Nexia International 2010 Annual Tax Conference. European Holding Company Analysis.

Nexia International

2010 Annual Tax Conference

European Holding Company AnalysisEuropean Holding Company Analysis

Nexia World Tax MeetingNew York, May 15, 2010

European Holding Company Analysisby Chris Leenders,

International Tax Partner at Koenen en Co,Member of Nexia The Netherlands/

Nexia International

European Holding Company Analysis

• Countries covered: 20• Updates as per January 1, 2010• Issues covered: 17• Main developments


Countries covered:

Out: Cyprus In: Ireland Austria Denmark Mauritius Italy Singapore Norway Croatia Poland

Slovak Republic


• Countries not covered?

• Czech Republic CroatiaAustria TurkeyFinland Hong KongCyprus Mauritius

Romania Singapore


Main changes/developments


Issues1. Treatment of dividend income

• Participation exemption: 17 countries (full or 95%)

• Taxable with credit: 2 countries (Greece, Russia)

• 3% burden: Norway


2. Treatment of capital gains

• Participation exemption: 15 (some 95%)• Taxable with credit: 1 (Greece)• Taxable: 2 (Russia, Slovak Republic)• Taxable: 1 (UK, if non trading)• Taxed at 3%: Norway


3. Minimum “ownership” period requirements

• None : 9 (Denmark, Germany, Hungary, Netherlands,

Malta, Ireland, Italy, Sweden, UK)


4. Active business test on underlying participation

• No : 15 (Belgium, Denmark, Hungary, Ireland, Poland, France, Germany, Greece, Luxembourg, Malta, Portugal, Russia, Sweden, Slovak

Republic, Switzerland)


5. Subject to tax-test on underlying participation

• No : 8 (Greece, Netherlands (if active business), Luxembourg (if EU

sub) Ireland, Malta (if EU sub), Portugal, Switzerland,

Slovak Republic)


6. Withholding tax on liquidation(of the holding company)

• No : 10 (Denmark, Greece, Hungary, Ireland, Luxembourg, Malta,

Norway, Slovak Republic, Spain, UK)


7. Interest deductibility; Debt/equity ratio’s

• Interest deductible: No: 5 (Portugal, Denmark, Poland, Italy, Hungary)

• Debt/equity ratio’s: No: 5 (Malta, Norway, Italy, Ireland, Sweden)


8. CFC and/or anti-abuse regulations?

None: 4 (Greece, Slovak Republic, Malta, Ireland)


9. Anti treaty shopping provisions

No: Hungary, Greece, Poland, Russia


10. Taxes on capital contribution

Yes: Greece 1%Hungary ($ 200 or € 150 fixed)Spain 1%Switzerland 1%


11. To sum up:

Best: Ireland and Malta

Worst: Russia, Poland, Norway, Italy


12. Main developments

- CIT rates seem to stabilise- Much more tax treaties in place- Non interest deductibility increases

from 2 to 5


13. Main developments

- Active business test on underlying participation:Increased from 10 to 15 countries!

- New taxation on banks?

European Holding Company Analysis14. Upcoming:

lyrics Alanis Morisette: ironic“An old man turned ninety-eight. He won the lottery

and died the next day.”

Death and Taxes


QUESTIONS ?

THANK YOU !

Death & Taxes

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Reasons to Discuss Death on a Saturday Morning

1. Alcohol

2. Headaches

25

3. Free Friday nights

4. It’s a fun topic for accountants

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Death & Taxes

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You are a tax advisor in your home country. You are engaged by Mrs. X, the wife of a foreigner, Mr. X, who has passed away. Mrs. X advised you that, at the time of his death, Mr. X owned property in your home country.

Mrs. X has asked you to determine and advise on any possible tax consequences in your home country resulting from Mr. X’s death. More specifically, she wishes to know what will be the implications for Mr. X, for the estate of Mr. X, and the heirs of Mr. X.

Death & Taxes

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What did Mr. X own?

Real estate

• Owned directly• Owned through a domestic company• Owned through a foreign company• Owned through a domestic trust• Owned through a foreign trust• Owned through a domestic partnership• Owned through a foreign partnership

Death & Taxes

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What did Mr. X own? (Cont’d)

Shares of a company

Interest in a partnership

Interest in a trust

Death & Taxes

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Implications to Mr. X on death

Filing requirements• Income tax returns• Compliance certificates• Estate tax/inheritance tax returns• Due dates• Information required

Death & Taxes

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Implications to Mr. X on death (Cont’d)

Taxes to pay• Income taxes• Estate tax/inheritance tax• Mutation tax• Probate fees

Death & Taxes

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Implications to the Estate of Mr. X

Residency of the Estate• Determined by trustees or

beneficiaries• Differences

Estate tax returns• Requirements to file• Due dates• Special tax rates or rules

Death & Taxes

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Implications to the Estate of Mr. X (Cont’d)

Period of the Estate’s existence• Legal requirements• Reasons to lengthen or shorten

Estate’s existence• Requirements to close estate and

distribute assets• Personal liability for executors

Death & Taxes

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Implications to the heirs of Mr. X

Any taxes to be paid by heirs on receipt of property

• Ways to avoid• Filing requirements to receive

property • Due dates

Death & Taxes

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Implications to the heirs of Mr. X (Cont’d)

What are the tax attributes of property inherited to the heirs?

• Original cost to decedent• Fair market value at decedent’s

death• Another value• Elections available

Structuring Investments in North AmericaJames Wall *James Wall *

J. H. Cohn LLPJ. H. Cohn LLP

May 15, 2010May 15, 2010

** Thanks to Steve Roth and Alfredo Solloa for their helpful comments Thanks to Steve Roth and Alfredo Solloa for their helpful comments

Circular 230 – General Information

• The information included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters. (The foregoing disclosure has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

• The information included herein is of a general nature and should not be relied on as tax advice. Consultation with a tax advisor in respect of specific transactions should be undertaken.

1

High-Level US, Canada and Mexico Tax “Highlights”

US Canada Mexico

General Federal and state/provincial tax rate 40% 31% 30%

Employee profit-sharing tax n/a n/a 10%

Dividend withholding tax rate (non-treaty) 30% 25% 0%

Interest withholding tax rate (non-treaty) 30% 25% 30%

Management fees paid for non-local based services 0% 0% 0%

Transfer pricing documentation required Yes Yes Yes

Significant capital taxes n/a n/a n/a

Exchange controls No No No

Special rules and reporting for foreign operations Yes n/a n/a

Comparability to US rules n/a Yes generally more

complex3

General Background Information Regarding US Tax Rules

• US persons and entities subject to US tax on WWI• Foreign persons and entities subject to US tax under one of two

regimes:• Net Income Regime – Applies to income effectively connected with a

US trade or business (“ECI”), less allowable deductions• Two requirements for the net income regime to apply

• The person must be engaged in a US trade or business (“ETB”); except for sales of US real property interests

• The income be effectively connected with the US trade or business (source is key)

• Gross Income Regime – Certain (non-capital gain) Income from US sources that is not ECI

• Collected via withholding tax (30% rate)• Rates reduced or eliminated via tax treaties• Domestic law exemptions

• Bank account interest• Registered debt (portfolio debt exemption)

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General Background Information Regarding US Tax Rules – cont’d.

• US Limited Liability Companies/Partnerships – Treated as flow through entities with no entity level income tax

• Earnings taxed at the owner level• If the entity is ETB, the partners are considered to be ETB• Rev Rul 91-32 takes the position that gain realized from the disposition

of a USP interest is ECI• No treaty protection because the PE of the USP is attributed to the partner

• US Corporations – Taxed at the entity level on WWI• Owners are not subject to US tax unless they receive income from the

US Corp.• Generally no owner tax on disposition of shares (USRPHC exception)

• Elective system for entity classification commonly referred to as the “check-the-box” election

• 2011 budget proposals will not modify this system (for now)

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Canadian Tax Rules Overview• The Canadian tax system is broadly comparable to the US tax system in

terms of computation of taxable income. Tax rates are somewhat lower. But, Canada does impose a Goods and Service Tax or “GST” that operates more or less like a VAT.

• The starting point for the computation of taxable income is GAAP income. Like the US, there is an accelerated system for computing tax depreciation. Meals & entertainment expenses are only 50% deductible. LIFO is not permitted.

• The basic Federal tax rate is 16.5% (for 2011), and provincial rates rate from 10% to 16%.

• Interest paid to related or unrelated parties is generally an allowable Canadian tax deduction, and the Canadian CFC can be capitalized with a reasonable amount of debt. Canada imposes so-called “thin capitalization” rules, and interest paid to related parties will not be allowed, to the extent that the CFC’s debt-to-equity exceeds a two-to-one ratio.

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Canadian Tax Rules Overview – cont’d

•Management and service fees paid by a Canadian company to a foreign parent should be deductible, and not subject to Canadian withholding tax. However, Canada will want documentation that intercompany charges are reasonable. The reasonableness of the transfer price on any purchases of products from or sales to related parties should also be documented.

•In addition to the 5% Federal GST, Ontario and the other provinces levy a sales tax, which in some provinces is similar to a VAT tax, and in other provinces is just a sales tax. The rate varies by province.

•There are currently no foreign exchange controls which would limit a Canadian company’s ability to make dividend, interest, management service fee payments, etc.

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Mexican Tax Rules Overview• The nominal tax rate in Mexico is 30%*. But, the Mexican tax system is less

comparable to the US tax system than the Canadian system and has some significant complexities caused by application of a minimum tax and tax rules that apply to inflationary gains/losses and currency movement.

• As in Canada, the starting point for the computation of taxable income is GAAP income. However, the computation of inventories and COG’s for tax is more complicated owing to adjustments that are made to offset the effects of inflation. Tax depreciation is based on the straight-line method over specified periods, and depreciation is indexed for inflation.

• Interest paid to related or unrelated parties is generally an allowable Mexican tax deduction. Mexico applies a debt-to-equity ratio of 3 to 1 in determining whether the capitalization of a subsidiary is reasonable (and penalizing interest deductions for undercapitalized companies.)

* For FY 2010-2012 .

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Mexican Tax Rules Overview – cont’d• Mexico applies a so-called “monetary correction” to account for the impact of

inflation on monetary assets and liabilities and also tax-effects FX movements on an annual accruals basis. As a result of the varying effects of monetary correction and FX movements, there have been periods where Mexican companies have incurred a higher tax burden as a result of being capitalized by debt instead of equity.

• There is also an employee profit-sharing tax of 10% of taxable income after certain adjustments. Splitting employees into a separate company no longer works in many cases – Social Security rules for outsourcing contracts.

• Management, technical assistance and service fees paid to related parties should be deductible, and such fees are not subject to Mexican withholding tax provided the services in question are rendered outside of Mexico.

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Mexican Tax Rules Overview – cont’d• Mexico will want documentation that intercompany charges are reasonable.

The reasonableness of the transfer price on any purchases of products from or sales to related parties should also be documented. (Transfer Pricing Study required and reasonability and method used, must be mentioned by external auditor on filing audit report to Mexican IRS – mandatory “tax” audit if gross income> 2.650 MUSD in prior FY)

• Mexico also applies a minimum tax known as the Flat Rate Business Tax (IETU). The rate is 17.5% and it applies to income computed generally on a cash basis rather than an accrual basis. IETU paid in excess of a Mexican company’s income tax liability cannot be carried over, and thus, if applicable is a final tax.

• The IRS has announced that the IETU will be considered a creditable FTC, pending further study.

• Mexico applies a VAT of 16%, generally.

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Repatriation of Funds From US

• Transfer Pricing• Services – Narrower definition of stewardship

• Generally, no withholding taxes• Sales of goods – Consider LRD arrangements• Royalties – Treaty provisions are key

• Dividends• Under US domestic law, distributions always come out of E & P first• Nimble dividend rule• Branch tax attempts to replicate dividend withholding tax for foreign

corps doing business in the US as branches• Certain treaties allow for zero rate of withholding tax from the US (UK,

Germany, Netherlands, Japan, Belgium, etc.)• All treaties have different technical requirements for zero rate

• Leverage – Various Limitations

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• Characterization as debt or equity• Thin capitalization• Documented ability to borrow on similar terms from

third parties

• Limitations on deductibility of interest expense• Earnings stripping• Cash-basis deduction for related-party payments• Transfer pricing considerations

Considerations in Financing US Operations

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• Determination of appropriate US WHT (default rate is 30%)• Conduit rules (treasury regulations and case

law)• Treaty limitations of benefits (LOB) provisions

Considerations in Financing US Operations cont’d.

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Most Common Inbound Structures

US Canada Mexico

F

Same in all cases

• Local corporation ring fences local liability• No tax filings by foreign parent• Transfer pricing typically the biggest issue• Debt financing by F will make sense if F tax rates are

lower and a treaty is in place

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Less Common Inbound Structures

• Branches and partnerships (except Mexico which does not have partnerships)

• Allows losses to flow to the branch owner/partner• Requires local country tax filings by the branch

owner/partner• Risk that tax authorities will question allocations of

income or deductions among the head office and the branch

• Hybrid investments from US into Canada (ULC’s) were very common but will be less so going forward due to new treaty provisions

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Questions

Nexia International 2010 Annual Tax Conference. European Holding Company Analysis.

Documents

Transcript of Nexia International 2010 Annual Tax Conference. European Holding Company Analysis.