will be permitted to reduce taxable income for the amount of profit arising on the sale of a replaced fixed asset. The amendment can be applied if the company acquires a functionally similar asset within 12 months before or after the old asset is sold. Tax base of the new asset is determined by reducing the cost of the new asset by disposal gain. These amendments do not apply to investment properties, motorcycles, aircraft, watercraft, and cars. Personal income tax Tax rate The rate of personal income tax (applicable to salary income and certain other) from 1 January 2009 is 23% (instead of 25%). Income tax rate applicable to business income of individuals stays 15%. From 1 January 2009, a personal allowance (tax exempt amount) is LVL 90 per month. The allowance for each dependent is LVL 63 per month and the minimum monthly wage is LVL 180. Dividends to EU or EEA citizens From 2009, a Latvian tax resident company will not have to withhold personal income tax on a dividend payable to a shareholder who is an EU or EEA citizen. This applies if the company paying dividends pays Latvian corporate income tax and does not enjoy any tax reliefs in the year it declares dividend or in the prior year. National social insurance (NSI) contributions From 1 January 2009, NSI contributions are due on total wage income (the NSI Act was amended in 2008 to suspend the NSI cap for the period of next five years). For more details, please contact: Maruta Zorgenfreija PKF Latvia SIA Tel: + 371 6 7333 647 Fax: + 371 6 7828 247 Email:�[email protected]


Luxembourg Major Developments in Tax Law for 2009 This tax update summarises major direct and indirect tax measures taken during 2008. Topics are:

1. Abolition of capital duty 2. Measures with respect to individual tax 3. Broadening of the favourable tax regime for IP 4. Decrease of the corporate tax rate 5. Broadening of dividend withholding tax exemption 6. Extension of the parent-subsidiary regime and the tax regime applicable to mergers 7. Developments in Luxembourg's treaty network.

Abolition of capital duty The main changes with regard to capital duty and registration duties may be summarized as follows: • Abolition of capital duty from 1 January 2009. • Replacement of the proportional tax by a fixed registration duty of 75 EUR for transactions such as

incorporations, transfers of corporations to Luxembourg, amendments of articles of associations. • The reform excludes contribution of real estate assets remunerated by shares, which is subject to a

proportional rate of 0.6% increased by a transcription tax of 0.5%, thus bringing the total rate to 1.1%. Contributions remunerated by other means than shares are subject to a 6% registration duty and a 1% transcription tax (4% for Luxembourg City). Transfers made in the context of corporate restructurings are exempt from proportional tax under certain conditions.

The limitation of the contribution tax in case of contribution of real estate assets to an investment fund is not changed by the reform (maximum capital duty limited to 1.250 EUR). Measures with respect to individual tax as of 1 January 2009 Tax brackets are increased by 9% in order to take into account inflation of the past years, while tax rates remain unchanged. This implies a reduction of the effective tax burden. Allowances for professional income and pensions and the single-parent allowance are replaced by tax credits. Several tax deduction ceilings, including the limit of deduction for insurance premiums, are increased. Child bonus is no longer deducted from tax due but paid out by monthly installments of EUR 76.88 per child. Broadening of the favourable tax regime for IP Besides the introduction of an 80% exemption on income from intellectual property (copyright on computer software, patents, trademarks, domain names, designs, models) as of 1 January 2008, a full exemption will apply with retroactive effect to 1 January 2008 for net wealth in relation with intellectual property eligible to the IP tax regime held by resident entities. As a result, the effective corporate tax rate on qualifying net IP income amounts to 5.93%, which also applies to net capital gains realized on qualifying IP.


As a founding member of the EU, Luxembourg enjoys full protection under the applicable EU directives which, together with its increasing network of tax treaties and the absence of a domestic withholding tax on royalties turns the country into one of the most efficient hubs for holding intellectual property worldwide. Decrease of the corporate tax rate as of 1 January 2009 The Government already announced in spring 2008 a gradual decrease, over the next years, of the combined corporate income tax from the current rate of 29,63% to 25,5% (for Luxembourg City). For 2009, the Corporate Income Tax rate is decreased from 22% to 21%, which results in reducing the global income tax rate from 29,63% to 28,59% (for Luxembourg City). Broadening of dividend withholding tax exemption as of 1 January 2009 The exemption of withholding tax provided by article 147 L.I.R. is broadened to dividend distributions made to fully taxable companies residing in any State which have signed a double tax treaty with Luxembourg and to permanent establishments of such entities. The exemption is granted if: • the receiving entity is subject to an effective tax rate of at least 10.5% and its tax basis is determined

following similar rules than those provided by Luxembourg tax law

• and if it either holds at least 10% of the shares of the Luxembourg entity or if the acquisition cost of the shares amounts to least EUR 1.200.000.

This measure is intended to facilitate profit repatriation for all treaty countries and aims to enhance Luxembourg tax competitiveness. Extension of the Parent-Subsidiary regime and the tax regime applicable to mergers The domestic participation exemption rules derived from directives 90/434/CEE and 90/435 CEE are extended to capital or cooperative companies resident in a Member State of the European Economic Area subject to a tax corresponding to Luxembourg corporate tax.

Developments in Luxembourg's treaty network

During 2008, Luxembourg initialed tax treaties with Albania, Armenia, Barbados, Kazakhstan, Kirghizstan, Macedonia and India. The tax treaty with Estonia became effective on 1 January 2008.

Besides the amendment to the Luxembourg-France tax treaty which has come into force as of 1 January 2008 and closes a loophole of double non-taxation of French real estate income derived by Luxembourg companies, one should highlight the launch of the ratification process of the favourable Luxembourg - Hong Kong tax treaty signed with Hong Kong on 2 November 2007. This treaty, which takes effect retroactively as per 1 January 2008, may allow Luxembourg to become a major hub for Asian investors seeking to invest into the EU.


For more details, please contact : Ralph Bourgnon PKF Weber & Bontemps Reviseurs d’Entreprises Tel : +352 45 39 78 1 Fax: +352 45 38 29 Email : [email protected]


The Netherlands Radical reform of tax treatment of interest under investigation The Dutch Ministry of Finance has announced that it is investigating a radical reform of the corporate income tax treatment of interest. Currently, the Dutch Corporate Income Tax Act (“CITA”) includes several provisions which restrict the deduction of interest. These provisions include thin capitalization rules and anti-base erosion rules regarding certain intra-group capital transactions. These rules are considered very complex for businesses and do often not have the desired effect from a tax revenue point of view. The announcement states that the following options are under investigation: • a complete exemption for all interest payable and receivable (intra group and third parties)

• an exemption for all intra group interest payable and receivable • A form of Comprehensive Business Income Tax (CBIT), similar to the 1992 US Treasury proposal.

Under CBIT certain qualifying interest is exempt • Earnings stripping rules based on EBIT-ratios, similar to the German rules introduced in 2008. Based on a first preliminary investigation, the focus of the further investigation will be on a measure which provides for a full exemption of intra group interest. Under such measure, interest payable to group companies is not tax deductible, while interest receivable from group companies is tax exempt. It is expected that before summer 2009, a legislative proposal will be sent to parliament. We hope to be able to inform you in more detail in our next International Tax Alert of June and/or October. Budget 2009 (highlights) The budget for 2009 includes some attractive measures for tax payers in the Netherlands. The most important measures relate to a reduction of the income tax rate for corporate tax payers and a temporary measure allowing an accelerated depreciation on qualifying investments made in 2009. Tax rates 2008 With retroactive effect the corporate income tax rate 2008 for SMEs have been reduced to the following rates: Profits up to � 275.000: 20% Profits over � 275.000: 25.5% Tax rates 2009 The corporate income tax rates 2009 for SMEs have been proposed at the following rates: Profits up to � 200.000: 20% Profits over � 200.000: 25.5% Accelerated depreciation In order to provide some tax relief to the business community, the Dutch government has introduced a temporary measure which provides for an accelerated depreciation on qualifying investments made in 2009. Under this measure, investments made in 2009 can be depreciated by 50% in 2009 and another 50% in 2010, provided that the following conditions are met:


• The tax payer has invested in new fixed assets • The assets are put into first use no later than 31 December 2011 • Fixed assets which do not qualify are financial fixed assets, intangibles, real property, vehicles and fixed

assets which are used by other parties (eg via lease). For more details, please contact: Ruud van der Linde PKF Netherlands Tel: +31 (15) 260 61 50 Email: [email protected]


Poland Tax Update The year 2009 brings changes in taxes which for business entities are a permanent element of their business. The changes concern the VAT tax, both income taxes, as well as the tax on civil law transactions. Below we outline the most important changes for the activity of entrepreneurs, taking into account the amendment of the provisions of the Tax Ordinance in such scope as they can have impact on the rights of such entities as parties in tax proceedings. 1. Value added tax (VAT) Changes in this tax were implemented in two stages: on 1 December 2008 and on 1 January 2009. The most important of them are: Export of goods: The definition of export, which was changed on 1 December 2008, covers also free deliveries. After providing such delivery and receiving customs documents confirming that the goods crossed the EU border, a company will be allowed to apply the 0% rate. Repeal of section 6 in Art. 19 of the VAT act caused that the tax liability for export will occur in line with the general principles – ie at the moment of issuing an invoice, no later than on the 7th day after the day of releasing goods. Intra-Community delivery: By changing the contents of section 2 in Art. 42, it was specified that the right to apply the 0% rate is conditioned by having proper documents before the date of submitting a declaration. If a company does not have such documents before the end of the deadline for submitting a declaration for a period of incurrence of a tax liability, it does not have to declare such delivery with the correct VAT rate for a national delivery until the moment of submitting a settlement for the last month in a quarter. Tax payer also will not tax with the national rate (in case of not having proper certificates) a delivery performed in the third month of a quarter in a settlement for that period, but will do it in the next settlement period. A later collection of documents authorises a tax payer to make a correction of records, declarations and summary information. Consignment warehouse: Without a doubt, a beneficial and long-expected change is introducing to the act provisions concerning settling tax by entities running consignment warehouses (call-off stocks). Thanks to such a solution, tax payers from other EU states bringing goods to consignment warehouses will not be obliged to register on account of transferring goods and their further sale in the territory of the country. At the moment, an owner of a consignment warehouse will recognize an intra-Community purchase of goods, as a rule, at the moment of collecting goods from the warehouse. However, it should be stressed that the solution above does not relate to cases where goods stored at a warehouse are intended for a trade activity of the owner of the warehouse (this applies only when they are intended for a production or service activity).

Place of rendering services


The changes in contents of Art. 27. 2.3.a of the act clarifies the process of establishing the place of rendering services such as fairs and exhibitions, as well as auxiliary services to those services. The place of rendering them is now the place where such services are rendered in fact. When defining the place of rendering services, the services will not be identified on the basis of PKWiU, except for those for which the provisions of the act and the executive provisions will quote statistical symbols. Guarantee deposit Art. 97 of the act repeals sections 5-8, which provided for tax payers starting their business activity and registered as EU VAT tax payers an extended 180-day’ deadline for returning VAT and a guarantee deposit in the amount of PLN 250,000. Currency exchange rate In December 2008, the act regulated the principles of calculating foreign currencies into Polish złoty. According to the newly introduced Art.31a, in order to calculate it one will have to use the average exchange rate of a given currency announced by the NBP for the last working day preceding the day of incurrence of a tax liability.

If, according to the provisions of the act or the executive provisions to the act, a tax payer can issue an invoice before the incurrence of a tax liability and issues it in the date provided for by the law, and the amounts used to define the tax base are specified in a foreign currency on that invoice, the calculation into Polish złoty is made according to the average exchange rate of a given foreign currency announced by the NBP on the last working day preceding the day of issuing such invoice. This regulation does not apply only in relation to import of goods because, in this case, the calculation into Polish złoty is made according to the customs provisions. VAT deductions and refunds According to the new wording of Art. 86.11, a tax payer can use the VAT deduction in one of the two next settlement periods (if they had not done so in the settlement period in which they received an invoice or customs document). If, in a given period, tax payers did not perform any taxable transaction, they do not have to transfer the amount of the calculated tax to the next settlement period. After the amendment, tax payers can choose between transferring the calculated VAT to the next settlement period or declaring it for a refund (Art. 86.19). In this case, a refund will take place within 180 days or 60 days if a tax payer submits a property security at the tax office (Art. 87.5a). After repealing point 2 in section 1 and sections 2 and 3 in Art. 88, the right to deduct the input VAT tax does not depend on the possibility of calculating expenses as tax deductible costs. After the amendment of Art. 87, as a rule, there is now one 60-day basic deadline for refunding tax, regardless of what tax rates apply for the turnover and regardless of whether the value of the calculated tax occurred after purchasing a fixed asset that is subject to depreciation. Despite extending the deadline for refunding for the tax office, tax payers will receive a refund within 60 days if they submit a property security at the tax office in the amount reflecting the amount of the applied for tax refund. VAT sanctions By repealing sections 4-8 in Art. 109, the legislator eliminated the possibility of imposing an additional tax liability on a tax payer, regardless of the kind of irregularities. The change relates to all tax proceedings which until 30 November 2008 had not finished with a final decision. Sale of enterprise


On 1 December 2008, Art. 6.1 of the VAT act was changed. It says that its provisions do not apply for transactions of selling an enterprise or an organized part of an enterprise. For tax payers this change means excluding from VAT liability each case of selling an enterprise or its part, with the use of which a business activity can be performed independently. Contributions in kind As a result of the introduced changes in the scope of the value added tax, contributions in kind made to commercial companies and partnerships are also excluded from the deduction. Such exemption was provided for earlier under the provisions of the old executive regulation to the VAT act (vide par. 8.6 of that regulation).

After 31 March 2009, such contributions will absolutely be subject to taxation in line with the general principles. Of course, this principle does not relate to cases when the subject of contribution is an enterprise or its organized part. Under Art. 6 of the VAT act, such transactions are not subject to taxation. The change above will undoubtedly have a positive effect on the issue of possible corrections in the scope of the calculated tax. The right of perpetual usufruct of lands As result of the changes, the issues connected with the right of perpetual usufruct of lands have also been regulated. At the moment, the legislator unambiguously confirmed that both selling such right and granting the right of perpetual usufruct constitutes a delivery of goods. Import of goods Tax payers will gain a simplification in the form of the possibility of settling import VAT in a tax declaration instead of a customs application. The new principles of settlement will, however, be hedged around with specific conditions. First of all, imported goods must be covered in the territory of Poland with one of the simplified procedures referred to in Art. 76. 1.b or 76.1.c of the Council Regulation (EEC) No. 2913/92 of 12th October 1992 establishing the Community Customs Code.

Another condition will be presenting to the customs authority a security in the amount equal to the amount of tax that is to be settled in a tax declaration and certificates: • on lack of arrears in payments of due social insurance premiums and in payments of taxes constituting

an income of the state budget, exceeding separately in each case, including separately in each tax, respectively 3% of the amount of payable premiums and due tax obligations in individual taxes.

• Confirmation of registering a tax payer as an active VAT tax payer. Quarterly declarations The right to settle VAT quarterly will now be given to all, not only to the so called “small tax payers”. Tax payers will be allowed to use this form if they notify the head of the tax office about choosing it at the latest until the 25th day of the second month of a quarter, for which a quarterly declaration is to be submitted for the first time. Tax payers who, during the fiscal year, start performing taxable transactions will make such notification until the 25th day of the month following the month when they started performing such transactions (Art. 99. 3). A tax payer can return to submitting monthly tax declarations not earlier than after four quarters for which the tax payer submitted quarterly returns, after prior written notification to the head of the tax office until the day of submitting a tax declaration for the first monthly settlement period. However, this must be not later than on the day of the end of the deadline for submitting such declaration (Art. 99. 4).


Advance tax Tax payers choosing the form of quarterly submission of tax declarations (other than small tax payers) will be obliged to pay advance tax for the first and second month of a quarter in the amount of 1/3 of the amount of the due tax liability resulting from the tax declaration submitted for the previous quarter. The payment date for advance taxes will end on the 25th day of the month following each of the months for which the advance is paid (Art. 103.2a). Tax payers whose due obligation in the previous quarter amounted to zero, ie there was no obligation in the settlement for the previous quarter, or the settlement shows the amount of refund of calculated tax a difference in the tax, are not obliged to pay advance taxes. Tax payer can, however, pay an advance tax in the amount of the actual settlement for the month for which the advance tax is paid (Art. 103.2b and 103.2c). For more details, please contact: Michał Piotrowski PKF Consult Tel: (22) 560 76 95 Email: [email protected] 2. Corporate income tax

Transforming a capital company into a partnership – undistributed profit The amendment introduced an essential, although unbeneficial change in a form of taxing undistributed profit while transforming capital companies into partnerships. The value of such profit was counted as income from share in profits of legal entities referred to in Art. 10. 1 of the act. This income will be established on the day of transformation (Art. 10.1.7). Transactions with related entities The amendment introduced a correction of income of a Polish tax payer related to a foreign entity, if such incomes are counted as incomes of that foreign entity and taxed abroad. This correction is possible if it is provided for in provisions of an international agreement between Poland and the country of the registered office of the foreign entity and consists in defining incomes of a Polish tax payer in such amount at they would have been gained if the trade or financial conditions established with a foreign entity reflected the conditions that would have been agreed between unrelated entities. This regulation applies respectively for a foreign entity having a foreign plant in the territory of Poland. The mode and method of applying the correction will be defined in a regulation (Art. 11.b – 11.d and section 9).

Loan adjusted by the exchange rate of a foreign currency Changes in the scope of provisions on the income tax covered also loans/credits adjusted by the exchange rate of a foreign currency. As a result of the changes introduced on 1 January 2009, these differences will constitute respectively a tax revenue or cost for lenders and borrowers. Abandoned investments By repealing point 41 in section 1, Art.16, the legislator introduced a very beneficial change enabling to count incurred costs of abandoned investments as tax deductible costs. Expenses for abandoned investments can now be counted as costs on the date of selling an investment or liquidating it (Art. 15. 4f).


Costs of remunerations and employee premiums According to the previously binding provisions, expenses intended for payment of remunerations or payment of social security premiums constituted tax deductible costs only at the moment of their true disbursement/payment ie on cash basis. The amended law provides for the possibility of counting the subject expenses as tax deductible costs already in the settlement for the month for which remunerations are payable on condition, however, that they are paid to employees in time (or put at their disposal), while in case of social security premiums, on condition that they are paid in time (usually until the 15th day of the following month). Tax exemptions The newly added point 50 in Art. 17. 1 of the act exempts from the tax interest or discount from bonds issued by the State Treasury, offered on foreign markets and incomes from sale of such bonds against payment, received by foreign entities. For more details, please contact: Agnieszka Chamera Tel: (22) 560 76 59 Email: [email protected] Dorota �lizawska Tel: (22) 560 76 95 Email: [email protected] 3. Personal income tax New tax rates One of the basic changes is the new tax bracket applied, among others, to incomes from labour. Starting on 1 January 2009, the lowest tax rate is 18%. After exceeding income in the amount of 85,528 PLN, the surplus over that amount will be taxed with the 32% rate. Transforming a capital company into a partnership After adding point 8 in Art. 24.5 of the act, incomes of natural persons from the share in profits of legal entities include the value of undistributed profits in capital companies in case of transforming them into partnerships. The income will be established on the day of transformation (Art. 24.5.8 of the act). The obligation of the taking over company, newly established company or company created as a result of transformation (as a tax payer) is to collect a flat rate income tax from the income received by the tax payer on the above mentioned account. For more details, please contact: Dorota �lizawska Tel: (22) 560 76 95


Email: [email protected] 4. Changes in the tax on civil law transactions (PCC tax) Loans from partners (shareholders) for the benefit of a capital company Undoubtedly, the most essential change in the scope of provisions of the act on tax on civil law transactions is excluding from the PCC tax loans provided by partners (shareholders) for the benefit of capital companies. In the old legal status, this kind of loan was treated as a change in the articles of association and as such it was subject to the PCC tax in the amount of 0.5%. At present, loans provided by partners for the benefit of a capital company will stop being treated as a change of the articles of association and, at the same time, as a result of changing Art. 9.10.i, they will benefit from the exemption from that tax. Other issues It is also worth mentioning that in the old legal status the PCC tax covered also changes in articles of association connected with transformation, merger, making a contribution to a company in a form of a division of a capital company or shares in another capital company, as well as, in specific cases, moving a company’s registered office or its actual management centre from one EU country to another. At present these transactions shall remain free of the tax on civil law transactions. The previous definition of „capital companies” was also changed. As of 1 January 2009, a “capital company” for the purposes of the act shall be a limited liability company, a joint stock company, as well as, as a result of extending the definition, a European company. For more details, please contact: Paweł Chrupek Tel: (22) 560 76 95 Email: [email protected]


Portugal Government Budget for 2009 The Portuguese Government Budget for 2009, published on the 31 December 2008, has introduced various changes to Portuguese Tax Legislation. No more than two weeks after the approval of that Budget, the Portuguese Government has presented a proposal for a Supplementary Budget, envisaging the adoption of measures tailored to stimulate new investments in strategic sectors and in R&D and to help the preservation of employment and the creation of new jobs. We provide below an overview of the major changes introduced by the new legislation. 1. Tax Benefits for new investments A new regime is created to favour eligible investment projects to be carried out during 2009, consisting of the following tax benefits:

a) An income tax credit, with a maximum limit of 25% of the corporate income tax liability. The tax credit will be calculated according to the following percentages of investment amount: 20% of the eligible investment, up to � 5 million; plus 10% on the relevant investment in the excess of � 5 million. To give an example, a company investing in 2009 � 6 millions in eligible applications would reduce its tax liability by � 1.1 million. In case the tax assessed insufficient to absorb the tax benefit, the tax credit can be carried forward for four years (ie up to 2013).

b) Exemption from real estate transfer tax, stamp duty and Municipal Tax, in connection with real estate qualifying as eligible investment. The activity sectors to which this benefit will apply includes: industry (except iron and steel industry, naval construction and synthetic fibres), agriculture, forest and new network generation wide band. 2. R&D Incentives

Tax credits for eligible R&D expenses are increased to 32.5% of the amount of the expense (20% before 2009). On the top of that, an additional tax credit is granted equivalent to 50% of the expenses incurred in excess of the average invested in two preceding years, with a maximum limit of � 1.5 million. 3. Taxation of non-residents

Non-resident taxpayers that are resident for tax purposes in another EU member state may elect, in certain circumstances, to be taxed in accordance with the rules applicable to Portuguese residents. 4. Simplified Tax Regime

The simplified tax regime, which consisted in determining the taxable income of small business as a percentage of the total income (and not on the basis of the actual profit), has been suspended as from the 1 January 2009. Taxpayers taxed under the regime in 2008 may elect to continue in the regime (until the maximum three year period is concluded) or change to the general tax regime. 5. Corporate income tax rate

The flat rate system has been changed with the introduction of a new band of income (first � 12 500) which will be taxed at the reduced rate of 12.5%. The excess will continue to be taxed at the 25% flat rate. 5. Urgent Rulings


The Government Budget for 2009 introduces the possibility for taxpayers to request an urgent ruling on specific situations, which must be responded within a maximum limit of 60 days. This system will enter into force in September 2009 and will be subject to a charge payable by the taxpayer. 6. Urban rehabilitation

A group of measures has been implemented with the purpose of improving the rehabilitation of real estate property. The new rules include tax benefits in respect of expenses incurred with the renovation of real estate and increased municipal tax rates for degraded real estate. In addition, a new and very favourable tax regime has been created for Real Estate Investment Funds for Habitation Leases. For more details please contact: José Ramos Email: [email protected] Nuno Alves Email: [email protected] Tel: +341 213 182 720 PKF Portugal


Romania Fiscal measures Romanian Government adopted a series of fiscal measures applicable from 1 January 2009 which will lead to the achievement of the following objectives:

• The continuous improvement of the fiscal legislation and its correlation with the legislation of the

European Union • The reduction of the negative effects on the internal capital market determined by the difficulties

recorded on the international financial market • The support of the activities from the research – development field in Romania, these activities being key

– instruments for the increase of the economic competition and the insurance of the long term development

• Measures of attraction of income on bank market • The insurance of cashing incomes at the state budget, from VAT and excises, considering that at the

level of the European Community there were adopted simplified customs procedures (an economic operator based on a unique authorization can declare in a single state, the one which authorized it, all imports executed in a certain period in different member states).

The main fiscal changes at the level of our country’s legislation are briefly presented, as follows: Changes with influence on the income tax • The inclusion in the category of non-taxable incomes, during the year 2009, of the incomes from the

trading of participation bonds on the authorised market; expenses representing the registration value of these participation titles and those registered with the opportunity of the carrying out of the trading operations, are non-deductible expenses

• The deductible amount of the expenses executed in the name of an employee, to the facultative schemes of pension, from 200 to 400 euros, on fiscal year, on each participant

• The increase of expenses with the premium for voluntary health insurance, from 200 to 250 euro per

fiscal year, per participant • The income obtained by non-residential legal persons from the trading on the authorised market of the

participation bonds hold by a Romanian legal persons are not taxed in 2009 • At the calculation of the income tax there is granted an additional deduction of 20% from the expenses

eligible for the activities of R & D • It has expanded the use of accelerated amortization method which, besides the technologic equipment,

machines, tools and installations, computers and peripheral equipments, now includes also the devices and equipment destined for the R & D activities (for the first year of amortization, the amortization will be � 50 % from the entry value of the assets, the rest of the value is amortised during the remained period of use)

• The annual fiscal loss starting with 2009 is recovered from the taxable profits obtained in the following

seven consecutive years.

The relief from taxation on re-invested dividends


These dividends apply for: • Dividends reinvested for the purpose of preservation and increase of new jobs for the development of

the activity of Romanian legal persons, according to their object of activity • Dividends invested in the registered capital of another Romanian legal person, in order to create new

jobs for the development of the activity. The tax on the income obtained by non-residents in Romania In the category of incomes exempted from the payment of taxes there will be included the following incomes:

• The interest for the public debt instruments in lei and foreign currency obtained from the trading of

securities and bonds issued by the administrative-territorial institutions, in lei and foreign currency, on the internal market and/or on the international financial markets

• The interest for the instruments issued by BNR in order to achieve the objectives of monetary policy and

the incomes obtained from the trading of stock and shares issued by BNR • The income from dividends remains exempted (with the condition to hold a minimum of 15% from the

participation titles to a Romanian legal person, for a period of at least two years) but it has enlarged the territorial sphere from which the non-resident is part of. It now includes EFTA states (European Free Trade Association), respectively: Iceland, the Principality of Liechtenstein, Kingdom of Norway and Switzerland as well as the member states of the European Union

• The interest for the time deposits and/or the saving instruments, realised in Romania by resident natural

persons in other states than those from EU.

Non-taxable incomes obtained by non-residents in Romania This category contains the following types of incomes: • incomes obtained by non-residential bodies of collective placement, without legal personality, from the

transfer of bond and titles directly and directly direct by a Romanian legal person • incomes obtained from Romania by non-residents through the transfer of derivatives • incomes obtained by non-residents on the foreign capital markets from the transfer of titles hold by a

Romanian legal person an from the transfer of bonds issued by Romanian residents.

An important change brought by Government Emergency Ordinance no. 127 from October 2008 is represented by the completion of non-resident concept which, besides the foreign legal person and non-residential natural person, now includes any other foreign entity, including collective placement bodies in stock and shares, without legal personality, which are not registered in Romania, according to the law. Value Added Tax With regard to VAT, a new reduced quota (5%) was introduced for the delivery of homes as part of the social policy, including of the land on which they are built. The delivered home part of the social policy is defined as: • deliveries of buildings destined to be used as homes for elderly and retired people, centres for children

and recuperation and rehabilitation centres for handicapped minors


• delivery of homes with a utile surface of maximum 120 m2, field in surface of maximum 250 de m2, with the value of approximately 100.000 euro, respectively approximately 130.000 USD, purchased by a single person or family.

As a result of the measures contained in “Anti crisis programme”, program realised by the Ministry of Public Finances to diminish the negative effects generated by the international financial crisis and published at 24 January 2009, there are a series of changes with fiscal impact. These include:

Impact over the budget for 2009 Immediate measures

- billion lei

Non-taxation of the reinvested profit, regulated by the Government Emergency Ordinance

-3,44

The regulation of VAT payment at the cashing of the invoice

-0,938

The modification of the gamble law and the revision of the taxes in this field

+0,024

The over-taxation of luxury products

+0,015

The treatment of income during ethical unemployment: 1. from point of view of the employer:

of non-salary nature and the enforcement of the adequate taxation regime (in this form, the measure refers to both tax income and also to the other social contributions);

2. from the point of view of the employee: the exemption from the payment of contributions to state budget and of social security in case of technical unemployment (but not more than three months)

-0,10

The elimination of road tax from the price of the fuel used for other types of transport than on public roads – eg naval, railways, mining)

-0,29

The installation of an annual pollution tax, according to the degree of pollution of the vehicle, its fabrication year, cylinder capacity and its transfer to local budgets;

0,5

Impact

over the budget for 2009 Prospective measures

- billion lei

The continuation of taxation measures of agriculture by the progressive equalization of the taxation quota and the taxation of agricultural fields.


Over taxation of the exceptional profit (by comparison with the profit rate of the previous year);

The widening of the application sphere of the differentiated tax income (increased), according to the activity field (eg. The exploitation of natural resources, gambling - already existent);

+0,71

For more details, please contact: Florentina Susnea PKF Romania Tel: +(40) 21.3173190 Fax: +(40) 21.3173196 Email: [email protected]


Slovak Republic Introduction of the Euro On 1January 2009, the Slovak Republic became the 16th EU Member State to adopt the euro as its currency, replacing the previously-used Slovak crown at a conversion rate of � 1 = 30.126 Sk. As a result of changeover to the euro, a number of tax regulations were amended to incorporate euro-valued thresholds and values. In a majority of cases, these new thresholds and values were usually the old Slovak crown rates divided by the conversion rate, ie 30.126. This was the case in accounting, income tax and excise tax laws. However, there were amendments to the Commercial Code and Value Added Tax Act that established new thresholds. VAT Amendments For example, the threshold for required VAT registration was lowered from 1,500,000 Sk to � 35,000 turnover in the past 12 consecutive months, while amendments to the VAT Act converted Slovak crowns values to euros using the above conversion rate. Turnover during 2008 is converted to euros at the conversion rate for the purpose of calculating turnover in the 12 consecutive months prior to any month in 2009, while the registration threshold effective after 1 January 2009 applies for a proprietor or legal entity determining in 2009 whether they have an obligation to register in the Slovak Republic for VAT. When the taxable amount for the supply of goods and services and for the intra-Community acquisition of goods is adjusted after 31 December 2008, if payment was requested in euros, the exchange rate when tax became chargeable is used. If payment was requested in Slovak crowns, tax may be adjusted by no more than the amount of original tax declared, calculated at the conversion rate. If payment was requested in a currency other than Slovak crowns or euros, the conversion rate used in the case of conversion from Slovak crowns to euros is used. In the Commercial Code, invested capital required to form a limited liability company was lowered from 200,000 Sk to 5,000 euros, with the minimum contribution by a single shareholder reduced from 30,000 Sk to 750 euros. The minimum invested capital required for a joint-stock company was also lowered from 1,000,000 Sk to 1,250 euros. The Slovak Accounting Act stipulates the preparation of financial statements for the reporting period ending 31 December 2008 (or earlier) using Slovak crowns, and data on tax returns for the 2008 tax period are also presented in Slovak crowns. However, tax on income earned during 2008 will be remitted to the tax authorities in euros, since the Slovak crown ceased to be legal tender when the dual circulation period ended on 16 January 2009. This also means, obviously, that tax prepayments in 2009 resulting from the 2008 tax return, as well as tax prepayments resulting from the 2007 tax return that fall due in the first three months of 2009, will be in euros. The conversion rate of � 1 = 30.126 Sk is used in calculating such prepayments. For the determination of deferred tax carried over from prior years into 2009 and the carry forward of tax losses to periods after 2009, the euro will be used, though only after 1 January 2009. Other than the amendments to current laws brought about by the Slovak Republic’s changeover to the euro, which were stipulated in the Umbrella Law (Act No 659/2007 Coll. on Introduction of the Euro to the Slovak Republic), and a new section of the Income Tax Act clarifying the declaration of employee bonuses as income, there have been no significant changes in Slovak tax law in the period that are not covered by the 2009 Tax Guide.


For more details, please contact: Richard Clayton Budd H2PKF sro Direct tel: +421 46 518 38 29 Direct fax: +421 46 518 38 38 Email: [email protected]


Spain Tax Reforms The year 2009 is a year of many tax developments and reforms which will affect various areas. Corporate Tax 1. Transfer pricing rules On 18 November 2008, the Royal Degree 1793/2008 was finally approved. It develops the Law approved in 2006 related with the prevention of tax evasion in connection with related parties. With the new Royal Degree, some questions referring to the normal market value between related parties have been regulated. The most important questions have been the regulation of the formal documents to accredit the related transactions: the group files (master file group and the specific files for each company). It will be necessary to do a functional and economic analysis of all the transactions between related entities. 2. Accelerated depreciation Accelerated depreciation of the fixed assets and property investments (affected by the company’s economic activity) acquired during the financial year started in 2009 and 2010 is allowed, providing the company maintains the same average number of employees for 24 months. The financial statements will not be affected by this tax benefit because the company will consider the difference between the accounting and the tax depreciation as an extra- accounting adjustment. 3. Research and development tax incentives

In order to adapt the internal law with the CEE rules, from 1January 2008 (retroactive effects), the research and development tax incentives can be applied to the Spanish investments and to the CEE investments. It is not possible to apply the tax benefit for the expenses or investments done out of the CEE. 4. Exchange of Real Estate - Valuation rules

The new tax criteria of the Directorate-General of Taxes about the capital gain derived from the exchange of Real Estate is to calculate the capital gain at the moment of the exchange of the land by the future construction according to the current value of the future construction (the previous criteria was to valuate the final gain according with the valuation of the construction when it was finished). Value Added Tax 1. Consideration as a VAT subject The Spanish law receives the CEE jurisprudence, and establishes that the Trading companies will not have always the VAT taxable status. The companies without economic activities will not be subject to VAT. 2. Monthly refund new system One of the most important measures adopted by the Spanish government to stimulate the economy has been to modify the refund system and to allow the monthly refund requests. The companies must send a monthly list with the issued and received invoices, in order to facilitate the control by the Tax authorities of the requested VAT amount.


3. Modification of the VAT Tax basis in case of unpaid invoices For companies that have issued an invoice which has not been fully or partially paid within 12 months will be able to reduce the tax basis following the legal conditions. Until now, it was required a delay of two years. Personal Income Tax 1. Reduction of the Personal Income tax withholdings From 1 January 2009, employees with wages less than euros 33,007.02 and to dedicate amounts to the acquisition or rehabilitation of its habitual residence through external financing (principally bank mortgage), will be able to request to the employer the reduction of the withholding tax rate in two percentage points. General deduction of Euro 400. This general quote deduction, introduced on 2008, is maintained for the year 2009. This deduction must be considered in the withholding tax rate calculation (reducing the tax basis), with the purpose of enjoying this deduction in advance, reducing the amount of the withholdings. Wealth Tax 1. Elimination of Tax This tax levied the personal and professional individual’s wealth. With effects from 1January 2008, the obligation to pay and to present the official form has been deleted. For more details, please contact: Aischa Laarbi Email: [email protected] PKF-Audiec, S.A. Tel: +34 93 414 59 28 Fax: +34 93 414 02 48


United Kingdom Tax Update Changes to UK taxation of foreign profits In its Pre-Budget Report on 24 November 2008, the UK Government announced that reforms in Finance Bill 2009 will deal with the taxation of foreign corporate profits repatriated to the UK. The aim is to improve the UK’s tax competitiveness to make it a preferred location for international groups. Draft legislation in all areas of proposed reform was published in December 2008 and the new rules are expected to take effect from April 2009. UK participation exemption announced for medium and large groups The most attractive feature of the proposed package, in the vast majority of circumstances, is an exemption from UK corporation tax on dividends paid by foreign companies to medium and large UK companies and groups. Anti-avoidance measures are proposed which will prevent the tax exemption from applying in particular circumstances, such as where the exemption has been used for tax avoidance purposes. The exemption will apply regardless of the size of the foreign shareholding and is expected to take effect from 1 April 2009. This represents a major shift in approach away from the credit method of granting double taxation relief and should make the UK more competitive with other countries in the European Union offering participation exemption regimes. Cap on interest deductions To target situations where a UK group bears more debt than is required to finance the worldwide group, the total amount of intra-group interest that is tax deductible in the UK will be capped at the group’s consolidated external finance costs. This change may impact adversely on UK subsidiaries of groups which finance their investment into the UK using intercompany debt. The existing anti-avoidance rules will also be extended to deny UK tax relief for interest where a borrower is party to a debt under a scheme or arrangement where one of the main purposes is a tax advantage. Controlled foreign company changes The holding company and acceptable distribution policy exemptions will be abolished. Consultation will continue throughout 2009 on the detail of future controlled foreign company (CFC) reforms. Planning points for groups including UK companies The foreign dividend exemption will dramatically alter the tax planning landscape for medium and large UK companies with foreign subsidiaries or with foreign portfolio investments. It will allow tax free repatriation of profits to the UK and will reduce the administrative burdens associated with maximising foreign tax credits. However, it will be necessary to consider the likely impact of the CFC reforms to ensure that tax savings from the dividend exemption are not neutralised by UK taxation of the foreign profits as they arise. Your client’s business footprint in the UK Ian Bingham, Tax Partner in the Manchester office of PKF (UK) LLP, leads the UK firm’s group focusing on international tax advice. Ian writes: We have recently developed some new materials to help overseas businesses investing in the UK. Our UK Footprint pack is a guide to choosing a vehicle for business in the UK.


The pack consists of a simple flowchart to help the reader consider their options and a detailed briefing on each vehicle. The pack flowchart can be accessed online at www.pkf.co.uk/footprint - the briefings can be accessed by clicking on the numbers in the flowchart or directly as follows: 1 Licensing www.pkf.co.uk/ukfoot1 2 UK service centre www.pkf.co.uk/ukfoot2 3 UK sales agent www.pkf.co.uk/ukfoot3 4 UK branch www.pkf.co.uk/ukfoot4 5 UK joint venture www.pkf.co.uk/ukfoot5 6 UK subsidiary www.pkf.co.uk/ukfoot6 For more general information for first time inward investors, we have updated the Doing business in the UK guide and this can be accessed under PKF resources on the PKF International Ltd website www.pkf.com . You can contact Ian and his team for help with business tax advice for inbound investors to the UK on [email protected] Proposed changes to UK company losses calculated using a foreign functional currency On 18 December 2008, the Government announced a proposed change to the rules relating to losses arising in companies that prepare their tax computations in a foreign ‘functional’ currency (legislation will be introduced by the Finance Act later in 2009). Where a company’s primary economic activities are carried out in a currency other than sterling, the company is required each year to compute its profits or losses for tax purposes in that other currency. This will often apply, for example, to the UK branches of foreign banks or a UK subsidiary that primarily transacts with its foreign parent. Where a profit arises, this is translated into sterling at the ‘appropriate exchange rate’ (which can be either the average rate or the closing rate for the year). Where a loss arises which cannot be utilised in the current year, the loss is translated into sterling at the appropriate exchange rate and then this is carried forward to use against future profits (calculated in the functional currency but expressed in sterling). It is proposed instead that any unused losses at the start of a company’s first accounting period beginning on or after 1 January 2008 are converted back into the company’s functional currency at the start of the period. Companies may elect not to carry out this initial conversion exercise. The election will presumably not need to be made until the tax computation is submitted. At that point, it will be necessary to consider the exchange rate movement between sterling and the company’s functional currency. If sterling has depreciated compared to the functional currency during the first period beginning on or after 1 January 2008, it may not be beneficial to make the election. Companies will need to make a careful assessment of when the losses are likely to be used and the expected exchange rate at that date – for example, if sterling has depreciated further by the time the loss can be used against profits, the new treatment will be beneficial. Alternatively, if sterling rises by the time profits are made so that it exceeds the conversion rate at 1 January 2008, electing out of the new treatment will prove to be more beneficial. If the converted losses are off-set against future profits, they are off-set in the functional currency first and then the net profit is translated into sterling to calculate the amount of tax payable. If further losses arise in periods beginning on or after 1 January 2008, those losses will have to be carried forward in the company’s functional currency. It will not be possible for companies to elect out of this treatment.


This move appears to be designed to reduce the value of losses available in sterling to such companies at a time when many companies are expected to make losses and the value of sterling has fallen sharply against major currencies such as the US$ and the Euro. However, it should be remembered that sterling may have appreciated against some currencies since January 2008. UK reduces VAT rate until 2010 The change to the standard rate of UK VAT that took place on 1 December 2008 has caused all retail businesses in the UK to revisit their pricing but there are some more difficult issues to resolve for services provided for a period that straddles the change. Ongoing supplies Normally, if either payment was made or the invoice was issued before 1 December 2008, the rate will be 17.5%. However, where the goods or services were not provided until after 30 November 2008, the supplier could opt to apply the 15% rate. Traders might have chosen to exercise this option where their customer (such as individuals, banks, charities and schools) was unable to fully recover the VAT charged. However, there was a strict time limit of 45 days from 1 December 2008 to issue a credit note if one was necessary. We are now outside this time limit and so businesses should neither issue nor accept credit notes which purport to reduce the rate of VAT charged. Businesses should remember that any other credit notes (eg for returned items) should show the VAT rate charged on the original supply. So, a credit note raised in March 2009 must still show the 17.5% rate if the original supply took place in November 2008. Where services are provided on terms that mean the payment is determined or payable from time to time (eg construction contracts and solicitors’ work) and where both invoice and payment is on or after 1 December 2008, the VAT rate will be 15%, irrespective of when the work was completed. Annual invoices showing the VAT due for the forthcoming year will cease to be effective for supplies after 1 December 2008. Amended invoices, showing the revised rate of VAT, are needed. Where goods or services are provided on a self-billing basis (ie the customer issues the invoice), the same rules apply as for invoices issued by the supplier. However, as the supplier is liable to ensure the right amount of VAT is accounted for, it is important to check that the self-billed invoices are correct. Sponsorship or other payments for periods straddling 1 December 2008 Companies which are unable to fully reclaim VAT and which have paid to sponsor sports teams and other organisations or paid celebrities for ongoing endorsement of their own products for periods that straddle the gap, should consider requesting repayment of the excess VAT paid in respect of that part of the contract period after 30 November 2008. In such cases, the suppliers are unlikely to wish to offend a sponsor and may readily agree to make claims to HMRC to correct the VAT position. HMRC approach to errors HMRC says that it will adopt a light touch approach to errors made relating to the VAT rate change in the first VAT return made after the change: this means that only errors that overall result in a loss of revenue to HMRC must be repaid and penalties may not be imposed. However, where a taxpayer business has incorrectly invoiced a customer VAT at 17.5%, it is nevertheless liable to account to HMRC for the amount so charged (it cannot account for 15% and retain the difference).To put right an error, it can issue a credit note to its customer, returning the excess to the customer and reclaim the excess from HMRC.


VAT payments on account For large businesses making VAT payments on account, HMRC has stated that if the business expects that the future VAT liability will be reduced by 20% or more, then it may write to request a reduction in payments on account. If the annual VAT liability is less than £1.6m, then a request can be made to leave the scheme. However, because this limit is assessed historically, if it is only the temporary VAT rate decrease that brings a business below the £1.6m level, by the time this has been realised, the rate will be due to increase again. Return to 17.5% The VAT rate will revert to 17.5% on 1 January 2010. The UK Government is planning to enact legislation to prevent supplies which are actually taking place in 2010 or later being subject only to the 15% VAT rate. We do not yet know the full details but such legislation is likely to affect how businesses invoice for supplies straddling 2009/2010. New UK tax penalties regime A new penalty regime will apply to all the main UK taxes for return periods beginning on or after 1 April 2008 – so the first new penalty demands are likely to be issued from April 2009. A similar range of penalties will apply for failure to notify HMRC of chargeability to tax. A penalty may be charged when a taxpayer submits an inaccurate return or document to HMRC that leads to an understatement of tax, a false or inflated loss, or a false or inflated repayment claim. The rules recognise that inaccuracies can arise for a number of reasons and applies different levels of penalty depending on the reason for each inaccuracy. The penalties are charged on ‘potential’ tax lost rather than the actual tax lost. For example, overstated loss claims will, in future, be subject to a penalty. The new penalty levels • For a mistake made despite taking reasonable care – no penalty is charged in respect of any inaccuracy

that still arises. • Carelessness – a penalty between 0% and 30% can be charged. • Deliberate, but not concealed, inaccuracy – a penalty between 20% and 70% can be charged. • Deliberate inaccuracy that is concealed – penalty between 30% and 100% can be charged. In each case, the minimum penalty can only be achieved where the taxpayer makes an unprompted disclosure of all facts, provides positive assistance to HMRC and full access to records. For a more detailed briefing on the new rules see http://digbig.com/4yeja . For more details, please contact : Ian Bingham PKF (UK) LLP, Manchester Tel : +44 (0)161 832 5481 Email [email protected]


Disclaimer

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 that such advice specifically relates to their particular circumstances. This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication.

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 which are 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, 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.

PKF International Limited is an association of legally independent member firms.

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