Remi Troch: How to save on taxes during crisis. Tax planning

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HOW TO SAVE ON TAXES DURING CRISIS? TAX

PLANNING

13th International Conference Audit, Taxes and

Accounting 2010

Remi Troch

17 December 2010



HOW TO SAVE ON TAXES DURING CRISIS?

Transfer of losses ² cross border use of losses;

Use of holding companies;

Finance structures within the EU.




TRANSFER OF LOSSESCROSS BORDER USE



Client name - Event - Presentation title


Cross Border use of Losses

Overview:

Cross-border use of losses from foreign subsidiaries Cross-border use of losses from foreign PE

Mutual problems:

when are losses Åfinal´ in the meaning of M&S?

when are final losses transferable to the headquarter/parent company?



Example:Latvia

Poland Portugal

Losses expire after 5years

Losses expire after

5 years

Losses are forfeited when more than

50% of the shares are sold






Historically, it all begun with the

case of 13

December 2005





´As Community law now stands, Articles 43 EC and 48 EC do not precludeprovisions of a Member State which generally prevent a resident parentcompany from deducting from its taxable profits losses incurred in anotherMember State by a subsidiary established in that Member State although they

allow it to deduct losses incurred by a resident subsidiary. However, it iscontrary to Articles 43 EC and 48 EC to prevent the resident parent companyfrom doing so where the non-resident subsidiary has exhausted the possibilitiesavailable in its State of residence of having the losses taken into account forthe accounting period concerned by the claim for relief and also for previousaccounting periods and where there are no possibilities for those losses to be

taken into account in its State of residence for future periods either by thesubsidiary itself or by a third party, in particular where the subsidiary has beensold to that third partyµ





Cross Border use of Losses of foreign subsidiariesJudgement X-Holding BV (25 February 2010)

The Member States of the EU are not obliged to widen a domestic tax group

system in a way that also companies situated in other Member States can be

included in such a taxation system.

Nevertheless this judgement does not change the main principles of M&S that

Member States with a domestic group taxation system are obliged ² under certain

circumstances ²to deduct so called ´final lossesµ of a foreign subsidiary on thelevel of the parent company.





Cross Border use of Losses of foreign subsidiariesPossibility to include foreign subsidiaries in domestic group taxation systems ²

latest developments/tendencies in ECJ decisions

A lot of countries only allow to include a subsidiary in a domestic tax group if it is

registered in the respective country and has also its place of management there.

Irrespective of the fact, whether or not a Member State has legislation on

(cross-border) group taxation, losses of foreign PE·s and subsidiaries (situated in

another Member State) are deductible in the Member State of the head officeIf the loss deduction in the foreign PE·s/subsidiary·s home state or elsewhere in the

European Union was definitively excluded (final loss).





- Latvia knows the system of transfer of losses if certain

conditions (a.o. percentage of shareholding) are met: losses

can be ´transferredµ from the loss making to the profit

making company.- It should therefore be possible to transfer the losses of a

subsidiary located in another EU Member State that would

expire or otherwise be lost (e.g. the subsidiary is sold) to the

Latvian parent company, thus reducing its taxable basis.




Irrespective of the fact, whether or not a Member State has legislation on

(cross-border) group taxation, losses of foreign PEs and subsidiaries

(situated in another Member State) are deductible in the Member State of

the head office if the possibility that the loss might be deductible in theforeign PE·s/subsidiary·s home state or elsewhere in the European Union

was definitively excluded (final losses)





Sweden operates a group contribution system, which legally requires that both the

contributing and the recipient company are liable to tax on business income in

Sweden.

The Court (Gambro Decision ² March 2009) distinguished between losses which

became unusable through the trading position of the company and losses which

became unusable through the operation of foreign tax provisions.

The Court allowed a contribution to a Dutch subsidiary which was made during

the tax year in which the Dutch subsidiary was finally liquidated.

The Court did not allow the contribution to an Italian subsidiary whose losses

could no longer be used by operation of the Italian tax law.





Germany ² two decisions in June 2010

The German Court agrees with the Swedish Court that time-barred losses are not

Åfinal´:

A Member State cannot be required to take account, for the purposes of applying

its tax law, of the possible negative results arising from particularities of

legislation of another Member State applicable to a permanent establishment

situated in the territory of said State which belongs to a company with a

registered office in the first State.

There are no other judgements from other countries with regard to the question

when losses are Åfinal´.

However, according to the ongoing discussion in the UK it seems to be possible

that the UK will accept time-barred losses as ´finalµ.





However, the German Court mentioned expressively the following cases in

which losses become ´finalµ:

The PE ceases its activity,

A subsidiary is liquidated or becomes insolvent,

If a PE is incorporated or transferred to another company,

Disposal of a PE,

It did NOT mention:

- Loss of loss carry-forward resulting from to a prejudicial transfer of shares

If there is a PE with big losses C/F, it might be a good idea to incorporate it. If the

losses cannot be transferred to the subsidiary in the Host Member State they

become final and might be used in the Member State of origin.





HOLDING COMPANIES




Why use a holding company?

Consolidate subsidiaries under one holding company for management and

reporting purposes;

Easy to acquire and to disinvest subsidiaries; Attract investors / minority shareholders;

Facilitate raising capital thereby enhancing the enterprise·s capital

structure;

Create a platform for future business acquisitions, joint ventures and

other business opportunities.




Source country benefits

Lower dividend WHT, for example under treaty/EC Directive

Lower interest and royalties WHT, for example under treaty/EC Directive

Protection from capital gains taxation under treaty

Residence country benefits

Reinvest dividends/capital gains elsewhere in the group without charging to tax

in home country

Deferring home country tax charge on dividends/capital gains




Parent

subsidiary

Parent

Holding

Subsidiary




Latvia

Russia

Latvia

Cyprus

Russia

Dividends:15% WHT

Dividends: 5%WHT

No WHT




Latvia Latvia

NetherlandsTaxation capital gain

sale shares real estate

Sale of shares:

taxable in NL(exempt)

Latvia

Latvia




Common Holding Company Locations

Cyprus

Luxembourg

Hong Kong Malaysia

Malta

Netherlands

Singapore




Best location????





Finance structures within the EU





Belgium: ´notional interest deductionµ:

As from tax year 2007 (income 2006) companies can decrease their taxable income

by a percentage of equity.

The rate is calculated on the basis of the rate of the 10-year government bond (or

¶OLO·). For SME·s the rate is increased by half a percentage point.

For the tax years 2011 and 2012 the maximum rate is set at 3,8% (4,3% for SME·s).

Any unutilized deduction can be carried forward during 7 years.

SME = sales < 7.300.000 Balance Sheet total < 3.650.000 maximum average

employed persons: 50 (can exceed 1 of the 3 criteria)





Belgium: ´notional interest deductionµ: example SME

Capital: 100.000

Retained earnings: 50.000Equity: 150.000

Loans to affiliated companies: 120.000

Interest income: 5% x 120.000 = 6.000

Notional interest deduction tax year 2011: 4,3% x 150.000 = 6.450

Taxable income: 0

Notional interest deduction carry forward to next year: 450





Netherlands: Finance company

Intra-group financing can be achieved through an intermediate

Netherlands finance company. This company borrows from internal and/orexternal sources for re-lending to group companies. The tax on the

interest received and paid with respect to the loans can frequently be

reduced to nearly zero as interest paid can be deducted from interest

received. Only a (small) spread is regarded as taxable income. (1/8th,

1/16th even 1/32th of a percent.

Another advantage is that the very beneficial treaty network of The

Netherlands.





Netherlands: Royalty company

The cross-border flow of royalties can be structured through a

Netherlands royalty company. The company owning the intellectual

property grants a license to use the rights to a Dutch Company, which

sub-licenses these rights to other companies worldwide. Royalties paid

can be deducted from royalties received, leaving only a small taxable

spread in Netherlands.

Another advantage is that the very beneficial treaty network of The

Netherlands.





- Please be aware that the present analysis contains general information and does not

respond to particular circumstances unknown to us. Consequently this presentation is to

be used only as a guideline and is applicable only as a general consultation.

-

If you believe that the commentary and conclusions are not complete, precise or true,please inform us as soon as possible. We hope that this presentation meets your

expectations.

- In case you have additional questions or you need an assistance, please do not hesitate

to contact us and we will be happy to help you.



Remi Troch

Director International taxes

´BDO Zelmenis & Liberteµ

Attorneys at law

Alberta street 1-2, Riga, LV-1010

Phone: (+371) 67222237

Fax: (+371) 67222236

E-mail: [email protected]

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