CEE Tax Notes - PwC...CEE Tax and Legal Services Leader Russia (Moscow) Steven Snaith Tel: + 7 495...

CEE Tax NotesWorking cross-border*Issue No. 7/2First Quarter Electronic Update

Country News

• Albania

• Azerbaijan

• Bosnia and Herzegovina

• Bulgaria

• Croatia

• Czech Republic

• Estonia

• Georgia

• Hungary

• Kazakhstan

• Latvia

• Lithuania

• Macedonia

• Moldova

• Montenegro

• Poland

• Romania

• Russia

• Serbia

• Slovakia

• Slovenia

• Ukraine

• Uzbekistan

*connectedthinking

CEE Tax and Legal Services Leader

Russia (Moscow)

Steven Snaith

Tel: + 7 495 232 5524

Fax: + 7 495 967 6001

Email: [email protected]

CEE Tax and Legal Services

Sales and Business Development Leader

Hungary (Budapest)

Martin Scott

Tel: + 36 1 461 9411

Fax: + 36 1 461 9559


CEE Tax Notes Editor

Hungary (Budapest)

Tibor Torok

Tel: + 36 1 461 9371

Fax: + 36 1 461 9559


Albania (Tirana)

C/O Rene Bijvoet (Serbia)

Loreta Peci

Tel: + 355 4 242 254

Fax: + 355 4 241 639


Azerbaijan (Baku)

C/O Courtney Fowler (Kazakhstan)

Movlan Pashayev

Tel: + 994 12 497 7405

Fax: + 994 12 497 7411


Bosnia and Herzegovina (Sarajevo)

C/O Ron Barden (Ukraine)

Mark Davidson

Tel: + 387 33 295 234

Fax: + 387 33 295 235


Bulgaria (Sofia)

Irina Tsvetkova

Tel: + 359 2 9355 126

Fax: + 359 2 9803 228


Central Asia Cluster

Kazakhstan (Almaty)

Courtney Fowler

Tel: + 7 3272 980 615

Fax: + 7 3272 980 252


Croatia (Zagreb)

Iain McGuire

Tel: + 385 1 6328 880

Fax: + 385 1 6111 556


Czech Republic (Prague)

Stephen Booth

Tel: + 420 2 5115 2888

Fax: + 420 2 5115 7888


Estonia (Tallinn)

Aare Kurist

Tel: + 372 614 1976

Fax: + 372 614 1980


Georgia (Tbilisi)


Matthew Tallarovic

Tel: + 995 32 508 050

Fax: + 995 32 508 060


Hungary (Budapest)

Russell Lambert

Tel: + 36 1 461 9223

Fax: + 36 1 461 9115


PricewaterhouseCoopers Tax Contacts for CEE:

CEE Tax Notes 2007/2PricewaterhouseCoopers

Yugoslavia and the State Union. The Uzbek Governmenthas also made significant steps to encourage foreigninvestors to invest in Clean Development Mechanism projects in Uzbekistan.

Please note that recently our region was renamed to CEE,and therefore we use the CEE Tax Notes as a title for ourpublication in the future.

Please also note that this publication is designed solely for information purposes. The descriptions of rules andregulations are given in brief and general terms only andshould not be regarded as a substitute for professionaladvice.

The first three months of the year are usually busy interms of the legislative work. This year the Governmentshave added several clarifications to the 1 January 2007changes. In addition to these clarifications, proposed taxchanges and tax reforms are also presented in the countrychapters.

Bosnia and Herzegovina describes the development in the VAT reverse-charge mechanism, tax incentives arediscussed in Croatia, Czech Republic, Georgia, Latvia andRussia. Bulgaria, Estonia, Lithuania and Ukraine haveconcluded new Double Tax Treaties with countries outsideour region. We are glad to report that Montenegro willhonour all the Double Tax Treaties signed by the former

Editor’s foreword

1

CEE Tax Notes 2007/2PricewaterhouseCoopers 2

ContentsAlbania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Azerbaijan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Bosnia and Herzegovina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Croatia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Czech Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Estonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Kazakhstan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Lithuania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Macedonia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Moldova . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Montenegro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Serbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Slovakia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Slovenia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Uzbekistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31


New changes on the minimum salary level ofsocial and health contributions calculations

In Albania, social security and health contributions arecharged on a sliding scale related to a set minimum salary range. The Council of Ministers issued a new decision on 24 February 2007 changing this minimumsalary range from ALL 14,000 – ALL 65,700 (approx. EUR 113 – EUR 532) to ALL 18,200 – ALL 64,815(approx. EUR 147 – EUR 525).

The minimum salary level applicable will depend on theindustry sector and the category of employee (e.g., manager,qualified workers, unqualified workers). This law hascaused extensive discussion amongst interested parties as to how the categories will be determined and how anentity’s employees will be classified in the categories set out in the newly-issued decision.

Albania


Social Insurance Liability of ForeignerEmployees in Azerbaijan

In the last two years, the Azerbaijan social security systemand legislation have been subject to some significantreforms. One of the important aspects of the reforms wasto bring a large community of foreign employees workingin Azerbaijan into the social security net.

Before 1 January 2006, foreign employees and theiremployers were not required to pay any social insurancecontributions (SIC), unlike national staff. The changesmade in the Social Insurance Law, driven by the StateSocial Insurance Fund (SIF), have made foreign employees equally liable as nationals to pay SIC.Currently, the employers of foreign employees are liable to pay 22% and the foreign employees 3% of gross salary.

Although the SIF has officially announced that foreignemployees paying SIC will be eligible to receive a pension from the Azerbaijan public funds after retirement,a number of conditions and bureaucratic barriers havebeen imposed. These will probably make the pension entitlement of foreign employees unattractive to pursue.

As this requirement is relatively new, a number of unclearissues remain with regards to the application of SIC to foreign employees. So far the SIF has not been able toissue more detailed instructions as to how SIC would apply to foreign employees. Given the broad language ofthe law, it is possible for the SIF to interpret such unclearissues to their own favour, in particular given the absenceof an effective appeal system for disputes. It is perhapsnot surprising that following the adoption of the newrequirements, the SIF sent audit notices to many companies with foreign staff and has started obtaininginformation about the number of expatriate employees and their salaries from the local tax authorities.

At this moment, probably the most important issue is what constitutes income subject to SIC. The law broadlydefines it as all income from “Azerbaijan sources” (except income explicitly exempt from SIC). The law does not further define what “Azerbaijan source” is, but it is likely that the SIF will adopt the same meaning that isin the tax law, i.e., income from employment in Azerbaijan.

There has also been some controversy as to whethermandatory SIC must apply to foreign employees workingfor subcontractors under oil and gas production sharingagreements (PSAs). This issue was subject to lengthy disputes between the SIF and oil companies. As of 1 January 2007, the law was amended to exempt subcontractors’ foreign employees from mandatory SIC(although the SIF still claims that the year 2006 is openand should be subject to SIC).

It is inevitable that in 2007 and beyond we will see moredevelopments in the regulations concerning the applicationof SIC to foreigners and more aggressive social insuranceaudits in practice.

Corporate taxation

Corporate tax

• The Ministry of Taxes has approved the new profit taxform and the reporting instructions for it.

Double Tax Treaties

• The Double Tax Treaty between Azerbaijan and Finlandsigned on 29 November 2005 took effect on 1 January2007.

Investment incentives

• The President of the Azerbaijan Republic has issued adecree on special economic zones. This instructed theCabinet of Ministers to prepare the draft text for a lawon Special Economic Zones, draft regulations on andsuggestions for favourable tax and customs regimesand foreign currency. The Ministry of EconomicDevelopment has been assigned to implement the statepolicy on the establishment and activity of specialzones.

Indirect taxation

Excise duties

• The Cabinet of Ministers has introduced new exciserates for oil products manufactured and sold inAzerbaijan. The new excise rates are effective from 8 January 2007.

Individual taxation

Personal income tax

• The Ministry of Taxes has approved a new withholdingtax report form for employment income.

Social security

• The President of the Azerbaijan Republic issued aDecree concerning additional measures for improvingthe social protection of the population. The decreestates the amounts of various social insuranceallowances, e.g., allowances for age, disability.

Azerbaijan


• Some foreign companies in Azerbaijan haverecently been subject to inspections by theMinistry of Labour and Social Protection of thePopulation for compliance with work permitrequirements. These inspections appear toensue from recent statements made by various Azerbaijan Governmental bodies onthe need to tighten work permit and labourcontrol.

• The President of the Azerbaijan Republicpassed a Decree increasing the minimumsalary from AZN 40 (approx. EUR 35) to AZN 50 (approx. EUR 44) with effect from 1 February 2007.

Other

• A new list of activities requiring special permits(licenses) has been issued and now includesvarious types of construction work.

• For some of the activities on the new list, thelicence duty was increased.

Pensions

• The President of the Azerbaijan Republic increased the basic employment-related pension from AZN 40(approx. EUR 35) to AZN 50 (approx. EUR 44) as of 1 February 2007.

Legal and other developments

Labour code

• Below follows some of main changes introduced to theLabour Code in 2007:

– If a national holiday falls in a vacation period, the holiday will not count as vacation time;

– Employees must be paid for unused vacation; and– Staff reduction and dismissal on the basis of lack of

professional skills may only be carried out with theapproval of the company’s trade union.

Aze

rbai

jan


Reverse-charge mechanism

Pursuant to the Bosnian VAT Act, in addition to the standard definition of a VAT payer, a person liable to payVAT is ‘a recipient of services purchased in furtherance of business purposes, if the provider of the services, notbased in Bosnia and Herzegovina (BiH), has not appointeda tax representative’.

The Indirect Tax Authorities published an instruction in2006 on the submission of VAT returns by recipients ofservices from persons not based in BiH and by contractorsunder the application of a special scheme for constructionwork in which domestic recipients of services provided byforeign companies are liable for the VAT due on the supply, rather than the supplier.

The instruction stated that recipients of services, i.e., registered VAT payers, are obliged to submit the below together with a VAT return:

– a report on the amount of input VAT paid on servicespurchased from a person not based in BiH, and deducted against total VAT for that tax period; and

– copies of payment slips for payments for VAT on services received from persons not based in BiH.

In practice, this meant that when a registered VAT payerreceived a foreign invoice without VAT from a foreign legalentity for specific types of services listed in the ‘Place ofSupply’ rules, the domestic registered VAT payer had tocalculate the VAT at the 17% rate. This VAT had to bepaid in cash.

The VAT payer had to submit the report and copies of thepayment slips proving that the VAT on services providedby foreign companies had been paid with the VAT returnfor that period. Only the VAT on foreign invoices that had been calculated and paid before the VAT return was submitted could be included as an input VAT deduction for a given month.

The major disadvantage of this approach was that businesses that were already in a net receivable position,i.e., which had previously incurred more input VAT thanoutput VAT, were not able to offset this credit against theVAT to be settled relating to the above-mentioned foreigninvoices.

Starting from 5 February 2007, a new Rulebook onamendments of the VAT Rulebook came into force.According to this new Rulebook, a VAT payer using theservices of a person established in a foreign country andtherefore is obliged to calculate, report and pay VAT onthe services received is also entitled to deduct the VATcalculated as input VAT.

The VAT payer is entitled to deduct the input VAT if thefollowing conditions are met:

– an invoice has to be issued by a person established in a foreign country;

– the taxpayer (i.e., the service-recipient) has to calculatethe amount of VAT on the invoice received; and

– the VAT has to be reported as part of the amount of output tax shown in the taxpayer’s VAT return.

Consequently, VAT payers that use the services of persons established in foreign countries and who areobliged to calculate VAT on those services, are allowed to include that VAT as both output VAT and input VAT inthe same VAT return without making any cash payment.

Thus from a non-reverse-charge system, Bosnia andHerzegovina has changed to a full reverse-charge mechanism.

Bosnia and Herzegovina


Recent VAT changes

Changes in the VAT Act

On 13 February 2007, at the request of a group of membersof Parliament, the Constitutional Court initiated a case todecide whether part of the 2007 State Budget Act, includinga section which amended the VAT Act, was in breach ofthe constitution.

The main changes to the VAT Act, which came into forceon 1 January 2007, are related to:

– The definition of the place of supply of services in relation to the intra-community transport of goods;

– The rules on the date of the chargeable event for periodic and continuous supplies remain the same as in the repealed VAT Act;

– Abolition of the obligation to self-revise the return inwhich a refund claim is made for the VAT paid on excisegoods that have been destroyed under administrativecontrol under the Excise Duties and Tax WarehousesAct; and

– Supplies of goods and services related to construction,industrial, household and dangerous waste, as well asits extraction and processing.

Changes in the Regulations for Application of the VAT Act

Amendments to the Regulations on the Application of theVAT Act have been announced. Some of the mainamendments are:

– The types of document required to exercise the right to VAT credits in cases of deemed intra-community acquisitions and acquisitions related to the actual receiptof goods;

– Recharges of services at cost between an entity and its branch established in another Member State areexplicitly excluded from the scope of VAT;

– The tax base in currency exchange operations isdefined; and

– A licence under the Energy Act is required to exempt the import of electricity or natural gas from VAT.

The validity of permits for VAT incentives for big investment projects, issued in accordance with the VATAct, is explicitly confirmed.

The following amendments were introduced to theRegulations on the Application of the VAT Act:

– Expansion of the scope for rules on international transport;

– Changes in the treatment of forwarding, courier andpostal services;

– Changes in the rules on documenting the annual adjustment of VAT credit; and

– Definition of the format of the VAT ID number for individuals other than sole traders.

Pending changes

The Council of Ministers has submitted draft amendmentsto the VAT Act and the Tax and Social InsuranceProcedures Code to the National Assembly, which proposethe implementation of:

– Longer tax audit periods;

– Bank guarantees for the timely refund of VAT;

– The tax authorities having the right to refuse VAT registration if certain related parties have unpaid VATobligations; and

– The abolition of the tax administration’s obligation to payinterest on the amount of VAT claimed as a refund andconfirmed by a tax audit.

Corporate taxation

Double Tax Treaties

• In 2007, Bulgaria signed a Double Tax Treaty with theUSA. The treaty provides exemption from withholdingtax on dividends if they are paid to pension funds; 5%withholding tax if the shareholding exceeds 10%; and up to 10% in other cases. The maximum withholdingtax on royalties is 5%. The withholding tax on interest is zero for interest payable to banks or on loans guaranteed or extended by public bodies, and up to 5%in other cases (10% in specific cases). Technical services fees are exempt from withholding tax. Gains from sales of shares are exempt unless theshares are in real estate ownership companies (withrespect to Bulgaria) or if the holding period is less than 12 months. Profits realised by a US Branch of a Bulgarian company are exempt from taxation inBulgaria. Underlying tax credit is available for profitsdistributed to US shareholders. The treaty is expectedto come into force on 1 January 2008.

Bulgaria


The new Investment Incentives Act

On 1 January 2007, the new Investment Incentives Actwas introduced. Amongst other, it included the followingitems:

– Investment incentives are usually organised as corporatetax credits. This means that tax rates can be reducedfor up to 10 years if certain conditions are met.

– General incentives apply for profits earned by investorsif these result from new investments with profiles asillustrated in the table below:

Investment Tax rate Period Necessary amount decrease to employ

Up to 10 EUR 1.5 million 50% 10 years employees

EUR 1.5 million 30 to EUR 4 million 65% 10 years employees

EUR 4 million 50 to EUR 8 million 85% 10 years employees

More than 75 EUR 8 million 100% 10 years employees

– Tax benefits cannot exceed the investment amount.

Employment benefits

– Non-refundable cash subsidies of up to 20% of justifiedcosts related to the creation of workplaces (with a maximum subsidy of EUR 3,000) will be granted to companies that guarantee employment in areas wherethe unemployment rate exceeds 10%. The subsidy rate will depend on the unemployment rate in the areawhere the investment is made.

Incentives for significant project investments

– Non-refundable cash subsidies of up to 5% of justifiedcosts related to investment in significant projects (with a maximum subsidy of EUR 1 million) can be granted tocompanies that meet certain conditions.

– A significant project investment is defined as a majoreconomic activity (such as the construction of a newplant or industrial facility), starting a new economic activity or a new technological development with aninvestment in assets exceeding EUR 15 million. At least 100 workplaces must have been created in the first year of the investment project.

Indirect taxation

Customs duties

• The Custom Law Amendments Act and the RegulationImplementing the Customs Act were introduced on 1 January 2007.

• The changes are part of the continuous process of theharmonization of the Croatian Custom legislation withEU Customs legislation, especially regarding electronicdata exchange, customs procedure simplification andchanges in Croatian customs transit procedure for thepurpose of harmonization with The Implementation ofthe Community Customs Code and Common CommunityTransit System. This creates the basis for the futureuse of the electronic regulation of transit procedures(NCTS-New Computer Transit System), which is common in transit procedures between EU and EFTAcountries.

Croatia


Legislative developments in the Czech Republic

Proposed changes to the Act on Investment Incentives

The Czech parliament is currently discussing a proposedamendment to the Act on Investment Incentives whichwould implement new state aid rules adopted by theEuropean Commission with effect from 1 January 2007. If approved in its current form, the amendment will introduce the following changes:

– The minimum level of investment required to receivestate support would be reduced from the current level of up to CZK 200 million (approx. EUR 7.4 million) to CZK 100 million (approx. EUR 3.7 million), made within three years. At least CZK 50 million (approx.EUR 1.8 million) should be covered by the investor’sown equity. This investment level will be the samethroughout the Czech Republic.

– Only the cost of new machinery (produced no more thanfive years prior to acquisition by the company and notdepreciated by the previous owner) can be included inthe calculation of the minimum investment level and eligible costs.

– Intangible assets are eligible up to 50% of the value oftangible eligible costs.

– Only land, buildings and machinery located in the CzechRepublic can be included in the minimum investmentlevel and the calculation of eligible costs. Office equipment, furniture or other assets located abroad cannot be included.

– Machinery should represent at least 60% of the investment in tangible and intangible assets. It isexpected that the current rule regarding high-techmachinery will be cancelled.

– Work on the investment project can start after confirmation is received from CzechInvest that the applicant is able to meet the general conditions forreceiving an investment incentive.

– The assessment process of applications for incentiveswill be simplified.

Investment incentives granted before the amendmentscome into effect will remain valid under the conditionsunder which they were granted.

New decree with comments on the Income Tax Act

The Ministry of Finance has issued new guidelines settingout its interpretations of several provisions of the IncomeTaxes Act. Although ministerial guidelines are not binding,Tax Offices generally assess tax in accordance with theMinistry’s recommendations. In the event of a tax audit,many taxpayers have found it valuable to follow the taxtreatment as described in guidelines.

The new decree replaces earlier guidelines and includesadditional recommendations for the tax treatment of several activities not covered in the earlier decree. Thenew guidelines also incorporate the conclusions of theCoordination Committee of the Chamber of Tax Advisorsas well as court rulings and decisions issued up to 2006.

The new guidelines address areas of personal income tax, corporate income tax, and certain general income tax provisions applying to both. While focusing on income tax legislation, the guidelines also have certain VAT implications.

Changes to the Labour Code relating to employee benefitsare in effect

The new Labour Code in effect from 1 January 2007 introduced significant changes concerning the option ofproviding various benefits to employees and the related taximplications of such benefits.

Certain benefits that were previously treated as tax non-deductible for employers can now be treated as tax-deductible costs (e.g., loyalty bonuses, travel expensesover the statutory limit, other bonuses). However, this doesnot necessarily result in a more favourable situation overallfor employers, as the conditions for the obligatory paymentof personal income tax on income from dependent activityand social security and health insurance contributionsrelating to employee benefits were changed also (e.g., certain benefits-in-kind). The new rules affect salaries and benefits paid for January 2007 onwards, and thus we suggest that companies review their employee benefit policies as soon as possible to ensure that they remaintax-effective.

Board members may be subject to health and social security contributions

The Supreme Administrative Court has recently upheld an earlier ruling regarding the obligation, in certain circumstances, to pay Czech social insurance contributionson income paid to members of a company’s board of directors, even though board members are not specificallylisted as insured persons in Czech social security legislation.

According to the court, the obligation to pay social securitycontributions arises in cases when an individual serves asa member of a board of directors in connection with his/heremployment relationship. This can occur if the company’sstatutes stipulate that a particular board-member functioncan only be performed by a person in a specific employeeposition, or if Czech legislation stipulates this requirement,e.g., the Act on Banks. It is likely that the health insuranceauthorities will also require health insurance contributionsfor the individuals affected.

Czech Republic


New Double Tax Treaty and VAT changes

Double Tax Treaty between Estonia and Luxembourg

The Double Tax Treaty between the Grand Duchy ofLuxembourg and the Republic of Estonia was signed inTallinn on 23 May 2006 and will become effective from 1 January 2008. The treaty is the first income tax agreement concluded between the two countries.

With some divergences, the treaty generally follows theOECD model convention. For example, the treaty allowsthe source state to apply limited force of attraction inattributing profits to permanent establishments.

The treaty sets a 5% maximum withholding tax rate on dividends if the beneficial owner of the dividends is a company (not partnership) directly holding at least 25% of the capital in the distributing company. A 15% withholding tax rate applies to other dividends.

The treaty sets a 10% maximum withholding tax rate oninterest. Certain interest, such as bank interest, is exempt.

The treaty sets 10% and 5% withholding tax rates on royalties. The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment.

It should be noted that, in many cases, withholding taxrates under Estonian domestic laws are more favourablethan treaty rates.

Under the treaty, Estonia will use the ordinary creditmethod to eliminate double taxation on income or capitalthat may be taxed in the other state. For dividends, thecredit will also include the appropriate portion of tax paidon the underlying profits of the company paying the dividends, if the recipient company owns at least 10% ofthe voting shares in the company distributing the dividend.

Luxembourg will generally use the exemption with progression and ordinary credit methods to eliminate double taxation.

VAT changes affecting importers registered for VAT purposes in Estonia

The Estonian Parliament has recently adopted changes to the Estonian VAT Act. Starting from 1 January 2008,importers registered for VAT purposes in Estonia will beable to account for VAT on imported goods, including capital goods, in their VAT returns. In order to qualify to use this VAT accounting scheme, the following requirements must be met by the importer before it submits the first customs declaration under the scheme:

– the importer has been registered as a VAT payer for atleast 12 consecutive months;

– supplies taxable at 0% VAT represent at least 50% ofthe total supplies made by the importer during the last12 months;

– the importer has been filing tax returns only by electronicmeans during the last 12 months;

– the importer has no overdue tax returns by the date ofthe transaction; and

– the importer has not had any unsettled tax liabilities during last 12 months and continues not to do so.

In the case of imports of capital goods, the first three conditions are not obligatory but the tax authorities mayrequire businesses to provide additional security.

Businesses intending to use the opportunity must informthe tax authorities in writing. Following the first use of thescheme, the tax authorities will carry out monthly checks toensure that the importer satisfies the above-mentioned criteria.

Estonia


Customs duties in Georgia

Customs tax (customs duty is referred to as customs tax in Georgia) is assessed on the declared customs value ofimported goods, and is now regulated by the Georgian taxcode. This covers goods which are not subject to zerorate customs tax (Georgia introduced reduced and zerocustoms tax rates from 1 September 2006). Theseinclude, for example, agricultural products, alcohol andconstruction materials. Importing these goods leads toimport tax of up to 12% (some agricultural products aretaxed at 5%).

The Customs tax and customs administration fees are due at the time goods are imported, i.e., before customsclearance is obtained from the authorities. The customsvalue of imported goods includes the shipping and insurance charges incurred before the goods enterGeorgian customs.

The following goods are exempt from customs tax:

– goods for export;– goods for re-export;– goods in transit;– goods intended for the official use of diplomatic

representatives in Georgia;– goods intended for oil and gas operations under the

“Law on oil and gas”; and– imports of tobacco products and raw materials

(except for the “Trabzon” type) until 1 January 2008.

Corporate taxation

Corporate tax

• Georgian tax legislation provides an incentive for individuals/legal entities engaged in agricultural production.

• Specifically, if the gross income of such individuals/legalentities does not exceed GEL 100,000 (approx. EUR 44,000), it is exempt from income/profit tax.

Georgia


Minimum tax declared unconstitutional

The provisions regulating the minimum tax payable on the expected income of companies were included in thecurrent Act on Corporate Tax and Dividend Tax (CDTA).After several subsequent legislative amendments, the regulation came into force as of 1 January 2007.

Following the introduction of the minimum tax concept, a number of petitions were lodged with the ConstitutionalCourt, seeking the repeal of the statutory provisions on this new tax category. The Court discussed the issue onseveral occasions and finally ruled for the repeal of the provisions concerned at its session of 26-27 February 2007.

The petitions claimed that the provisions on minimum taxviolated the principles of tax equity and the democratic rule of law and represented unjustified discrimination. The petitioners argued that loss-making companies were being treated as tax evaders without first being presumed innocent, and the new tax was to be used as a ‘quasi-sanction’, potentially disrupting such companies’business operations and eliminating them as taxpayers.

According to the commentary to the ruling, corporate tax isan income tax levied on the profits of corporate taxpayers,and legislators, when drafting the provisions on this tax,were required to meet the requirements of constitutionalityset out in the Constitution and previous rulings of theConstitutional Court concerning tax equity. The Court ruledthat the minimum tax failed to meet these requirements.

The Constitutional Court found that the petitions were wellfounded and, with the dissenting opinion of two of the judges,repealed all of the statutory provisions on the minimum tax.

Corporate taxation

Corporate tax

• From 1 September 2006, a new type of profit tax, called‘Special tax’, is levied at a rate of 4% on entities that aresubject to corporate tax. Special tax is levied on the pre-tax profit reported in the financial statements, asadjusted by specific tax base modifying items but no taxincentives and loss carried forward can be deducted fromthe amount of the tax payable. The special tax base canbe reduced by the part of income above acquisition cost,accounted by including repurchased own shareholdings,own shares, and internally converted investor units. TheSpecial tax base may be reduced by the direct costs ofresearch and development. These new provisions mightalso be applied in determining the surtax obligation forthe tax year of 2006.

Indirect taxation

Customs duties

• The Export Control System (ECS) was introduced inHungary on 1 March 2007 and the system will be

implemented in all Member States by 1 July 2007. The purpose of the ECS project is to enable customsoffices, other governmental organizations and economic operators of the European Union involved in export procedures to exchange electronic messages in order to computerize the administrative flow of the operation.Until all Member States have joined the ECS, transitionalarrangements will operate. During the transitional period,the third copy of a SAD or an Export AccompanyingDocument (EAD) can be used to certify that goods havepermanently exited the territory of the Community. When the system is fully implemented, electronic exportdeclarations will be accepted at all customs offices andSADs will be replaced by EADs. Authorized exporterswill have the right to arrange customs clearances, includ-ing printing out the EADs at their own offices, after they have registered with the Customs Authority.

Excise duties

• The amendment to the legislation clarifies that the production of goods that are not subject to a tax payment obligation and that have an alcohol content of over 1.2% (e.g., medicines, chocolates with alcoholcontent, perfumes), shall not be classified as an activitythat may solely be conducted in a tax warehouse.

• Hungary is restricting the quantity of cigarettes that canbe imported by private individuals arriving from Romaniaand Bulgaria until 31 December 2009.

Environmental protection product fee

• A special exemption application can be filed by 30 Juneof the relevant year if the previous application for product fee exemption was rejected due to failure toobserve the submission deadline, despite complyingwith the prescribed criteria for form and content.

Individual taxation

Social security

• All pensioners who have employment income becamesubject to the employee’s 8.5% pension contribution asof 1 April 2007. This contribution entitles them to anincreased pension after 365 insurance days. The rateof the rise is 0.4% of the monthly average base of thecontribution. Additionally, as previously, all employedpensioners have to pay 4% health care contributionswhich entitle them to receive health care benefits.

• From 1 April 2007, an individual’s close relatives (withthe exception of children under age of 18) who are notentitled to social security services in their own right areliable to pay contributions that entitle them to itemisedhealth care services. The contribution rate is 9% of thecurrent minimum wage.

Hungary


Unified Registration System to be introduced

Currently, legal entities and individuals in Kazakhstan haveseveral different registration documents (obligations). Forexample, in addition to a national Identity Card, individualswill also have separate registration for tax purposes (a TaxRegistration Number) and for pension obligations (a SocialIdentification Code).

This causes inconveniences both for document holdersand for entities using the data contained in the documents(e.g., it is necessary to fill in different data in various registers).

Parliament has recently adopted a law that addresses thisproblem. The Law on National Registers of IdentificationNumbers, dated 12 January 2007, provides for the introduction of a unified Individual Identification Number(IIN) for individuals and a unified Business IdentificationNumber (BIN) for legal entities, branches and representativeoffices.

The BIN and IIN will be used for tax, customs, bank,licensing and statistical purposes etc.

The procedure for obtaining BINs and IINs opens inAugust 2007. All entities must obtain BINs and IINs byAugust 2010.

Indirect taxation

VAT

• The list of leased fixed assets that can be imported into Kazakhstan exempt of import VAT has been updated to include various kinds of railroad carriages,(e.g., passenger, tanker, freight).

Other taxes

Subsurface use taxes

• On 24 January 2007, the Kazakhstan Government introduced unified rules for determining the base rate of ‘signature bonuses’ (a special type of tax) for subsurface-use contracts. The base rates will be determined according to the reserves of a particularmineral deposit and its economic value.


Foreign currency regime

• Following the introduction of the new law on currencycontrol, new currency control rules have been adoptedeffective from 1 January 2007. The rules are of a clarifying nature and do not affect the principles of currency control as set out in the previous legislation.

Environmental law

• A new Ecology Code has been introduced effective from23 January 2007. The Ecology Code consolidates theseparate Acts that govern the protection of the environment, including the Law on Ecology Expertise,the Law on Protection of the Environment and the Lawon Protection of the Atmosphere. Amongst other, theCode requires certain types of licenses to be re-issuedduring the year from the date the Code came into force(e.g., license for environment design, ecology expertise).

Licensing

• A new law on licensing has been adopted effective fromAugust 2007. The Law reduces the number of activitiessubject to licensing and introduces a “one window”(“one-stop-shop”) principle for obtaining a license.

Kazakhstan


Cross border group relief in Latvia

About a year ago, European companies were eagerlyawaiting the outcome of the Marks & Spencer case in theEuropean Court of Justice (ECJ). The case was principallyconcerned with whether the parent company in a group ofcompanies might use its foreign subsidiary’s tax losses.The ECJ ruled in favour of the taxpayer, albeit with someprovisos. In view of this ruling, the Latvian Ministry ofFinance has incorporated similar group relief provisionsinto the Corporate Income Tax (CIT) Act.

Conditions for cross border relief

If a Latvian company wishes to claim a foreign company’stax losses, the following conditions must be met:

– The foreign company must be registered in a countrywith which Latvia has a tax treaty or in the EU/EEA;

– The foreign company must belong to a qualifying taxgroup under Latvian law, i.e.,:� the parent company must directly or indirectly hold a

90% share in its subsidiaries;� group membership must continue throughout the tax

period;� the tax periods of the companies seeking the tax relief

must end on the same date; and� the foreign company must recalculate its taxable

income according to Latvian CIT requirements.

– The foreign company must have no tax arrears in itscountry of incorporation;

– The foreign company must be not be exempt from foreign CIT, nor eligible for a reduced rate or any otherCIT relief; and

– The Latvian company must receive confirmation fromthe foreign tax authorities that:� the foreign company is a member of the group;� the tax losses were made in the tax period in which

the group relief will be used; and� the tax losses cannot be offset in subsequent or

previous tax periods or used by another taxpayer inthe foreign country.

Latvian CIT provisions

According to the ECJ ruling in the Marks & Spencer case,the parent company may use its subsidiary’s tax losses if:

– the foreign subsidiary cannot use the losses in its country of residence; and

– the foreign subsidiary cannot transfer its tax losses toanother group company in its country of residence.

The key difference in Latvian law is that group relief isavailable to, for example, a Latvian fellow subsidiary and asubsidiary’s subsidiary as well as to the parent company.Theoretically, this provision is very favourable for Latviancompanies with related parties in other countries becausethe latter qualify as group companies that may use tax

losses. Unfortunately, this provision may only apply in rarecases, i.e., when tax laws prevent a foreign company fromtransferring tax losses in its country of residence.

Unlike the ECJ case, Latvian CIT law states that a Latviancompany within a group may use losses made by a foreignmember in the current year. The tax laws of nearly allEU/EEA countries contain very extensive group relief provisions and, along with Latvian CIT law, specify a period (five to ten years) within which qualifying tax lossesmay be used.

The CIT Act permits Latvian companies to use foreign taxlosses incurred in the current tax period only. Thus, a taxloss that a foreign company wishes to transfer to a Latviancompany at the end of the above period (five to ten years)may not be used under Latvian CIT law.

Each case should be judged on its own merits: Latviancompanies will be able to invoke the relevant sections ofthe CIT law in very rare and special cases, subject to making preliminary enquiries into this matter.

Corporate taxation


• The Taxation of Free Ports and Special EconomicZones Act has been amended with effect from 1 January 2007. Among other things, the amendmentsclarify state aid intensity levels and industries that areineligible under EU law. Locating a business in a special economic zone (SEZ) or in a free port has therefore lost some of its former attraction from a directtax perspective.

• On 21 December 2005, the European Commissionpassed the Guidelines on National Regional Aid for2007-2013. As a result of aligning the Taxation of FreePorts and Special Economic Zones Act with theseguidelines, companies in the following industries will nolonger be eligible for corporate income tax relief:

– transport;– steel;– man-made fibre production;– agriculture;– fishery;– coal; and– shipbuilding.

• Before 1 January 2007, aid intensity for SpecialEconomic Zone companies or licensed companies did not exceed 50% of the total accumulated investment for large companies and 65% for small and medium companies, according to the definitions in EC Regulation 70/2001. From 1 January 2007, aidintensity is also capped by size, but the allocation ismore detailed: 50% (large), 60% (medium) and 70%(small). Agricultural produce processors and retailersare governed by separate aid intensity rules.

Latvia


behalf. This exemption has its restrictions, as companies may only invest in projects concerned with improving the environment.The amount of the exemption may be used topay for a waste manager’s services. If a company delegates its NRT obligations to awaste manager, then the manager must reportto its contractors on how the programme isbeing implemented.

Individual taxation

Personal income tax

• Health, accident and life insurance premiumstotalling LVL 300, approx. EUR 427 (previously LVL 180, approx. EUR 256) a yearwill not be subject to personal income tax in2007. This limit now also applies to nationalsocial insurance contributions.

• In future, exemptions of up to 10% of grossqualifying salary will be available for endowment insurance premiums and contributions that an employer pays on behalfof employees to insurance companies andpension funds registered not only in the EUbut also in the EEA (i.e., Iceland, Liechtensteinand Norway).

Other taxes

Other

• Amendments to the Taxes and Duties Act concerning penalties came into force on 1 January 2007. Previously, the penalty was100% of the understated tax, irrespective ofthe level of understatement and the severity of the violation.

• The Act now prescribes the following penaltylevels:

– If the tax charge for the period under reviewhas been understated by up to 15% of thetax charge, there is a possible penalty of30% of the total tax liability that should havebeen reported; if the understatement is morethan 15% of the tax charge, there is a possible penalty of 50% of the total tax liability that should have been reported.

– If the revenue authorities find that the taxpayer has previously understated a taxcharge, there is a possible penalty of 100%of the total tax liability that should have beenreported.

– If a taxpayer that has already committed arepeat offence commits one or more similaroffences within three years, there is a possible penalty of 150% of the tax thatshould have been reported for each of these subsequent offences.

• A new rule has been introduced for large investmentprojects involving projected investment costs exceedingthe LVL equivalent of EUR 50 million (approx. LVL 35million). For these projects, the Cabinet of Ministers willdecide on maximum percentages that a company’s totalaccumulated direct tax relief in a tax period may reachin relation to its total accumulated investment:

– up to 50% for an investment project of up to EUR 50 million;

– up to 25% for that part of a project which is in theEUR 50-100 million range; and

– up to 17% for that part of a project which exceedsEUR 100 million.

• If an investment project’s costs exceed EUR 100 millionand total direct tax relief exceeds EUR 28.125 million,then implementing the project requires the EuropeanCommission’s prior approval.

Indirect taxation

Natural resources

• There are amendments to the Natural Resources Tax(NRT) Act from 1 January 2007 – specifying new taxable items and rates and a new procedure thatapplies when claiming natural resources tax exemptionfor waste packing.

• The NRT Act specifies new taxable items – coal, cokeand lignite – which are taxable on their extraction. If documents accompanying these products state theirheat value (GJ/t), the rate will be LVL 0.11 per GJ/t(approx. EUR 0.16), but if the heat value is not stated,the rate will be LVL 3 per tonne (approx. EUR 4.27).

• New rates have been set for accumulator batteries andaccumulator banks from 1 January 2007. The Act ratesthis group per unit of weight, not as a percentage of thecommodity price, as was the case previously.

• From 1 April 2007, NRT will be levied on organic solvents containing volatile organic compounds. Rateswill range from LVL 0.01 (approx. EUR 0.014) to LVL 0.05 (approx. EUR 0.071) per kg and exemptions will also be available.

• The Electricity Tax Act came into force on 1 January2007, with the result that electricity supplied to end-users and classified as 2716 in the EU CombinedNomenclature has become taxable at a rate of LVL 0.71per MWh (approx. EUR 1.01). The tax is payable byorganizations defined in the Electricity Market Act(including electricity producers, distributors and retailers)which supply electricity to end-users, and byautonomous producers defined in the law.

• The NRT Act provides 100% exemption (80% before 1 January 2007) if a company implements a voluntarywaste packing management scheme. A waste packing management scheme means that either the companyitself sets up and implements a waste management programme or it enters into a contract with a wastemanagement company to manage waste packing on its

Latv

ia


Tax changes in Lithuania

Amendments to the Law on VAT

On 1 January 2007 a consignment stock simplificationbecame available which enables foreign suppliers to avoidVAT registration in Lithuania.

According to the new Government Order No. 39 whichcame into force on 19 January 2007, under certain conditions the tax authorities are entitled to re-establish the taxable value of goods or services for VAT purposes.

Increase of personal allowances

From 1 January 2007, the basic tax-free personalallowance has increased from LTL 290 (approx. EUR 84)to LTL 320 (approx. EUR 93) per month. Insured incomehas also increased from LTL 1,212 (approx. EUR 351) to LTL 1,356 (approx. EUR 393), which affects retired persons and individuals with disabilities, and also increases the maternity allowance ceiling.

Corporate taxation

Double Tax Treaties

• Treaties with Bulgaria, Israel and Luxembourg becameeffective from 1 January 2007.

Lithuania


Micro-companies in Macedonia

A new definition of a “micro-company” for tax purposeswas introduced with the latest changes in the CorporateIncome Tax Law. Micro-companies will be taxed an annuallump sum on their annual revenues. The annual lump sumwill be calculated on the basis of a micro-company’s totalrevenues in the previous calendar year, as follows:

– for total revenues of up to the MKD equivalent of EUR 25,000, the lump sum will be the MKD equivalentof EUR 300; and

– for total revenues exceeding the MKD equivalent of EUR 25,000 but less than EUR 50,000, the lump sumwill be the MKD equivalent of EUR 700.

A micro-company is defined as a domestic legal entity thatmeets the following conditions for the previous calendaryear:

– the entity has carried out economic activities, exceptbanking, financial or insurance activities, or games ofchance and entertainment games;

– it had up to nine employees;– the overall revenues earned by the entity from any

source do not exceed the MKD equivalent of EUR 50,000;

– the revenues earned from one buyer or person relatedto the buyer do not exceed 80% of total revenues; and

– all the participation rights in the micro-company areowned by no more than two natural persons.

Corporate taxation

Corporate tax

• Under the recent changes in the Corporate Income TaxLaw, depreciation calculated on tangible and intangibleassets cannot be included as expenditures in the taxbalance for the period over which the assets are fullydepreciated if such assets qualify for tax exemptionbecause they were purchased from reinvested profit.

• Another new feature is that for banks and savings institutions, the tax base is fully decreased by the amountallocated as a statutory reserve for covering potentiallosses. This does not apply to insurance services,which tax base is decreased by up to 75% of the statutory reserve allocated for covering potential risks.

Withholding tax

• Pursuant to the latest changes in the Corporate IncomeTax Law, the withholding tax is not recognized as anexpense for a tax purposes. Subsequently, it should beadded back at the end of the year in the annual tax balance statement.


Environmental law

• New changes and amendments have been introduced,providing new regulations on Environmental ProtectionReports and the persons obliged to prepare them, thegathering and processing of information related to environmental protection, the list of environmental protection measures and cross-border environmentalimpacts. In addition, there are also changes in the section on licensing.

• The section of the Environmental Protection Law on feeshas also partly changed. There are new regulations forcases when the fee is returned or when a company isexempt from paying the fee. In addition, there havebeen changes to the regulations on the fee for plasticproducts and packaging made of plastic mass, and thefee for the production of energy from fossil fuels.

• The new regulations were introduced in the section ofthe Environmental Protection Law that deals with theauthorised bodies, inspection and control.

• The new amendments have widened the scope of activities of the State Environmental ProtectionInspectorate, which now include approval for imports of new technology, checking that protection standardshave been implemented, checking emissions of toxicsubstances, checking product packaging, checkingwaste treatment, checking exhaust gases etc.Infringements of this law will lead to increased fines andother penalties and sanctions such as suspension ofmanufacturing activity, full or partial closure of factories,confiscation of equipment or products which do not meetthe criteria of this law etc. The State EnvironmentalProtection Inspectorate will issue a decision with anexplanation and the penalty for each infringement.

• Additionally, new fees for energy production from fossilfuels have been introduced.

Consumer protection

• The Law on market inspection generally regulates theprinciples, organization and authorization of the marketinspectorate and the inspection procedure.

Other

• Company registration has been shortened to three working days in the changes to the One Stop Shop Law.

• A new Law on Technological and Industrial Zones waspromulgated and replaces the former Free EconomicZone Law.

• The fee for obtaining an Attorney-at-law licence form the Macedonian bar has increased from EUR 1,000 to EUR 2,000.

Macedonia


Progress in the Moldavian legislation

The Law on the organization and carrying out of touristactivity in the Republic of Moldova has been adopted. The Law sets out the principles of state policy on tourism,the organization and coordination of tourist activity andentrepreneurial activity, forms of tourism, the qualityrequirements for tourist services and the creation of national tourism areas. Additionally, compulsory travelinsurance for tourists has been introduced. Insuranceexpenses are to be included in the price of tourist packages. The Law came into force on 2 February 2007.

The Moldovan Government has adopted a strategy on thereform of the state regulatory framework for entrepreneurialactivity and a plan for the implementation of the strategy.The strategy establishes the basis for improving the regulatory framework. This will be based primarily on thefollowing components:

– a state policy regulating entrepreneurial activity;

– a stable public institutional system capable of supervising and coordinating the improvement of the entrepreneurial regulatory framework; and

– methods for evaluating and implementing new regulations.

Additionally, the Government Decision provides that forevery measure or group of measures within the entrepreneurial regulatory framework, “guillotine” laws willbe adopted to facilitate the implementation of the reform.

The Moldovan Government has adopted regulations on the use of apostilles in compliance with the convention onthe annulment of the requirement for foreign official documents to be apostilled twice in order to be legally valid (‘supra-legalised’). The use of single apostilles and theirofficial recognition came into effect on 16 March 2007.(This is the date when the convention on the annulment of the supra-legalisation requirement of foreign official documents comes into force).

Moldova


Unification of the social security contribution regulation

According to the Ministry of Finance agenda for 2007, the system of payment and collection of social securityinsurance contributions is to be unified by a single Law.Currently, separate laws regulate pension and disabilityinsurance, health insurance and unemployment insurance.

MontenegroNews development in Montenegro

Confirmation of the Double Tax Treaties

The Montenegrin Ministry of Finance has confirmed thatthe new independent state will honour all the treatiessigned by the former Yugoslavia and the State Union.

Draft Law on Customs Tariffs

In April 2007, the Parliament of Montenegro adoptedamendments to the Law on Customs Tariffs, which will bringabout the implementation of a harmonized system in 2007.


Taking advantage of economic growth

In 2006 the Polish economy grew by more than 6%.Moreover, according to official and unofficial forecastsPoland is likely to repeat or even exceed that result in2007. The Minister of Finance, Mrs Zyta Gilowska, hassuggested that Poland should take advantage of this situation by cutting the social security contribution rates.

In Poland, a high social security burden is one of the mostsignificant causes of unemployment (it has fallen lately, butstill stands high at 15%). Currently, the employee’s shareof the social security is 18.71% of gross salary, while theemployer’s share is in the range of 19.71% - 22.41%. The Minister of Finance proposed that the employee’sshare should be cut by three percentage points from 1 July 2007. A further reduction would become effectivefrom 1 January 2008; as a result the employee’s contribution rate would be 13.71% of gross salary (five percentage points less than today), while the employer’scontribution rate would be in the range of 17.71% - 20.41%(2 percentage points less than today).

The reactions to this plan have been quite sceptical.Economists have criticized it mainly because it would befinanced from economic growth rather than spending cuts.

The general public has also been reluctant to show enthusiasm, as a similar rate reduction plan wasannounced and then withdrawn in 2006. We hope to beable to report positively on this issue in a subsequent edition of CEE Tax Notes.

Another important legislative initiative relates to VAT.Parliament has started work on the draft amendments tothe VAT Law, which includes several advantageous solutions. One of them is the introduction of “call-off” warehouses, which would facilitate imports from the EU countries (i.e., transactions that are referred to in theVAT legislation as “intra-community acquisitions ofgoods”). Another idea is to remove the 30% VAT penalty,which currently applies to taxpayers that have understatedtheir VAT liability (the penalty is calculated on the difference between assessed liability and the liabilitydeclared). The draft amendments also include some controversial provisions, which may potentially impede the deductibility of input VAT in a number of situations.Furthermore, the draft widens the range of taxpayers sothat managers and management board members with noemployment contracts, for example, might be obliged toregister for VAT.

Poland


Leasing

The harmonized VAT and customs legislation has introduced significant changes to the statistical and VAT reporting requirements, as well as the relevant customsregulations. Since the Accession of Romania to the EU(“Accession”), these changes have made an immediateimpact on leasing operations carried out in Romania.

As the Treaty of Accession (“Treaty”) did not contain specific provisions concerning cross-border operationscommenced before Accession and due to peculiarities of the relevant Romanian legislation, companies with leasing operations faced many questions in relation to the indirect tax base.

In order to address the questions raised by Romanianleasing companies, the Ministry of Public Finance issuedan order stipulating the conditions under which leasingoperations commenced before 1 January 2007 should befinalised after the Accession (1 January 2007). The ordercontains specific provisions in relation to the following:

– closing of leasing agreements in respect of goods withCommunity customs status;

– tax base for customs purposes; and – mechanism for paying the related import VAT.

Corporate taxation

Corporate tax

• Starting 1 January 2007, the un-depreciated accountingrevaluations are taken into account for purposes of tax depreciation and taxable capital gains upon the saleof the asset. The revaluation reserve will then be taxedat the moment of utilisation (e.g., through increase ofshare capital, distribution of dividends, and offsettinglosses).

• The revenues earned and expenses incurred in relationto transactions with derivatives are included into the taxbase for profit tax purposes.

• The Romanian legislation follows the interpretation ofthe ECJ (e.g., Denkavit International BV, VITICAmsterdam BV and Voormeer BV) in what constitutes a minimum holding period as provided by the Parent-Subsidiary Directive. Even though dividendsfrom EU companies are subject to profit tax if receivedbefore the end of a two-year holding period, the taxpayer may re-compute its profit tax liability for theyear in which the dividend was received and submit anamended profit tax return in the year the minimum holding period requirement is met.

• Certain clarifications regarding the assessment of a permanent establishment are introduced (e.g., place ofbusiness, e-commerce) in accordance with the OECDGuidelines

Withholding tax

• Dividends paid by a Romanian company to anotherRomanian company are subject to a 10% withholdingtax, unless they qualify for exemption under the conditions set out by the Parent-Subsidiary Directive(e.g., 15% shareholding, 10% from 2009, and a minimum holding period of two years).

• Domestic legislation also follows the interpretation of theECJ in cases Denkavit, VITIC Amsterdam andVoormeer regarding withholding tax applicable in caseof a dividend, interest or royalties payment. In order toapply the withholding tax relief, the two-year holdingperiod requirement must be satisfied at the date of thepayment. Otherwise, the Romanian company will haveto pay the withholding tax (if any) until the two-yearholding period requirement is met. The Romanian company making the payment may request a refund of tax paid on behalf of a non-resident at the end of the two holding years.

Indirect taxation

VAT

• Simplified VAT provisions will apply to certain construction-assembly work, including the following:

– construction and repair services of all types of buildings;

– electrical, sanitary installation and insulation works;– finishing works (e.g., carpentry, painting, and

flooring/inlaying).

• A new reporting period of three months during a semester (six months) can be applied in certain situations.

Customs duties

• Starting 1 January 2007, a new criterion for exemptionfrom the requirement to provide a bond as a guaranteefor the payment of import duties (“import duties bond”) is enforced. Under the new regulations, the customsauthorities may grant an exemption from the importduties bond for certain goods, such as goods placedunder the Inward Processing Relief (suspension system), certain pharmaceutical products, organicchemicals, and mineral products placed under a bondedwarehouse regime. The exemption from the

Romania


Individual taxation

Personal income tax

• If the buyer of shares in a non-listed or limitedliability company is a foreign company, and theseller is a Romanian resident individual, thebuyer has the obligation to report and pay thecapital gains tax due by appointing a fiscalrepresentative or agent in Romania.

• As of 1 January 2007, the withholding tax oninterest income derived from term deposits inRomania no longer applies to EU residents(provided the EU residence is proved), irrespective of whether the deposits are madebefore or after 1 January 2007.

• Income from prizes will also include incomegenerated as a result of promoting products or services through advertising.

• Income from gambling is defined as incomeobtained by participants from gambling activities carried out by any legal entity dulyauthorised to engage in such gambling activities.

• Romanian companies which benefit from thework carried out by expatriates from EU/SEEcompanies on a secondment basis shouldnotify the Territorial Labour Inspectorate (ITM)and the Office for Labour Force Migration. In the event of an ITM inspection, theseRomanian companies should also producesupporting documentation, consisting of theagreement with the EU/EEA home employer,the secondment letter, and evidence that theprovisions of the Romanian Labour Code arebeing observed.

Labour Code

• The National Collective Bargaining Agreement(“NCBA”) for the years 2007-2010 has beenpublished. New provisions include the following:

– Further details on the procedure for termination of employment on the groundsof lack of qualifications and capabilities have been included in the NCBA;

– The minimum indicative rates have beenincreased according to the employee’s qualification, which results in a gross minimum salary between RON 440, approximately EUR 130 (for unqualifiedemployees) and RON 880, approximatelyEUR 260 (for positions requiring a universitydegree);

requirement to guarantee the payment of customsduties and VAT granted by the customs authoritiesbefore the Accession under the previous regulations willremain valid until the discharge of the duty-suspensioncustoms regimes for which they were granted.

• Pursuant to the Treaty, Romanian companies arerequired to remove at their own expense any stock ofagricultural products in excess of the average stock forprevious years as determined by government decree.The deadline for reporting the surplus stock of sugar,sugar products and agricultural products (i.e., meat,processed meat, milk and dairy products, margarine,orange juice) was set for 15 March 2007.

• Conditions under which cross-border leasing operationscommenced before the Accession can be dischargedafter 1 January 2007 have been established by an order of the Ministry of Public Finance and include thefollowing:

– Leasing operations can maintain the customs regime /preferences (temporary admission with a total relief orimport with exoneration from import duties) underwhich they were placed, if in view of the Accessionthe deadline for finalising the customs procedures isextended to the expiry date of the contract;

– For leased goods with Community customs status, nocustoms duties or compensatory interest amounts aredue upon termination of the leasing operations by wayof releasing the goods into a free circulation in Romania;

– For leased goods without Community customs statusreleased for free circulation after the Accession date,customs duties are due at the rates stated in the initialcustoms declaration and computed on the residualvalue established under the leasing agreement, whichcannot be lower than 20% of the original value. Inaddition, for goods which were subject to cross-borderleasing, compensatory interest for the period startingfrom the Accession date becomes due;

– Persons registered for VAT purposes in Romania willnot actually pay import VAT at customs, but willaccount for VAT in a monthly VAT return. VAT shallapply on the residual value;

– Excise duties, if any, will be payable according to therelevant legal provisions at the moment when theleasing contract was initiated (e.g., excise duties arecomputed at the entry value of the goods for leasingcontracts initiated after 1 April 2005).

Environmental tax

• In January 2007, the regulations regarding packagingand waste packaging were amended. In particular, therecycling targets for packaging materials for the perioduntil 2013 were re-considered. Also, under certain conditions, companies can disregard wood packagingintroduced to the market when computing the recyclingtarget.

Rom

ania


– Directive 1999/30/EC of 22 April 1999 relating to limit values for sulphur dioxide,nitrogen dioxide and oxides of nitrogen, particulate matter and lead in ambient air;

– Directive 2000/69/EC of 16 November 2000relating to limit values for benzene and carbon monoxide in ambient air;

– Directive 2002/3/EC of 12 February 2002relating to ozone in ambient air;

– Directive 2000/60/EC of 23 October 2000establishing a framework for Communityaction in the field of water policy.

• In addition, new regulations on air quality andnoise emission limits have been adopted.Romanian authorities will have to keep theEuropean Commission informed on certainenvironment issues.

– The NCBA may be renegotiated on an annual basis, at least in respect of the clauses concerning remuneration, occupational health and safety, professional training, benefits granted and the list of industry sectors in which collective bargainingagreements are to be concluded.

• The following EU Directives have been transposed intoRomanian legislation:

– Act 467/2006 on employee reporting and consulting(transposing EU Directive 2002/14/CE); and

– Act 217/2006 on the establishment and functioning ofWorks Councils (transposing EU Directive 94/45/CE).

Environmental law

• Further steps in the adoption of the EU regulations havebeen made by passing new regulations transposing thefollowing EU regulations:

– Directive 96/62/EC of 27 September 1996 on ambientair quality assessment and management;

Rom

ania


Recent changes in tax legislation

Law No. 268-FZ of 30 December 2006 came into forcefrom the beginning of 2007. The new law introduces some significant changes to the Russian tax system:

– It provides for the opportunity to deduct the cost of land plots for profits tax purposes.

– It obliges taxpayers with more than 100 employees tosubmit tax returns in electronic form (in the transitionalperiod of 2007 the requirement is applicable to taxpayers with more than 250 employees).

– It provides for some benefits to individual taxpayers who sold shares before 31 December 2006.

The other important action was the introduction of a list of “tourist-recreation areas” (special economic areas with favourable tax regimes) by the government on 3 February 2007.

Corporate taxation

Corporate tax

• From 2007 the cost of land plots purchased from stateor municipal authorities and payments for the right toconclude a lease agreement for land plots from state or municipal authorities can be deducted for profits taxpurposes.

• The cost of a land plot can be “amortized” evenly overthe period defined by the taxpayer (but not less than fiveyears). Or the taxpayer can deduct the cost from up to30% of the profits tax base for the preceding reportingperiod until the full cost has been deducted. The deduction may be claimed after the date on which documents for state registration of land plot rights aresubmitted. The income from the sale of a land plot isdefined as the difference between the sale price and“residual” value of the land plot. The loss on the salecan be “amortized” evenly during the remaining(unused) period of amortization.

• The new rules are applicable for taxpayers who conclude agreements on purchase of land plots or rights to lease during the period of 1 January 2007 to 31 December 2011.


• The Law “On Special Economic Areas” introduces“tourist-recreation areas” designated for the development and effective use of Russian touristresources.

• In February 2007 a list of seven tourist-recreation areaswas introduced by seven resolutions of the Russian government. These areas are located in:

– Maiminsky and Chemalsky regions of the Republic ofAltai;

– Pribaykalsky region of the Republic of Buryatia;– Altai region of Altai kray;– Krasnodar kray;– Irkutsk region;– Zelenograd region of Kaliningrad territory; and– Cities of Essentuki, Zheleznovodsk, Kislovodsk,

Pyatigorsk, and Lermontov; Mineralovodsk region;and Predgorny region of Stavropol kray.

Customs duties

• New Commodity Nomenclature of Foreign EconomicActivity and a new Customs Tariff took effect from 1 January 2007. The reason for the amendments tothese documents is the modification of the HarmonisedSystem by the World Customs Organisation, upon whichRussia has based its Commodity Nomenclature.

• New forms of Cargo Customs Declarations and TransitDeclarations came into effect from 1 January 2007. Inconnection with changes in customs legislation on themethods of determining customs value, new forms ofCustoms Value Declarations and Adjustments to theCustoms Value came into effect from 1 January 2007.

• The Russian government extended the validity of the0% rate of import customs duty for certain types of technological equipment (approx. 700 commodity positions) until 30 June 2007.

Excise duties

• Export duty on crude oil was reduced from USD 180.7to USD 179.9 per ton and is applicable for February andMarch 2007.

Individual taxation

Personal income tax

• Individual investors will likely benefit from the Law published on 31 December which states that individualswho held securities for more than three years and soldthem before 2007 have an unconditional right to claimthe property deduction (i.e., may be exempt from taxation with respect to all proceeds from such transactions). Under previous legislation, the propertydeduction was, somewhat counter-intuitively, availableonly for taxpayers who were not able to provide documentary evidence of their expenses. Thus,

Russia


(Financial Action Task Force) or OECD non-member state, a Russian resident wasrequired to preliminarily register the bankaccount with the Russian tax authorities. From1 January 2007, this requirement has beenabolished. Residents may now open banksaccounts at any foreign bank upon subsequent notification of the Russian tax authorities.

• From 1 January 2007 the requirement forRussian residents to convert a portion of theirforeign currency earnings into roubles wasabolished.

• While the new rules have abolished most ofthe currency control restrictions, certain otherrequirements still remain valid. Set forth belowis a list of some currency control requirementsthat are still applicable and which should betaken into account when performing currencytransactions in Russia:

– Russian companies are required to collectall currency earnings from foreign tradetransactions in their bank accounts in Russia(“repatriation of currency earnings”).

– Russian residents which are legal entitiesare required to formalize “deal passports”with Russian banks in connection with foreign trade transactions and loan agreements with non-residents.

– Currency transactions between Russian residents are prohibited (with some exceptions).

Rus

siataxpayers who sold their shares in 2006 may have an

advantage under the new ruling. Those who failed toget the property deduction in previous years may applyfor a refund. It should be noted, however, that a refundclaim should be made within three years of the tax payment. The benefit is short-lived, though, as from2007 only actual expenses may be deductible fromincome from the sale of securities with no propertydeduction being available.

• According to the law mentioned above, during the periodof March to December 2007 individuals may make so-called declaration payment with respect to understatedincome received before 2006. The declaration paymentshall be made on the basis of a 13% rate. Individualsthat make this payment shall be considered compliantwith tax legislation.



• From 1 January 2007 legislators have abolished therequirement to make payments in roubles only for transactions involving Russian domestic securities, if theparties to the transaction are a Russian resident and anon-resident. Therefore, as of the above date such payments may be carried out both in Russian roublesand in foreign currency.

• Major changes have affected the procedure for openingforeign bank accounts. Until 1 January 2007, in order to open a bank account at a bank located in an FATF


CEFTA

As of 1 January 2007 CEFTA consists of the following parties: Albania, Bosnia and Herzegovina, Bulgaria,Croatia, Macedonia, Moldova, Montenegro, Romania,Serbia and UNMIK Kosovo.

Till date only Macedonia and Croatia have signed aStabilization and Association Agreement with the EU.

A regional Free Trade Agreement (FTA), which was signedon 19 December 2006 in Bucharest under the CEFTAumbrella, should create a single market in this region,enable diagonal accumulation of the origin of goods, unifyrules of arbitration and increase the level of intra-regionalsales. This FTA should replace a network of 32 bilateralFTAs currently in force between the listed parties.

Additionally, it should also be the first step for all the parties concerned in their accession to the Pan-Euro-Medsystem of origin.

One of the most important benefits that a regional FTA will bring to this market is diagonal accumulation of originand abolishment of the “no drawback rule” in the tradebetween parties. Effectively, this means that flow ofgoods, originating in FTA countries for the purpose of processing and final consumption, will be enabled withoutpayment of customs duties in the countries of import. For example, semi-completed products originating inAlbania will be imported in Serbia duty free, partiallyprocessed, and further exported to Croatia duty free.

However, certain imperfections of bilateral FTAs, whichshould be replaced by CEFTA, have been transferred tothis regional FTA. This relates mostly to the lists of sensitive products which remain subject to duties. These lists mainly encompass agricultural products andwill have bilateral effect.

It should be noted that prior to ratification, the regional FTA will have no effect. Signatory parties agreed thatCEFTA should be ratified locally by the end of June 2007.Effectively, this date represents a deferred deadline forresolving the remaining problems (Serbia wishes to protecttobacco investors by imposing high duty rates on importsof tobacco from Croatia. Similarly, Bosnia will impose highduty rates on meat and dairy products originating in Serbiaand Croatia).

Consequently, the process still needs to be monitoredclosely. Before ratification, bilateral FTAs are fully applicable.

Individual taxation

Personal income tax

• By 15 March 2007 taxpayers were liable to pay annualpersonal income tax for 2006. Individuals required tosubmit annual returns were Serbian tax residents whoseworldwide net income was higher than:

– Serbian citizen: RSD 1,142,820 (three times the average annual salary – approx. EUR 14,197); and

– Non-Serbian citizen: RSD 1,904,700 (five times theaverage annual salary – approx. EUR 23,661).

• Personal deductions and allowances that applied to both Serbian and foreign citizens for the purposes ofdetermining annual personal income tax were:

– In the case of the taxpayer: RSD 152,376 (40% of theaverage annual salary – approx. EUR 1,893); and

– In the case of dependent family members: RSD 57,141 (15% of the average annual salary perdependent – approx. EUR 710).

Other taxes

Property taxes

• With effect from 1 January 2007, the Law on FinancingLocal Authorities establishes fiscal decentralisation inwhich larger budgetary funds will be approved to poorermunicipalities at the expense of the richer ones.

• According to the Law, property taxes are the source of income for local authorities, which will individually set the tax rates up to the threshold regulated by theproposed amendments to the Property Tax Law.



• National Bank of Serbia (NBS) adopted a Decision onthe terms and conditions under which Serbian residents,both legal and physical persons, may be allowed to hold foreign currency on a bank account abroad. The Decision pertains to residents that are seeking professional improvement or education in a foreigncountry. In addition, with permission from the NBS,physical persons could open a bank account abroad in order to pay for accommodation and health care

Serbia


– have capital in excess of EUR 200,000;– perform business activities in the financial

market for a period of at least 12 monthsprior to submitting the request to the SEC;and

– have performed minimum 10 transactionsevery three months during the most recentyear. The value of transactions shouldexceed EUR 50,000 over a three-monthperiod.

• In addition, the SEC shall also grant the statusof professional investor to other legal entitiesfor a period of one year and limited to oneinvestment, provided that the following criteriaare met:

– have assets in excess of EUR 5 millionaccording to the latest annual financialreport;

– have capital in excess of EUR 500,000; and

– over a period of three years, have undertakena business activity identical to the businessactivity of the company which securities it ispurchasing.

• Additional approval of the SEC, in this latercase, is needed for any additional investmentof other legal entities.

services, as well as to gain settlements following judicialverdicts. Legal entities are also allowed to open bankaccounts abroad after obtaining the NBS’s consent forthe following purposes: for conducting of constructionworks abroad; financing of branches; put down guaranteed deposits; conduct research; and run certaincredit transactions with foreign countries.

New Securities Law

• The new Securities Law sets out that only professionalinvestors can participate in a closed issue of shares inpublic joint stock companies and that the SerbianGovernment shall regulate the manners and criteriaused for determination of professional investors. Finally, in February the Decision on the manner in which professional investors’ status will be determinedand more specific criteria were adopted by the SerbianGovernment.

• The request for determination of the status of a professional investor is to be submitted to the SecuritiesExchange Commission (SEC).

• Financial institutions (banks, insurance companies, etc.)and other legal entities, when submitting request for thedetermination of the status of a professional investor,should meet following criteria:

– have assets in excess of EUR two million according tothe latest annual financial report;

Ser

bia


New amendments to the Labour Code and theCommercial Code

A new amendment to the Slovak Labour Code was prepared and is in the process of being discussed byParliament. Whilst there are likely to be further changes,some of the key proposed amendments are:

– Employment activities will be more clearly defined. Thiscould lead to some individuals currently working as contractors being reclassified as employees. Up to now, the Slovak authorities have not paid a great deal of attention to this issue. However, this looks likely tochange, and individuals who now work as contractorsbut are, in substance, carrying out the role of employeesmay become entitled to the same protection under theLabour Code as applies to employees. This could alsolead to changes in the way these individuals are treatedfor tax and social security purposes;

– The maximum amount of compensation payable by anemployee for damages he caused should increase fromthree times to four times the average monthly salary;

– The possibility to conclude an agreement on labouractivity for a maximum of ten hours a week should be re-introduced;

– Additional remuneration for working in an environmentharmful to human health should be 20% of the Slovakminimum salary;

– Rules covering working at home and telecommuting arebeing introduced;

– The distribution of working hours should be further regulated. This could reduce the amount of overtime anemployee is permitted to work over certain periods; and

– The minimum salary of employees whose remunerationis not agreed in a collective agreement should be atleast a specified minimum monthly salary for the degreeof difficulty of the work.

A new amendment to the Slovak Commercial Code wasalso approved by Parliament. Under this amendment, theshare capital of a limited liability company and of a cooperative can be stated and paid in euros, rather thanonly in Slovak crowns. For a limited liability company, theminimum share capital is EUR 5,000; for a cooperative, it is EUR 1,250.

Slovakia


Interest on inter-company loans

Up to 2007, interest on inter-company loans between related entities was defined as:

– the interest rate on treasury bills in the secondary market, for loans of up to one year inclusive;

– the interest rate on state bonds in the secondary market,for loans over one year; and

– the interest rate on German government bonds, for allcross-border loans (BUND).

However, amendments to the transfer pricing provisions inthe new legislation show a trend towards implementingtransfer pricing practice from other European countries,such as the Netherlands. Accordingly, a reference interestrate is the sum of the variable part of an interest rate and afixed mark-up, expressed in basis points. One basis pointis equal to 1/100th of 1%.

The variable part of the interest rate is defined accordingto the official values of interest rates on the first day of thecurrent month at which banks offer loans to other banks

with a maturity of 12 months, or other suitable maturity,e.g., three months (EURIBOR, LIBOR-USD, LIBOR-JPY,LIBOR-GBP, or LIBOR-CHF).

The mark-up consists of two parts: one related to thematurity of the loan; and the other related to the credit rating of a borrower that receives a loan. The followingmark-ups are determined for particular maturity period:

– Up to 1 year – 0 basis points;– Up to 5 years – 3 basis points;– Up to 10 years – 5 basis points; and– More than 10 years – 6 basis points.

The mark-up depends on the credit rating of a borrowerthat receives a loan from a related party or gives a loan toa related party. Credit ratings assigned by the credit ratingagency “Standard & Poor’s”, or some other agency whosecredit ratings can be converted to “Standard & Poor’s”, areas follows:

– from AAA to A- - 5 basis points;– from BBB+ to B- - 20 basis points;– under B- - 200 basis points; and– if a tax payer does not have a credit rating – 100 basis

points.

Slovenia


Ukraine and Cyprus to conclude new tax treaty

On 21 February 2007, the Cabinet of Ministers of Ukraineauthorised the Ministry of Finance to sign a new tax treatywith Cyprus. According to the official explanation providedby the Cabinet of Ministers, the existing treaty encouragestax avoidance and the outflow of capital from Ukraine toCyprus.

The existing treaty was inherited from the USSR andexempts dividends, interest and royalties from withholdingtax. The new treaty introduces withholding taxes at the following rates:

– 5% on dividends if the beneficial owner is a Cypriot company that directly owns at least 25% of the Ukrainiancompany. Otherwise, a rate of 15% will apply to dividends;

– 10% on interest; and– 10% on royalties.

It is possible that the new treaty will come into force on 1 January next year.

Corporate taxation

Corporate tax

• From 1 January 2007, companies deriving more than90% of their income from dividends are no longerrequired to pay the 25% advance corporate tax whenthey make dividend payments.

Withholding tax

• From 1 January 2007, the tax on payments to non-resident insurers or re-insurers that are not includedin the official list of qualifying companies has increasedfrom 3% to 12%. The tax is charged on the Ukrainianentity that pays the foreign insurer or re-insurer.

Indirect taxation

Customs duties

• From 1 January 2007, the annual license fees for theproduction, export and import of spirits were reducedfrom UAH 25,000 (approx. EUR 3,800), UAH 85,000(approx. EUR 13,000) and UAH 170,000 (EUR 26,000)respectively to UAH 780 (EUR 120). However, theexcise duty rates on alcohol and tobacco wereincreased by between 25% and 30%. The annuallicense fees for the wholesale of spirits were alsoincreased from UAH 85,000 (approx. EUR 13,000) toUAH 500,000 (approx. EUR 76,200).

Individual taxation

Personal income tax

• From 1 January 2007, the personal income tax rateincreased from 13% to 15% (from 26% to 30% for non-residents). In addition, several measures broadened the personal income tax base:

– Revenues from the sale of real estate (includingincomplete developments) is now subject to tax ateither 0%, 1% or 5%, depending on the nature of thereal estate and the number of real estate sales undertaken by the same taxpayer during the calendaryear. The tax is based on either the price indicated inthe sale agreement or the property’s value calculatedby the authorised state authority, whichever is thehigher. The tax has to be paid before the sale agreement is notarised. If the deal is not executed,the tax paid will be refunded to the taxpayer throughthe taxpayer’s annual tax return.

– Gross revenue from the sale of movable property issubject to tax at the standard rate (15%). As anexception, one sale per calendar year of a car, motorcycle, yacht or boat with an engine will be subject to a lower 1% rate, provided the seller paysthe state (stamp) duty before the sale agreement isnotarised. The state duty is 1% for sales to a spouse,parent or child, and 5% in other cases.

– Income received as an inheritance or gift is subject to tax at the following rates: 0% if received from aspouse, son or daughter, parent, parent-in-law, or a spouse’s children; 5% if received from resident testators other than those stated above; 15% ifreceived from a non-resident testator, irrespective of the relationship with the testator.

Social security

• From 1 January 2007, the employer’s pension fund contribution increased from 32.3% to 33.2%, whileemployer’s social security fund contributions decreasedfrom 2.9% to 1.5%. Contributions are capped on thebasis of a maximum income of 15 minimum wages(UAH 7,875, approx. EUR 1,200 for the first quarter of2007; UAH 8,025, approx. EUR 1,220 for the secondand third quarter of 2007; and UAH 8,220, approx. EUR 1,250 for the fourth quarter of 2007).


Pension fund charges over currency purchase

• From 1 January 2007, the pension fund charge on salesand purchases of foreign currency through a bank wasreduced from 1.3% to 1%.

Ukraine


Clean Development Mechanism projects

Uzbekistan is a party to various bilateral and multilateralinternational environmental protection agreements, including the Kyoto Protocol to the United NationsFramework Convention on Climate Change. Under thisProtocol, Uzbekistan qualifies for ‘carbon credits’ whichcan be earned for the reduction of carbon gas emissionsas a result of special ecology and energy economy projects. These ‘carbon credits’ can be sold to countrieswith excessive carbon gas emissions.

Following a President’s Resolution enacted in December2006, a series of measures were developed by the UzbekCabinet of Ministers in early 2007 aimed at reducing

carbon gas emissions, including attraction of foreigninvestment and modern technologies.

There is a standard procedure for companies to developand implement Clean Development Mechanism (CDM)projects, involving the submission of a project applicationwith a detailed description/study of the project, and technical documentation at a later stage (if the applicationis accepted). The application is to be considered by thespecial CDM committee at the Uzbek Cabinet of Ministers.

According to the President’s Resolution, foreign companiesmaking direct investment in the CDM projects would beexempt from paying Uzbek corporate income tax in respectof revenues they receive from such projects.

Uzbekistan

PricewaterhouseCoopers Tax Contacts for CEE:

Japanese Business Practice (CEE)

Belgium (Brussels)

Steve Moriyama

Tel: + 32 2 710 7432

Fax: + 32 2 710 4299


Kazakhstan (Almaty)

Courtney Fowler

Tel: + 7 3272 980 615

Fax: + 7 3272 980 252


Latvia (Riga)

C/O Iwona Smith (Poland)

Zlata Elksnina

Tel: + 371 709 4514

Fax: + 371 783 0055


Lithuania (Vilnius)

C/O Iwona Smith (Poland)

Kristina Bartuseviciene

Tel: + 370 5 239 2365

Fax: + 370 5 239 2301


Macedonia (Skopje)

C/O Ron Barden (Ukraine)

Bob Savic

Tel: + 389 71 232 710

Fax: + 389 2 311 6525


Moldova (Chisinau)

C/O Mihaela Mitroi (Romania)

Andrian Candu

Tel: + 373 22 238 122

Fax: + 373 22 238 120


Poland (Warsaw)

Iwona Smith

Tel: + 48 22 523 4853

Fax: + 48 22 508 4853


Romania (Bucharest)

Peter de Ruiter

Tel: + 40 21 202 8670

Fax: + 40 21 202 8600


Russia (Moscow)

Steven Snaith

Tel: + 7 495 232 5524

Fax: + 7 495 967 6001


Serbia and Montenegro (Belgrade)

Rene Bijvoet

Tel: + 381 11 3302 100

Fax: + 381 11 3302 101


Slovakia (Bratislava)

Todd Bradshaw

Tel: + 421 2 5935 0600

Fax: + 421 2 5935 0222


Slovenia (Ljubljana)

Janos Kelemen

Tel: + 386 1 583 6058

Fax: + 386 1 583 6098


Ukraine (Kiev)

Ron Barden

Tel: + 380 44 490 6740

Fax: + 380 44 484 0966


Uzbekistan (Tashkent)


Abdulkhamid Muminov

Tel: + 998 71 1206 101

Fax: + 998 71 1206 645


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CEE Tax Notes - PwC...CEE Tax and Legal Services Leader Russia (Moscow) Steven Snaith Tel: + 7 495...

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