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The latest International measures adopted to combat tax driven structures - I GAAR

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Philippe Butty

on 20 May 2016

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Transcript of The latest International measures adopted to combat tax driven structures - I GAAR

BMU, Spring 2016
The latest international measures adopted to combat tax driven structures

EU
-
I: GAAR

Means to fight against tax saving structures
The GAAR looked under Dutch tax law
Valid commercial reasons may
inter alia
be present if the shareholder (i) conducts a material business enterprise and the shareholding is part of the business enterprise's assets, (ii) is a top holding company that carries out material management, policy and financial functions for the group or (iii) functions as an intermediary holding company within the group structure. In case of an intermediary holding company, an additional requirement applies pursuant to which such holding company should have substance within the meaning of section 8a of the ATR Decree.
Basic problem
Structure typically used internationally to decrease the tax:
The "Substance Test"

At least 50 percent of the statutory (and decision making) directors of the Dutch company should be residents of the Netherlands;
The Dutch resident directors have the required professional knowledge to perform their duties satisfactorily. Their duties should at least include (i) decision making on the transactions of the Dutch company within the framework of normal group influence and (ii) taking care of a proper execution of the transactions to be entered into;
The company has qualified personnel at its disposal to properly execute and register the transactions entered into (this may also be employees from third parties, such as trust companies);
Board decisions are made in the Netherlands;
The most important bank accounts are kept in the Netherlands;
company bookkeeping must take place in the Netherlands;
The company’s business address is in the Netherlands and the company is not treated as a tax resident of another country;
The company complies with all its tax reporting obligations in the Netherlands.

Company A
Company B
Company A
Company A'
Company B
I: GAAR - General Anti-Abuse Rules

On 27 January 2015, the European Council formally adopted a binding general anti-abuse rule (GAAR) to be included in the European Union’s (EU) Parent-Subsidiary Directive (PSD).

While the original version of the PSD only allowed Member States to apply domestic or agreement-based provisions required by anti-abuse rules, the PSD will now contain a mandatory GAAR, meaning that the Member States are required to deny the dividend withholding tax exemption under the PSD in cases of tax avoidance.
Old version of art. 1,2:

This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.



What the EU parent-subsidiary Directive is foreseeing
Company A
Company B
Ownership: = or > than 10%
Net profit before tax: 100
CIT (30%):
30
Net profit after tax: 70
Distribution of dividends: 70

No WHT allowed
(art. 5 PSD)
Exemption of CIT on the
dividends distributed
or...
...
Credit of the underlying tax paid
(art. 4 PSD)
Net profit before tax: 100
Tax: 30% 30
Net profit after tax: 70

Net, without DTA: 51
Net, with DTA: 66.5

WHT (domestic): 30%
WHT (DTA): 5%

Distribution of
dividends: 70


CIT: 25%
Tax:
51 X 25% = 12.75
66.5 X 25% = 16.625

Net amount after CIT:
Without DTA: 38.25
With DTA: 49.875


Domiciled in the EU
Net profit before tax: 100
CIT (30%):
30
Net profit after tax: 70
Distribution of dividends: 70
No WHT allowed
(art. 5 PSD)
Exemption or credit method: No/little CIT
No WHT based on domestic
law of A'

CIT: 25% of 70 =
17.5
Net profit after
tax:
52.5
New version of art. 1,2:

2. Member States shall not grant the benefits of this Directive to
an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances.

An arrangement may comprise more than one step or part.

3. For the purposes of paragraph 2, an arrangement or a series of
arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

4. This Directive shall not preclude the application of domestic or
agreement-based provisions required for the prevention of tax
evasion, tax fraud or abuse
Objectives of the new version:


The PSD GAAR is intended to encourage corporate groups to further align their businesses toward an operating model where operational and management structures more closely match the holding structure.

As of 1 January 2016, the PSD GAAR may affect new and also existing international EU holding structures, particularly in cases where the EU holding is deemed to have insufficient economic substance (e.g., insufficient employees, premises or performance of managerial activity), subject to proof to the contrary by the taxpayer.

Consequences of the application of the GAAR to certain Dutch structures
Individual
EU-Co
Dutch Co
Distributions by NL Co to EU Co are not subject to dividend withholding tax, by virtue of the Directive. Without EU Co, the distributions to the foreign individual would be subject to Dutch income tax and Dutch dividend withholding tax.

Example
: the income from a Dutch entity is 250, consisting of a dividend of 100 which qualifies as a profit, a capital gain of 200 and costs attributable to the income of 50.
As far as income tax is concerned, the tax liability would arise to 62,5 with the application of the GAAR (250 X 25 : 100), assuming that the CIT is 25%, meaning that the CGT is taken into account in the computation of the taxable income.
If GAAR is not applied, only 100 is taxed at 25% (= 25 instead of 62.5)

Concerning the WHT, no WHT applies, if GAAR does not apply. If it does, the WHT applicable will be the one between NL and the country where the individual is resident. If no treaty has been conclude, the WHT will be 15% (Dutch domestic WHT).


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