OEK Aug-Sept 2015 - PwC...2015 Tax and economic news Issue 130/131, August/September 2015 Tax and...

www.pwc.de

Osteuropa kompaktTax and economic news Issue 130/131, August/September 2015

Tax and economic news Issue 130/131, August/September 2015

Osteuropa kompaktOsteuropa kompakt Tax and economic news Issue 130/131, August/September 2015

Content Table of Contents

Content ............................................................................................................................................ 1Czech Republic ................................................................................................................................ 3Automatic exchange of information about financial accounts is approaching ............................ 3EU Report criticises Member State Tax Codes for Profit Shifting .................................................. 4EU member states will share Advanced Pricing Agreement ......................................................... 4OECD protocol to agreements on the exchange of tax information expands their possibilities .. 4Control Statement – four months for preparation ........................................................................ 5Horizontal delegation of authoritative competence can make the functioning of the company more effective ................................................................................................................................. 5Corporations have to finish the general opt‐ in till the end of the year ....................................... 5Estonia ............................................................................................................................................. 6Corporate tax avoidance under siege ............................................................................................ 6Changes in PE reporting ................................................................................................................. 7VAT paid to be published ................................................................................................................ 7Supreme Court on forced VAT deregistration ................................................................................ 8Online filing in now multilingual .................................................................................................... 8Latvia ............................................................................................................................................... 8Are prizes you win in contests taxable? ......................................................................................... 8Charging payroll taxes where a staff motivation programme involves descounts .................... 10How social security applies to people working outside EU (Kik’s case) ...................................... 11Personal identity number without birth date .............................................................................. 12Interpretation of worker postings ................................................................................................ 13Benefits unvailable to inactive EU citizens in another member state ......................................... 14Qualifying members of a VAT group ............................................................................................ 15New requirements for multinational groups ............................................................................... 16Transfer of social insurance contributions from another member state .................................... 17In‐depth Cooperation Programme members to face more requirements .................................. 18Credit bureaus to seek income details from tax authorities ....................................................... 19VAT on service subscriptions ........................................................................................................ 20VAT on house management services and entertainment events ................................................ 21Real estate tax developments ...................................................................................................... 22Lithuania ........................................................................................................................................ 23Value Addes Tax (VAT) ................................................................................................................. 23Corporate Income Tax .................................................................................................................. 23Personal Income Tax and Social Insurance Tax ........................................................................... 24Legal News .................................................................................................................................... 24Tax Case Law................................................................................................................................. 25Romania ........................................................................................................................................ 26Tax inspections focus on net assets of companies ....................................................................... 26The new fiscal code ....................................................................................................................... 26Russia ............................................................................................................................................ 37Court practice news — allocation of expenses to a PE in Russia ................................................ 37

www.pwc.de

Osteuropa kompaktTax and economic news Issue 130/131, August/September 2015

Tax and economic news Issue 130/131, August/September 2015

Osteuropa kompaktOsteuropa kompakt Tax and economic news Issue 130/131, August/September 2015

Ukraine .......................................................................................................................................... 39Сhanges in Transfer Pricing legislation ........................................................................................ 39The list of banks – financial guarantors for the purposes of an automatic VAT refund ‐ is approved ....................................................................................................................................... 39The National Bank of Ukraine prolongs most of the currency control restrictions .................... 40The President of Ukraine has enacted a list of persons falling under special economic and other restrictive measures (sanctions) ................................................................................................... 40The Cabinet of Ministers updated the list of countries (territories) which meet the criteria for a low‐tax jurisdiction under TP control ........................................................................................... 40

Osteuropa kompakt Issue 130/131, August/September 2015

3

Czech Republic Automatic exchange of information about financial accounts is approaching The Czech Republic will participate in the automatic international exchange of infor‐mation about financial accounts for the purposes of tax administration. Unified procedures and conditions for the implementation of this exchange are set out in the so‐called Common Reporting Standard (CRS) which was prepared by the OECD. 61 countries are already committed and more than 90 countries have prom‐ised to implement information exchange. The first automatic exchange should be set up by September 2017 by means of the General Tax Directorate. Information about financial accounts in the Czech Republic should be identified and collected by financial institutions in 2016 and will be announced to the Specialized tax office in June 2017. The same terms for notification and exchange of information will be applied in the following years. The information will be forwarded to the state whose tax resident is the owner of notified financial account or another person with links to the owner. Forwarded information will include:

Details about the financial institution being notified Details of the account holder (name, address, state or states of tax residency, VAT identification number or date and place of birth)

Details of individuals controlling the entity that owns the account (e.g. Trust Fund) Account number

Balance or account value (for insurance contract with capital value or retirement insurance contract

with capital value or surrender value) at the end of the calendar year, and information about the possible cancelation of the account

Total gross amount paid or credited to the account holder in connection with the account (interest, dividends, etc.) including the aggregate amount paid by the ac‐count holder for any redemption

The key procedure is going to be the use of due diligence methods to determine the owner of an existing or newly‐created account or its controlling entity as a so‐ called reportable person, and determine the state or states to which such a per‐son is a tax resident. The procedure will be a considerable administrative burden for the notifying financial institution and for the account holder.

CRS provides specific procedures for due diligence for:

Previously existing accounts of individuals with a lower value (i.e. with an aggre‐gate balance or value that, at the end of the calendar year that precedes the commencement of the due diligence procedures, correspond to the amount of $ 1,000,000)

Previously existing accounts of individuals with a higher value

Osteuropa Kompakt Issue 130/131, August/September 2015 4

New accounts of individuals Previously existing accounts of entities (i.e. not individuals) New accounts of entities When creating a new account, the financial institution will require a statutory decla‐ration for the purpose of determining tax residency of the account holder or its con‐trolling person or persons. EU Report criticises Member State Tax Codes for Profit Shifting To help combat tax avoidance by multinational companies, the EU Parliament report called for taxes to be automatically imposed on money leaving the EU that has not been taxed. The report also called for sanctions against tax havens and free trade agreements that include tax provisions as well as whistle‐blower protection at the EU level. According to an EU Parliament tax committee draft report, EU member states' “excessively” complex national tax codes allow base erosion and profit shifting by large multinational companies that is undermining the EU single market. The report also accused Luxembourg, the Netherlands and Ireland of EU treaty and law violations that have allowed for sweetheart tax rulings offered to multinational companies that are currently being investigated by the EC for illegal state aid. The EC took note of the Parliament draft report, but will wait until October when the final version is released before making any detailed comment. EU member states will share Advanced Pricing Agreement The European Commission proposed a draft Council Directive that would require the Czech Republic to automatically share information about Advanced Pricing Agree‐ments (APAs) which were granted to multinational companies. The information ex‐change should also cover the decisions issued during the 10 years before the Di‐rective became effective. The Czech tax office is already considering whether the transfer pricing method in APA applications would be acceptable from the other states' perspective and wheth‐er the ruling could be seen as "state aid" by the European Commission. Nevertheless, APA is still the best alternative to gain certainty on the transfer pricing method in a cooperative environment. OECD protocol to agreements on the exchange of tax information expands their possibilities The OECD recently published a model protocol for agreements on the exchange of information in tax matters, which was concluded in the past and is based on a model agreement drawn up by the OECD. The protocol is intended to expand these agree‐ments and allow for the possibility of automatic and spontaneous exchange of infor‐mation. So far, the exchange of information has been possible but only upon request. Currently, the Czech Republic has agreements with the British Virgin Islands, Jersey Island, the Bermuda Islands, the Isle of Man, Guernsey Island, the Republic of San Marino, the Cayman Islands, the principality of Andorra, the Commonwealth of the Bahamas and the Cook Islands (agreed in 2015, not ratified yet).


Control Statement – four months for preparation A Control Statement is a new report that all VAT payers will have to submit starting in January 2016 if they performed or received taxable supplies where the place of sup‐ply is in the Czech Republic. It can only be filed electronically, in the XML file. The Czech Financial Administration published the required technical structure and instructions on its website. Most companies will have to adapt their respective IT systems due to the scope of the data required. The Control Statement doesn’t relate to Electronic records of sales – these two statements are fully independent. Horizontal delegation of authoritative competence can make the functioning of the company more effective

The New Civil Code and the Business Corporation Act allow for the division of powers of members of an institution (especially executives or board members) into certain defined segments. It should be divided according to a specific field that can be viewed as a concretized range of matters or activities (whether it is divided by the scope of expertise or geographically). The so‐called horizontal delegation may then lead to the objectives of the company being fulfilled more effectively. The consequence of this division is that only a member who has been assigned the competence in a specific field can make decisions about relocated matters. Other members of the institution, including members of the supervisory body of the com‐pany if established, are not relieved of their duty to supervise the proper manage‐ment of affairs within the industry that have been entrusted to them. Members have the right to ask the authorized member for information on actions taken and planned and the information must be provided. This division impacts the functioning of the company and upon the area of responsi‐bility of statutory bodies, which may be partially limited by that division within an industry that is not covered by the objective field. However it must be noted that the actual delegation of powers can only have an im‐pact within the company and that liabilities to third parties can’t be limited this way. Corporations have to finish the general opt‐ in till the end of the year The end of the period, within which corporations established before 1.1.2014 can make a so‐called general opt‐in and submit to the new Business Corporations Act (BCA), is approaching. Corporations can make this choice within two years after the effective date of the BCA, i.e. 1.1.2016 at the latest. If they don’t do so, they remain subject to the adjustment of the old commercial code which, at the time of the effectiveness of the new law, causes interpretation prob‐lems. If the business corporation decides to opt in, it must fulfil statutory obligations. It has to convene a General meeting to decide on the submission of the BCA. This decision must be in the form of a notarial deed. This opt‐in will become effective when pub‐lished in the Commercial register.


In our opinion, the submission of the BCA is an advantageous step that will avoid legal uncertainty and conflicts about which establishment of the Commercial Code is applicable in this case. Opt‐in will simplify the corporation’s practical life and act as an outward signal that the company is properly managing its affairs. Your local contact person: Adrian Cloer, e‐mail: [email protected]

Estonia Corporate tax avoidance under siege The Ministry of Finance has published a draft law on amendments to Income Tax Act transposing the latest changes to EU Parent‐Subsidiary Directive No 2011/96/EU (‘PSD’) into national law. The objective of PSD is to exempt cross‐border dividends and other profit distribu‐tions paid by subsidiaries to their parent companies from withholding tax and elimi‐nate double taxation at the level of parent companies. However, a few years in prac‐tice proved PSD not only a fair tool for tackling double taxation, but also an effective instrument for those seeking to benefit from double non‐taxation. It was the latter that lead the Council to pass two amending directives ‐ 2014/86/EU and 2015/121/EU ‐ in order to impose within EU the “anti‐hybrid rule“ and the “general anti‐abuse rule“ respectively. The “anti‐hybrid rule” is aimed to prevent double non‐taxation resulting from mis‐matches in the tax treatment of hybrid loans, i.e. financial instruments that have characteristics of both debt and equity. For example, if the Member State of the paying company considers a payment to be tax deductible interest, while the Member State of the recipient company treats the same transfer as a tax exempt dividend, no taxes would be paid in either of the states. In order to implement the “anti‐hybrid rule” into Estonian legislation, the draft law proposes to limit the applicability of the participation exemption regime for dividends received from qualifying EU subsidiaries to the extent that such dividends are not deductible by the subsidiary. If the dividends are deductible for the subsidiary (as an interest payment), the exemption method may not be applied by the parent compa‐ny The “general anti‐abuse rule” should prevent the corporate groups benefiting from aggressive tax planning in the form of arrangements that are not “genuine” and that have been constructed to obtain a tax advantage under PSD. The anti‐abuse clause the Ministry of Finance has proposed to be added to Income Tax Act provides that the participation exemption may not be applicable on income from qualifying EU or domestic subsidiaries if “the tax authorities identify that a transaction, a part of the transaction, or, a series of transactions have been put into place for the main purpose or for one of the main purposes of obtaining a tax ad‐vantage and are therefore not genuine. A transaction or a series of transactions shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.” The same anti‐abuse principle


will be applied to the payments from equity (such as capital reduction) if the underly‐ing profits were received in the form of a dividend. By filing the form TSD 7 (part II) on dividends received a corporate tax payer conjoint‐ly confirms that the arrangements which generated the dividends were genuine and do reflect economic reality. It is yet unclear if the Tax and Customs Board will be authorized to issue a binding ruling for safe landing in this matter. The proposed amendments should become effective as from 1 July 2016. The draft law and related documents are available in Estonian at: http:/ eelnoud.valitsus.ee/ main/mount/ docList/69c48934‐6d39‐4cf1‐89c1‐410ef24deac9 Changes in PE reporting The Tax and Customs Board reminds of amendments effective from January 2015 in the tax reporting for permanent establishments of the foreign companies. According to the changes, the permanent establishments are required to report the distributed profits on the declaration form TSD 3 (no longer on TSD 6 which was applicable be‐fore 2015). Moreover, as from 2015, the permanent establishments have to report the distributed profits attributable to them even in the cases where such profits are exempt from Estonian taxation because permanent establishment has not been cre‐ated within the meaning of a double tax treaty. (Estonian national law provides slight‐ly broader definition of a permanent establishment in comparison to the effective tax treaties.) The corporate declaration form TSD 3 applicable as from 2015 is available in English at: http:/ www.emta.ee/public/vormid/maksuvormid/ TSD_TM_TSM_ ja_TD/2015/TSD_lisa_3_EST_ ENG.pdf The tax authorities’ instructions on how to fill out the form TSD 3 have been pub‐lished in Estonian language on the following web page: http:/ www.emta.ee/public/vormid/maksuvormid/ TSD_TM_TSM_ ja_TD/2015/Vorm_TSD_ lisa_3_2015.pdf VAT paid to be published As from 1 August 2014, the state taxes paid by all juridical persons (including compa‐nies and private entrepreneurs) and the institutions of the state and local municipali‐ties have been published on the website of the Estonian Tax and Customs Board to ensure fair competition in the market as well as improvement in tax compliance. The taxes that have been subject to publishing include all amounts and types of state taxes paid during the calendar year, cumulatively on a cash basis. However, the so called employment taxes – social tax, income tax, mandatory funded pension contri‐bution and unemployment insurance contributions – have been set apart from other types of taxes paid. Taking this practice further, the Ministry of Finance has published a draft law which will, if adopted, enable the tax authorities to also highlight the amounts of VAT paid by each VAT registered taxpayer.


The respective online data base is in Estonian and is updated quarterly on the 10th day of the month following each quarter (accessible at: http:/ www. em‐ta.ee/index.php?id=35927). Supreme Court on forced VAT deregistration On 7 May 2015, the Estonian Supreme Court passed its ruling in case No 3‐3‐1‐17‐15 which dealt a dispute on whether the tax authorities may cancel VAT registration merely because a company has failed to provide evidence on being actually engaged in trading. The Supreme Court stressed that while the burden of proof lies with the taxpayer, it cannot be concluded that failing to do so should always result in deregistration from VAT register. Cancellation of VAT registration should depend on specific circumstanc‐es of each case and the tax authorities should make the decision in accordance with the right of discretion whereas the taxpayer is obliged to prove its engagement in business and co‐operate with the authorities. In this case, the taxpayer was given an opportunity to provide the requested infor‐mation on two occasions, however, the taxpayer chose to not oblige. The court held that the taxpayer’s conduct significantly narrowed the range of choice for the tax authorities, who were therefore right to conclude that the actual engagement in trading was not proved and thus there were no grounds for VAT registration. Online filing in now multilingual Online tax reporting has been available for the Estonian corporate tax payers for over ten years. Although undisputedly remarkable landmark, e‐filing has been somewhat challenging for non‐ Estonian speakers. Therefore we are very glad to announce that as from the end of July, the online corporate tax and payroll reporting application („e‐maksuamet“) is supported by two more languages: English and Russian. Your local contact person Villi Tõntson, e‐mail: [email protected] Hannes Lentsius, e‐mail: [email protected]

Latvia Are prizes you win in contests taxable?

To motivate, entertain or thank their employees for good performance, companies sometimes hold contests where staff can win various prizes. The Personal Income Tax (PIT) Act allows certain exemptions for cash and non‐cash prizes won in contests and competitions. Still, do those exemptions cover prizes awarded to employees? Rules of the PIT Act Under the PIT Act, any cash and non‐cash prizes won in contests and competitions totalling up to €143 in the tax year, prizes won in public international contests and competitions totalling up to €1,423 a year, as well as any cash prizes paid to the Baltic Assembly prize winners and the Cabinet of Ministers’ prizes are excluded from the person’s annual taxable income and exempt from PIT.1


Accordingly, any prizes won in public international contests and competitions open to anyone totalling up to €1,423 a year are exempt from PIT. The PIT Act does not, how‐ever, state that this exemption covers employment income. Ruling No. 8.9‐11/96156 issued by the State Revenue Service (SRS) explains that this exemption is not available to employees because their taxable income includes any gifts and prizes they receive from their employer. Ruling No. 8.9‐11/96156 The situation under review To decide the best employees of M SE (Societas Europaea or European company), help achieve its Baltic sales targets and attract new customers, M held an interna‐tional competition for its Baltic sales and customer service staff. M’s board approved the competition rules describing the procedure, a total prize pool of €10,500 (capped at €750 per employee), the jury, the person responsible for overseeing the competi‐tion etc. M’s branch employees (including Estonian headquarters as well as Lithuanian and Latvian branches) entered the competition, and so it was considered international. At the end of the competition, the results were summarised and winners decided ac‐cording to the criteria of the competition rules. The winners included three employees of the Latvian branch, each winning a trip to Barcelona. The Latvian branch paid 400 lats expenses per employee, and this was the only prize each of them won for entering competitions in 2012. The SRS’ opinion In the ruling the SRS states that income attracting wage tax includes any payments made to the employee under any present or past contract of employment or any benefits the employee receives directly or indirectly in cash or other assets from the employer, including gifts and prizes. Accordingly, in the situation under review, the prize (trip to Barcelona) is taxable employment income that does not qualify for the exemption under section 9(1)(10) of the PIT Act. Findings In this ruling the SRS has clearly stated that the exemption for cash and non‐cash prizes won in contests and international competitions is available where such prizes do not arise from employment. Any gifts and prizes an employee receives from the employer are part of his remuneration regardless of whether these are awarded in a contest or prize draw (subject to an exemption cap of €1,423) because the best sales performance contest is a motivating event that encourages employees to improve their performance, and so the prize can be considered similar to a bonus. However, an employer might hold a contest to entertain employees during a corpo‐rate event where there is no way of identifying persons who entered the contest and won prizes, especially with a large field and numerous winners. We believe that where it is not possible to personalise the prize winner, PIT and national social insur‐


ance contributions do not apply, and the company must add the expenses to its in‐come subject to corporate income tax. Charging payroll taxes where a staff motivation programme involves descounts In addition to wages, employers tend to provide employees with various benefits such as health insurance, product discounts, and loyalty programmes. For the pur‐poses of this article we have split discounts allowed to employees into two groups: 1. discounts that equal those offered to a certain customer class; 2. discounts that exceed those offered to customers on the market. This article explores differences in the tax treatment of discount programmes in each of these cases. Relevant rules Under paragraphs 18.3(3–4) of Cabinet Regulation No. 899, Application of Provisions of the Personal Income Tax Act, any gifts and prizes the employer awards to employ‐ees, as well as any other employment‐related benefits the employer makes available to employees or their family members, are income subject to wage tax. Wage tax is payable on the market value of the benefit. The cabinet regulation also provides that employment income includes any income derived as the difference between the deposit interest rate a bank makes available to its employees and the rate offered to other customer classes. Findings It follows from the above rules that benefits an employer makes available to employ‐ees, such as discounts or inclusion in corporate loyalty programmes – 1. are employment income if such discounts exceed those offered on the market

and if such loyalty programmes are more generous to the employees than other customer classes;

2. are not employment income if such discounts and loyalty programmes equal those offered on the market and if the employees qualify after meeting the same criteria as other customers.

This interpretation has been orally confirmed by the Ministry of Finance. Practical examples Product discount differentials between employee and customer When buying identical goods or services, the employee receives a 25% discount, as opposed to 10% offered to the customer. With a price of €500, the customer gets only €50 off, while the employee or their family member gets €125 off. The €75 difference attracts payroll taxes, i.e. personal income tax and national social insurance contributions. Deposit interest rate differentials between employee and customer


The customer is offered a deposit interest rate of 5% per annum, while the employee gets 12%. If the customer and the employee have deposited an identical amount of €1,000, the customer’s income is €50, while the employee earns €120. The €70 difference at‐tracts payroll taxes. How social security applies to people working outside EU (Kik’s case) On 19 March 2015, the European Court of Justice (ECJ) ruled on the so‐called “Kik’s case” regarding the social security coverage for a resident of the Netherlands who is employed by a Swiss employer but works on a ship that flies the Panamanian flag. This case will affect the social security position of employees working on ships in the offshore industry such as tugs, crane vessels, and pipe‐laying vessels. The case makes it clear that qualifying employees who work on a ship sailing under a non‐EU flag will always be subject to European social security legislation. This article offers more de‐tails of this case. Background A Dutch national residing in the Netherlands, Mr Kik worked on board a pipe‐laying vessel under the Panamanian flag and was employed by both a company established in the Netherlands (up to 31 May 2004) and by a company established in Switzerland (from 1 June 2004) to do the same work. Accordingly, he was subject to the Dutch social security scheme up to 31 May, with his salary attracting Dutch income tax throughout 2004. Under Dutch legislation, a person is no longer covered by the Dutch social security scheme after meeting the following criteria: • the person has worked outside the Netherlands for at least three months, and • the work outside the Netherlands is done for an employer not established in the

Netherlands. Accordingly, Mr Kik left the Dutch social security scheme from 1 June 2004. Questions under review and ECJ ruling Question 1: Is Regulation 1408/71 on the application of social security schemes to employed persons and their families moving within the Community applicable? According to the ECJ, doing work outside the EU should not exclude workers from the protection of this regulation as long as there is a sufficient link with the EU. Accord‐ingly, the regulation applied to Mr Kik. Question 2: Which member state’s legislation is applicable? Since the regulation was ruled to be applicable, it should be decided which country’s social security scheme covered Mr Kik given his ties with the EU via – 1. his place of residence (the Netherlands), and 2. the country where his employer was located (Switzerland).


The ECJ ruled that where there is no link between work and the worker’s country of residence, social security should be allocated to the country where his employer is located. Swiss legislation does not, however, require social security coverage in Mr Kik’s case. Accordingly, the ECJ ruled that if social security is allocated to the country where the employer is located, but that country’s law does not provide for mandato‐ry coverage, the person will be covered by social security in his country of residence (i.e. the Netherlands). Consequences for employees in the offshore industry In the light of this court ruling, we advise you to reassess the social security position of offshore workers. Careful consideration should be given to any employees exclud‐ed from mandatory social security in the country where their employer is located. Personal identity number without birth date On 28 July 2015, the Cabinet of Ministers debated and endorsed proposals for amending the Population Register Act to set up new procedures for creating personal identity numbers. Proposed new arrangements As from 1 January 2017, a person’s identity number will no longer feature their birth date. It will be made up of eleven digits to prevent identity numbers from repeating: the first digits will be 32, and the rest will be random digits from 0 to 9 generated by the system automatically. The first six digits can be separated from the other five by a hyphen. In the existing personal registration system, the first six digits of a personal identity number indicate the person’s date of birth (day, month and year), and the seventh digit relates to the century, where 0 denotes the 19th, 1 is the 20th, and 2 the 21st century. It is the appearance of the birth date in the first part of the personal identity number that has so far aroused controversy over alleged infringement of the right to private life. Moreover, the tax authorities have been using the personal identity number in unchanged form for creating the taxpayer registration number of the indi‐vidual, and so the personal identity number might have appeared in various state‐ments and reports, with the result that details of the person’s birth date have be‐come available to an unpredictably large circle of persons. Under transition rules, a person with the identity number allocated before 2017 will be permitted to change it once after 2016 to an identity number that does not give away their birth date by sending a request to the Citizenship and Migration Office. According to a press release issued by the Ministry of the Interior on 28 July 2015, no stamp duty will be charged for such a request. The proposals also provide for more efficient exchange of information with foreign authorities, which involves entering on the Population Register a foreign identity number that has been created before 2017 and entered on a document issued by the competent authority permitting the person to stay abroad, thus making personal identification more convenient and efficient.


According to the Ministry of the Interior, a free e‐service “Comparing your former and newly allocated personal identity number” will be set up to help data recipients verify their data, minimise doubts, and make data processing more efficient. Interpretation of worker postings As we wrote in our Flash News edition of 9 July 2013 about the posting of workers, the Latvian rules for business trips, on‐the‐job travel and worker postings are not sufficiently clear and can be interpreted in different ways. So far the question of whether posting a worker to work abroad can be treated as a business trip has re‐mained open. The rules are silent about whether reimbursing a posted worker’s ex‐penses at statutory rates is exempt from personal income tax and national social insurance contributions. The Ministry of Welfare has shed more light on these mat‐ters. Published on the Welfare Ministry’s website on 31 July 2015, an official interpreta‐tion of the concept of posting gives clear answers to the questions raised earlier. How is a posting different from a business trip? According to the Welfare Ministry’s interpretation, the Latvian Labour Code permits an employer to post a worker from one EU member state to another for an agreed period in order to provide cross‐border services. This means that a posting covers situations where – • an employer posts a worker abroad under a contract signed with the person for whom the work will be carried out;

• an employer posts a worker to a group company or branch in another country; and• a labour hire firm (temporary employment agency) as employer posts a worker to a host employer who will benefit from and direct the work, and his company is estab‐lished or he carries on business abroad.

Unlike the business trip, the posting must have an international element, i.e. a posted worker is someone who does work over an agreed period outside the country in which they usually work, and the work is done for a person with whom the employer has signed a contract for that work. It follows that a posting includes both the case of a worker being posted from Latvia to another member state and the case of a worker being posted from another member state to carry out work in Latvia. Is a posting covered by the requirements for reimbursing expenses included in the business trip rules? According to the Welfare Ministry’s interpretation, an employer posting a worker to provide services abroad must comply with the requirements of Cabinet Regulation No. 969 dated 12 October 2010, Procedures for Reimbursing Expenses Associated with Business Trips. We encourage the employer to approach the liaison and/or regulatory agencies in the relevant member state before the posting to find out what rules apply.


Benefits unvailable to inactive EU citizens in another member state Under a recent ruling by the Court of Justice of the European Union (CJEU) on case C‐333/13, certain social benefits might not be available to economically inactive EU citizens who go to another member state solely to obtain social assistance. This arti‐cle casts more light on the case and the CJEU ruling. Background Two Romanian nationals, Ms Dano and her son, brought proceedings before the So‐cial Court (Leipzig, Germany) against the Leipzig Jobcenter, an agency that refused to grant them certain social benefits by way of basic provision, including subsistence benefit and social allowance for her son as well as a contribution to their accommo‐dation and heating costs. Ms Dano came to Germany in 2010 without the intention of looking for a job there, however she requested benefits by way of basic provision (available to jobseekers only). According to the circumstances of the case, Ms Dano did not have any profes‐sion or qualification; she was not seeking employment and had not worked in Roma‐nia or Germany. While in Germany (less than five years), they lived with Ms Dano’s sister, who provided for them. The CJEU ruling In its ruling, the CJEU held that for the purpose of having access to certain social ben‐efits (such as German benefits by way of basic provision), nationals of other member states can claim equal treatment with nationals of the host member state only if their residence complies with the conditions of the Free Movement of Citizens Directive. Under this directive, where the period of residence is between three months and five years (as in Ms Dano’s case), one of the conditions for a right of residence is that economically inactive persons must have sufficient resources of their own. The CJEU stated that the host member state was not required to grant social assis‐tance during the first three months of residence under the directive. The CJEU observed that Ms Dano and her son did not have sufficient resources and were not, therefore, entitled to claim a right of residence in Germany under the di‐rective. Accordingly, they were not entitled to invoke the principle of non‐discrimination laid down by the directive and by the regulation on the coordination of social security systems. Conclusions The directive seeks to prevent economically inactive EU citizens from using the host member state’s welfare system to fund their means of subsistence. Accordingly, a member state must have the possibility of refusing to grant social ben‐efits to economically inactive EU citizens who exercise their right to freedom of movement solely to obtain another member state’s social assistance with insufficient resources for claiming a right of residence.


Qualifying members of a VAT group To continue our Flash News edition of 28 July 2015 about the joint cases C‐108/14 and C‐109/14 heard by the Court of Justice of the European Union (CJEU), this article explores the CJEU ruling on whether persons that are not legal entities can form a VAT group. Forming a VAT group Because the original case involved unincorporated subsidiaries (general or limited partnerships), the CJEU was asked whether within the meaning of the VAT directive, member states may restrict the VAT group facility to companies (legal entities) that are linked to their holding company under a relationship of subordination. The CJEU case law recognises that – • in permitting each member state to regard as a single taxable person any persons

established in the territory of that member state who, while legally independent, are closely bound to one another by financial, economic and organisational links, the VAT directive imposes no other conditions, in particular no scope for member states to prescribe that only companies that are legal entities can form a VAT group;

• in giving member states the discretion to impose certain restrictions on the VAT group facility, the VAT directive makes it clear that such restrictions must satisfy the goal of the directive to prevent tax evasion and avoidance.

In the original case, the CJEU held that being bound by close links does not mean that the VAT group facility is only intended for companies that are in a relationship of subordination with their holding company. Also, in the original case, the CJEU ruled that the VAT directive prevents member states from restricting the VAT group facility to companies that are (1) legal entities and (2) are linked to their holding company under a relationship of subordination, unless these two requirements are a necessary and appropriate measure to achieve the goal of the directive. Conclusions The Latvian VAT Act states that a VAT group can be formed by – • companies within a corporate group defined by the Corporate Groups Act; • the Latvian branch of a foreign trader (legal entity) that is in the same corporate

group under the Corporate Groups Act with the other members of the VAT group. Accordingly, any persons that are not legal entities (with the exception of a foreign trader’s branch) are prohibited from joining a VAT group in Latvia. In the light of the CJEU ruling, the Latvian lawmaker should evaluate whether the present VAT group treatment, i.e. the exclusion of persons such as partnerships and municipalities from the VAT group facility meets the condition of the VAT directive that member states may introduce VAT group restrictions for the sole purpose of preventing tax evasion and avoidance. If you would like to form a VAT group but your status does not meet the require‐ments of the VAT Act, PwC experts would be happy to help you.


New requirements for multinational groups In our series of articles about the OECD’s BEPS Action 13, Guidance on the Implemen‐tation of Transfer Pricing Documentation and Country‐by‐Country Reporting, we have written about the guidelines for implementing the country‐by‐country report. This article explores a document known as the master file. Under Latvian legislation, Latvian taxpayers doing business with related parties are required to prepare a statutory transfer pricing documentation package that must include chapters listed by the Taxes and Duties Act: the company analysis, the indus‐try analysis, the functional analysis, and the economic analysis. Action 13 also provides for two mandatory reports: • the country‐by‐country report, and • the master file. The master file The master file should provide an overview of the multinational group’s business, general transfer pricing policy and income split to help the tax authorities evaluate the presence of transfer pricing risks. The main purpose of the master file is to illus‐trate the information about the group companies, their functions, risks and assets included in the country‐by‐country report and to justify the profit split between com‐panies and jurisdictions. When creating the master file, the company should consider the appropriate level of detail since the purpose of the master file is to provide the tax authorities with in‐formation necessary to carry out appropriate transfer pricing analysis. According to the OECD guidelines, the information to be disclosed in the master file falls into five categories: • general information about the group, • the organisational structure of the group, • information about the group’s intangible assets, • intragroup financial transactions, and • the group’s financial and tax position. General information about the group To assess the activities carried out by the group companies, the master file should describe their main functions and profit drivers. When creating the master file, it is important to specify the main goods and services that generate the highest percent‐age of the group companies’ income, giving details of the main markets as well. The master file should also specify any intragroup services rendered during the period under review. The document should come complete with the group’s overall functional analysis covering the risks taken and assets employed. In addition, this chapter should indi‐cate whether any group restructuring has taken place during the period under re‐view.


The organisational structure of the group This chapter should provide information about the group’s organisational and legal structure and about the activities carried out by the group companies and their geo‐graphical location. Information about the group’s intangible assets According to the OECD guidelines, the master file should specify any intangible assets used by the group and name their owners, in particular any intangibles that have a material effect on the operations and aggregate revenues of the group companies. It is also important to describe the group’s transfer pricing policy with respect to intan‐gible assets. In addition, this chapter should indicate whether any intragroup ex‐change of intangibles occurred in the financial year under review, specifying the par‐ties and any compensation received. Intragroup financial transactions This chapter should provide a general description of intragroup financing, including major transactions with independent parties. It should also indicate any group com‐pany that provides financing services to related parties and specify the tax jurisdic‐tion it operates in. The group’s financial and tax position The OECD guidelines state that the master file should indicate consolidated revenues for the financial year under review, as well as giving information about any advance pricing agreement signed with the State Revenue Service. Watch this space for an article about the local file. Transfer of social insurance contributions from another member state Our experience suggests that Latvian residents employed for a certain period in an‐other member state could be paying mandatory national social insurance contribu‐tions there, even though under EU legislation they are subject to the Latvian social insurance system and should be paying mandatory contributions in Latvia under Lat‐vian legislation. This situation arises because the person has not gone through all the formalities necessary to take out the A1 form. To address this problem, there are proposals for amending the National Social Insurance Act that lay down procedures for transferring mandatory social insurance contributions. This article takes a look at some of the proposed amendments. Going through the formalities The transfer of mandatory social insurance contributions can begin after the person has taken out the A1 form. According to the proposals, all the formalities associated with the transfer of manda‐tory contributions will be handled by the National Social Insurance Agency (NSIA). The person will only need to file an application with the NSIA, and the agency will be required to contact and liaise with the competent agency of the member state. The NSIA will also provide relevant information to the Latvian State Revenue Service.


No mandatory contribution adjusted and no overpayment refunded Mandatory contributions will be transferred only for a past period agreed between the NSIA and the competent agency of the member state, and only for the period indicated on the A1 form. None of the mandatory contributions transferred will be adjusted. The NSIA will calculate and register the mandatory contributions transferred and the relevant income, taking account of the contribution rate applied to the person as employee or self‐employed for the period in Latvia. Where the income subject to mandatory contributions that has been calculated for the calendar year exceeds the statutory cap, only the cap will be registered for the person. Any overpaid contributions transferred will not be refunded. Only the level of old‐age pension will be recalculated The transfer of contributions will not change the level of social insurance benefits awarded to the person, with the exception of old‐age pension. Within a month after the transfer of contributions, the NSIA will review and recalcu‐late the old‐age pension awarded to the person. Within five working days after the transfer of contributions, the NSIA will ensure they are registered in the accounts of members of the state‐funded pension scheme, taking account of the contribution rate for the period in the state‐funded pension scheme. In‐depth Cooperation Programme members to face more requirements Proposals for amending Cabinet Regulation No. 459 of 26 June 2012 on the In‐depth Cooperation Programme that lay down additional requirements for its members have been announced at a meeting of state secretaries. An annotation explains that the Ministry of Finance (MOF) has drafted the proposals to ease the administrative bur‐den on government agencies such as the MOF and the State Revenue Service (SRS) and businesses. Time will tell whether the proposed improvements will achieve the desired effect. This article takes a look at some of the proposals. The In‐depth Cooperation Programme (ICP) Launched on 1 July 2012, the ICP is a government programme designed to promote closer and more effective cooperation between the tax authorities and taxpayers aimed at easing their administrative burden. A taxpayer can join the programme by applying for membership through the SRS Electronic Declaration System. Proposed amendments As the proposals for amending the cabinet regulation are at an early stage of debate, we will consider their main aspects. To ease the administrative burden on the SRS and the ICP members and to prescribe procedures for routinely checking their tax risk management systems, the following new requirements are being proposed:


1. After detecting a member’s failure to meet statutory criteria, the SRS will inform the ICP Committee. After evaluating this information, the committee will decide whether it is necessary to warn the member about their expulsion from the pro‐gramme and ask them to explain their non‐compliance; 2. The member should have a certified auditor or a certified auditors company pre‐pare a report on how the member has set up a tax risk management system and whether that system meets international standards. The member should submit the report to the SRS along with financial statements for the year; 3. ICP membership being voluntary, the member will have the right to apply for their expulsion from the programme. These proposals have yet to be debated and passed by the Cabinet of Ministers. Credit bureaus to seek income details from tax authorities Proposals for amending the Taxes and Duties Act are now ready for their third read‐ing by Parliament. This article explores the proposal for imposing an obligation on the State Revenue Service (SRS) to provide a credit reference agency with information about an individual’s income on request. The SRS to have more powers to disclose taxpayer details A credit reference agency will be permitted to seek information about an individual’s income from the SRS at the request of a user of credit information to assess the cre‐ditworthiness of a prospective or existing customer of that user or to manage the user’s credit risk. After receiving the taxpayer’s income details from the SRS information system, the credit reference agency as a data manager will process the personal data (i.e. pass the information to the credit user without changing its content). For credit risk management purposes, information can be requested by credit infor‐mation users that have this obligation imposed on them by legislation. The SRS will provide the amount of information requested and verify before the disclosure that the company holds a valid credit bureau licence issued by the National Data Office and that this office has not decided to suspend or cancel that licence at the date of disclosure. At this stage, the credit bureau will also be responsible for ensuring that information from the SRS is sought at the credit information user’s request and that the data sub‐ject has consented to this disclosure or that this data processing follows from con‐tractual obligations of the subject. The proposed amendments to the Taxes and Duties Act are expected to come into force on 1 January 2016 as the SRS information systems are adapted for making elec‐tronic disclosures to credit reference agencies. These proposals do not affect the rights of the individual where he or she notices and can prove that the data held by the SRS is incomplete, outdated or false, and then asks the data furnisher to adjust the information available from the SRS.


VAT on service subscriptions As SRS tax auditors tend to question receipt of services and recovery of input VAT, this article explores the CJEU ruling C‐463/14 of 3 September 2015 on the Aspa‐ruhovo Lake Investment Company OOD (“ALIC”) case, which focuses on how a sub‐scription contract fits the concept of supply of services. Facts of the original proceedings ALIC, a Bulgarian company, had signed a subscription contract for consulting services (corporate financing, sales promotion, legal, and IT security) with four companies represented by one and the same person. Under the contracts, the service providers undertook to be available to ALIC for consulting services every day, to provide com‐petent staff for any required period, to review documents, and to exchange neces‐sary information. The service providers also undertook not to sign similar contracts with ALIC’s competitors. In return, ALIC undertook to pay the service providers a weekly fee. ALIC properly recorded and paid for those services, and recovered the input VAT appearing on the service invoices. The tax authority conducting a tax audit of ALIC claimed there was no evidence relat‐ing to the actual supply of the services, their type, amount, nature, or results. There was not a single document to indicate how many hours had been worked, nor infor‐mation about how the fees were calculated. Even though the service providers ex‐plained that the parties had no intention of formally documenting how the services were requested and supplied, as orders were received and carried out electronically, at meetings or by telephone, the tax authority denied ALIC’s right to recover the in‐put VAT appearing on the service invoices. The CJEU ruling Having examined the questions put by the Bulgarian court, the CJEU made the follow‐ing statements: • Consulting services (including legal, commercial and financial services) are taxable

under the VAT directive. • VAT is charged where there is a direct link between the service and the fee. A di‐

rect link means a legal relationship between the service provider and the custom‐er involving the supply of a service for an agreed fee. The fee represents the actu‐al value of the service.

• If one of the features of the service is that the provider is constantly available to provide it to the customer when necessary, then there is no need to prove that the payment covered an individualised service supplied at a particular moment, regardless of the amount of the service. The fact that services are neither agreed in advance nor individualised or that the fee is paid in a lump sum does not affect the direct link between the service and the fee. The subject matter of the service might not be a precisely defined consulting service, but rather the provider’s availability to provide consulting services to the customer if necessary. The service is supplied by means of ensuring the provider’s availability during the period of the subscription contract, regardless of the number and nature of consulting ser‐vices actually supplied.

• The term “supply of service” covers a subscription contract for supply of consult‐ing services. In addition, the service is treated as supplied and a chargeable event for VAT purposes occurs at the end of the period for which the fee was agreed, regardless of whether and how frequently the customer has used the services.


Given that the CJEU has instructed the national court to verify whether the services have been actually supplied, and considering our own experience of dealing with SRS tax audits, we would recommend that our clients receiving or supplying services (es‐pecially any of those mentioned in this court case) should pay more attention to doc‐umenting those services and retaining information in order to be able to prove to SRS tax auditors that the services have been actually supplied and received. Important evidence includes a clearly defined subject matter of the contract, the service provid‐er’s obligations, email correspondence, meeting minutes etc. VAT on house management services and entertainment events On 25 August 2015 the Cabinet of Ministers met to debate proposals for charging VAT on dwelling house management services and to revise the exemption on cultural and entertainment events aimed at making profits without reinvesting them to carry out or improve future events. This article explores some of the proposals. House management services Under the Latvian VAT Act, dwelling house management services are exempt. How‐ever, this is contrary to EU Council Directive 2006/112/EC on the common system of value added tax, which does not exempt these services. Accordingly, the proposed amendments will resolve the discrepancy between the VAT Act and the directive. The changes in the VAT treatment of dwelling house management services are ex‐pected to come into force on or after 1 July 2016. Cultural and entertainment events Theatre and circus performances, concerts, events intended for children, amateur art troupe events and events for charitable purposes, visits to state‐funded museums, libraries, exhibitions, zoological and botanical gardens, as well as library services are currently exempt. The exemption is available where these cultural services are pro‐vided without systematically making profits. If profits are made, the exemption is available where those profits are applied or reinvested to improve the services. Accordingly, profits must be used for providing or improving such exempt cultural services in the future. However, if a company aims to make profits from organising cultural events, and those profits are distributed among its shareholders, the admission charge for those events must include VAT. Under the applicable rules, the exemption might currently be taken also by organis‐ers of various commercial entertainment events that qualify as culture establish‐ments under the Culture Establishments Act. Accordingly, the current scope for tak‐ing the exemption is fairly wide. The proposals narrow the scope for exempting services supplied by culture estab‐lishments that organise commercial entertainment events. It is also necessary to as‐sess and identify culture establishments that provide culture services eligible for the exemption. The proposals have yet to be debated by the government.


Real estate tax developments On 11 August 2015 the Cabinet of Ministers agreed to increase the real estate tax (RET) cap on rural lands and to calculate a special value for RET purposes. This article explores the proposed changes in the RET Act and other amendments that will affect future RET assessments. Amendments to the National Cadastre of Real Estate Act and the cadastral valua‐tion rules The National Cadastre of Real Estate Act has been amended with effect from 1 Janu‐ary 2015 to update the cadastral value base every two years rather than annually as before. This means that the cadastral values will change once every two years if the property market or factors affecting the value of an area have changed. Under the transitional rules of the law, the cadastral values will not be updated in 2016, and the 2015 data will be used instead. From 2017 the cadastral values will have to match the property market price levels by 85% on average. Amendments to Cabinet Regulation No. 305, Cadastral Valuation Rules, provide for raising public awareness of the new value base. The National Land Service (NLS) is planning to publish details of the cadastral values at www.kadastrs.lv. Interested parties will have one month to study the figures on this website and send in reasona‐ble proposals. In cooperation with the municipalities, the NLS will evaluate those proposals and adjust the base figures if necessary. This process is expected to begin in 2018. As regards the procedures for calculating cadastral values, the rules provide for im‐proving the valuation of multipurpose buildings. In future, the age of a building will be taken into account when calculating the cadastral value for an apartment. Proposed changes in the RET Act On 11 August 2015 the Cabinet of Ministers supported the proposal for drawing up amendments to the RET Act to cap the increase in RET on rural lands, which will be debated as part of the national budgetary bills package for 2016. According to the proposals, the following arrangements will be in place up to 2020: • In rural areas, a special value calculated by the NLS will be used for assessing RET

on land units that exceed 3 hectares and have at least one of the prescribed uses from the categories “Farm land,” “Forest land and protected nature areas where business activity is prohibited by law,” or “Water land” (collectively referred to as “rural lands”). The cadastral values that can be used also for other purposes will remain unchanged for rural properties.

• The annual increase in the special value of rural lands for RET purposes will not exceed 20% of the cadastral value or special value calculated for a land unit in the previous year.

Your local contact person: Zlata Elksina‐Zascirinska, telephone: +371 6709‐4514


Lithuania Value Addes Tax (VAT)

Reverse‐charge mechanism is applicable to supply of goods with installation related to construction Revere‐charge mechanism is applicable to construction services which include supply of goods installed in immovable property in which construction services are per‐formed and after such installation the goods become an integral part of the property, if the goods are supplied under a single agreement concluded for supply and installa‐tion services and (or) construction services. Reverse‐charge mechanism for supply of goods with installation is applicable from 25 August 2015. Order No. 1K‐273 of the Finance Minister dated 20 August 2015 and Letter No. (18‐2‐31‐2) RM‐18892 issued by the Tax Authorities on 27 August 2015. Invoices not required in apartment block modernisation projects From 22 August 2015 new provisions came into force according to which both admin‐istrator and subcontractor are not required to issue invoices to owners of flats and (or) premises in apartment blocks ‐ non‐taxable persons participating in apartment block modernisation projects. Invoices are not required to be issued for administra‐tion as well as modernisation of apartment blocks and similar services. Letter No. (18.2‐31‐2) RM‐18893 issued by the Tax Authorities on 27 August 2015 and Letter No. (18.2‐31‐2) RM‐18964 issued on 28 August 2015. One copy of declaration to refund VAT for a foreign passenger According to the amendments only one copy of declaration form FR0420 to refund VAT for a foreign passenger will be required to be filled, which will be given to a for‐eign passenger. A merchant will not be required to fill in and hold any additional copy of the declaration. Letter No. (18.2‐31‐2) RM‐17542 issued by the Tax Authorities on 11 August 2015.

Corporate Income Tax Deductibility of expenses for employees’ non‐consecutive studies The official commentaries on Art. 14 Part 3 and Art. 26 Part 1 of the Law on CIT were updated. It is indicated that the payables to schools, for the non‐ consecutive studies of natural persons would be treated as deductible expenses for CIT purposes, if such studies are equivalent to the studies that award a higher education and/or a degree. Moreover, related editorial changes were made, the commentary was updated with new examples. Press release issued by the Tax Authorities on 18 August 2015.


Updated publication regarding features of the transfer of tax losses The Tax Authorities prepared updates to the publication „Features of the transfer of tax losses (in case of reorganization, transfer, restructuring, or liquidation)” explain‐ing the application of the 70 % restriction on tax losses carried forward. The publication was updated in connection to the introduction of the euro starting from 1 January 2015. Press release issued by the Tax Authorities on 11 August 2015. Personal Income Tax and Social Insurance Tax An update of the Commentary on the Law on PIT related to introduction of euro The Tax Authorities provided Commentaries on Art. 9 and Art.17 on the Law of PIT which were updated in connection to the introduction of the euro starting from 1 January 2015. Besides, the Commentaries on Art. 24, Art. 28, Art. 29, Art. 30 and Art. 31 of the Law on PIT were updated in connection to the introduction of the euro as well as due to the updated rules on completion of tax returns. Press release issued by the Tax Authorities on 7 August 2015, press release issued by the Tax Authorities on 7 August 2015, press release issued by the Tax Authorities on 20 August 2015, press release issued by the Tax Authorities on 20 August 2015 and press release issued by the Tax Authorities on 21 August 2015. Legal News Aims to attract more investors to partnerships Amendments aim to strengthen a legal environment for general and limited partner‐ships (the Partnership) and raise their attractiveness to the investors. It is proposed to: • reduce the list of required information provided in the joint‐partnership agree‐

ment; • establish an agreement of the Partnership’s members and provide requirements

for the content of such agreement. It is proposed to maintain the confidentiality of the contents of such agreement;

• remove the requirement to publicly disclose limited partners of the limited part‐nerships and the amount of their contributions in the Register of Legal Entities. However, the contributions of the members of the Partnerships would have to be submitted to the System of the Participants of the Legal Entities (JADIS).

It is also intended to allow a settlement with outgoing general partnership’s members not only in cash, but also in assets. Amendments aim to clearly regulate profit distri‐bution of general partnerships for the period that is shorter than a financial year. If adopted, amendments would come into force on 1 July 2016. Draft Law on Partnerships No IX‐1804.


New version of the Law on Small and Medium‐Sized Business Development A new version of the Law on Development of Small and Medium‐Sized Business is aiming to adapt Commission Recommendation No 2003/361/EC regarding the limits of annual income and amount of assets in the balance of enterprises including entre‐preneurs which are regarded as small and medium enterprises. Amendments also propose to adjust provisions of the state aid for small and medium enterprises which no longer meet factual and legal situation. It is considered to abol‐ish preferential loans, microcredit, venture capital investment, guarantees, and credit insurance. If adopted, amendments would come into force on 1 July 2016. Draft Law on Small and Medium‐Sized Business Development No VIII‐935. Tax Case Law VAT treatment of goods for provisioning of vessels, when they are sold to undis‐closed intermediary On 3 September 2015, the European Union Court of Justice (further – the EUCJ) ruled in case C‐526/13 (Fast Bunkering Klaipėda), on a question if exemption for the supply of goods for the fuelling and provisioning of vessels used for navigation on the high seas should be applied even though the supplies were made to intermediaries acting in their own name, taking into consideration that ultimate use of goods is known and duly established by confirmatory evidence submitted to the tax authority before sup‐ply. According to the decision of the EUCJ, the exemption provided for in that provision of the VAT directive is not, in principle, applicable to supplies of goods for the fuelling and provisioning to intermediaries acting in their own name, even if, at the date on which the supply is made, the ultimate use of the goods is known and duly estab‐lished and evidence confirming this is submitted to the tax authority in accordance with the national legislation. However, in circumstances such as those at issue in the main proceedings, that exemption may apply if the transfer to those intermediaries of the ownership in the goods concerned under the procedures laid down by the applicable national law took place at the earliest at the same time when the opera‐tors of vessels used for navigation on the high seas were actually entitled to dispose of those goods as if they were the owners, a matter which is for the national court to ascertain. Your local contact person: Kristina Krisciunaite‐Bartuseviciene, telephone: +370 5 239‐2300


Romania Tax inspections focus on net assets of companies In brief Recently, the Romanian tax authorities have been conducting tax audits to check the companies’ compliance with the applicable legal provisions regulating net asset val‐ue. In detail Under Company Law no 31/1990, the net asset of a company should have a value of at least half of the share capital of the respective company. If, at the end of the finan‐cial year, a company reports a negative net asset or if the net asset is positive, but lower than half of the registered share capital, certain actions need to be undertaken by the company’s directors to restore the net asset position. If the company’s directors take no remedial action, interested parties (including Ro‐manian tax authorities “RTA”) may file for dissolution of the company. Recently, the Romanian tax authorities have been focusing on the net asset position of companies and the compliance with the applicable legal provisions. Several companies whose net asset value was negative or below half of their share capital have received notifications from Romanian tax authorities, requesting infor‐mation on their net asset position and the actions undertaken to restore it. If the legal requirements are not fulfilled, the RTA may request enforcement of the provi‐sions regarding the dissolution of non‐compliant companies. The takeaway Companies whose net asset position does not comply with the relevant legal provi‐sions may be subject to investigations conducted by Romanian tax authorities. We are available to assist you in analysing the factors which triggered this position, identifying potential risk areas, by issuing recommendations and by proposing solu‐tions to restore the net asset value. Your local contact person: Sorin David, Romania Legal Leader, Tel: +40 21 225 3770 Anda Rojanschi, Partner, Tel: +40 21 225 3586 The new fiscal code In brief Law no. 227/2015 regarding the Fiscal Code has been published, with its provisions entering into force on 1 January 2016, except for the cases specifically mentioned within the law.


In detail General provisions

The fiscal principle of predictability of taxation has been introduced, providing for no changes in the legislative framework for a period of at least one year as of the introduction of new provisions / amendment of existing provisions. Thus, any in‐crease in taxes and contributions, introduction of new ones or the cancelation or reduction of any tax incentive enter into force starting with 1 January of the fol‐lowing year, except where the amendments are based on Romania’s international agreements.

The provisions regarding the setting up and functioning of the Central Fiscal Commission have been transferred to the Fiscal Procedure Code.

New definitions have been introduced for the following terms: “arm’s length prin‐ciple”, “centre of vital interests”, “place of effective management”, “international transportation”, “exemption method”, “operations involving financial instru‐ments”, “stock option plan”, “withholding tax” and “taxes and social contributions paid by way of withholding”.

Some existing definitions have been changed / supplemented: “related parties”, “association without legal personality” – replaced with “fiscally transparent enti‐ty”, “dividend”, “royalty”, “fiscal value”, etc.

The provision according to which in defining the permanent establishment con‐cept reference can be made to Article 5 – “Permanent establishment” of the OECD Model Tax Convention has been transferred from the Methodological Norms to the Fiscal Code.

The anti‐abuse rules provided by article 11 have been supplemented with the def‐inition of cross‐border artificial transactions. These are excluded from the applica‐tion of Double Tax Treaties.

The obligation of the tax authorities to adjust the price of a transaction at the me‐dian value of market price (i.e. central trend on the market) when deviations from the market value are noticed has been regulated.

Corporate Income Tax

Foreign legal entities with the place of effective management in Romania are con‐sidered taxpayers for corporate income tax purposes. Tax transparent entities with legal personality are no longer considered taxpayers in Romania for corpo‐rate income tax purposes.

The period in which a taxpayer has to communicate to the territorial tax bodies the intention of changing the fiscal year period has been reduced (i.e. within 15 days as of the beginning of the new fiscal year).

New provisions have been introduced with respect to the statute of limitation pe‐riod for the corporate income tax due by taxpayers with a fiscal year other than the calendar year. The period is now five years starting with the first day of the month following that in which six have passed since the end of the fiscal year for which the tax is due.

Amendments have been brought in relation to the fiscal correction of accounting errors, by matching requirements with bookkeeping rules. Thus, the possibility to rectify the tax base in the fiscal year when the accounting error is corrected, if this is reflected in the profit and loss account, has been introduced.

A new provision has been introduced, according to which the additional deduction for R&D activities is not recalculated if the R&D project’s objectives are not met.


The applicability of the tax exemption of reinvested profits has been extended so as to also include subgroup 2.2.9 from the Catalogue regarding the classification and useful life of fixed assets (i.e. computers, tax registers, software, etc.).

The non‐taxable treatment of the revenues from dividends received from Roma‐nian legal entities independent of any other conditions has been reintroduced; as regards the dividends received from foreign legal entities, the current conditions have to be further met for such exemption to apply (i.e. a minimum shareholding of 10% for an uninterrupted period of at least one year).

Various provisions of the European Directive no. 2011/96/EU, on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, have been transposed into the domestic legislation. Specifically, anti‐abuse rules for preventing unlawful tax practices, aimed at ob‐taining tax benefits contrary to the principles of the Directive, have been intro‐duced. In addition, the non‐taxation of dividends received by a Romanian legal en‐tity from a foreign legal entity under certain conditions is only applied as long as these are not treated as deductible expenses at the level of the paying entity.

The general rule for deductibility of expenses has been amended and the expens‐es incurred for business purposes are to be considered as tax deductible. Under the current provisions, only the expenses incurred for the purpose of obtaining taxable revenues are treated as deductible.

Amendments are brought to various deductibility thresholds: - the deductibility thresholds for the expenses incurred on behalf of an employ‐

ee in relation to voluntary pension schemes (i.e. EUR 400/year/employee) and for the expenses for voluntary health insurance premiums (i.e. EUR 250/year/employee) have been eliminated; these expenses are to be taxed at the level of the employee, with the threshold being EUR 400/year/employee for each type;

- the tax base for the deductibility of protocol expenses and legal reserve no longer includes non‐taxable income and expenses related to non‐taxable in‐come;

- the allowance applied to the total salary fund to determine the limit of deduct‐ibility for social expenses has been increased from 2% to 5%.

The provisions regarding the treatment of inventory losses have been harmonised with VAT legislation. Expenses incurred in relation to non‐recoverable missing or damaged inventories are treated as deductible if certain conditions are met (e.g. the qualitative damage is due to objective causes properly justified, the products have expired, etc.).

The percentage used for determining the fiscal credit received for sponsorship expenses has been increased from 0.3% to 0.5%.

A provision regarding the taxation of the legal reserve upon use for covering tax losses or distribution under any manner has been introduced together with the elimination of the provision according to which a subsequent rebuild of the legal reserve is no longer deductible for corporate income tax purposes;

The possibility to deduct the losses incurred in writing off receivables has been introduced in cases these are covered by an insurance policy.

Amendments have been brought to the provisions regarding the deductibility of interest expenses and foreign exchange losses for loans contracted from entities others than banks: - the interest expense deductibility is limited to a 4% rate (previously 6%); - for the purpose of calculating the debt‐to‐equity ratio, loans with a reim‐

bursement term of longer than one year for which no interest is due according to the contract are also taken into consideration.


New rules have been introduced in relation to the obligation of legal entities dis‐solved through liquidation to declare and pay corporate income tax. Thus, the pe‐riod from 1 January of the fiscal year following that in which the liquidation pro‐cedure was initiated and the closing date of the procedure is considered to be one fiscal year for the purpose of recovering fiscal losses, and during this period the taxpayer is not required to declare and pay the quarterly corporate income tax.

If income from sale / transfer of shares held by a foreign legal entity in a Romani‐an entity, the obligation of the buyer to withhold the tax (if a Romanian resident) has been eliminated.

The amendments applicable to domestic mergers, total or partial spin‐offs, trans‐fer of assets and exchange of shares have been harmonised with those applicable to similar cross‐border transactions. These amendments include:

the neutrality of the contribution in kind to a Company’s equity has been elimi‐nated, except for cases where a transfer of a going concern takes place;

transfers carried out during a partial spin‐off will be neutral only if a transfer of a going concern takes place and the transferor maintains at least one line of activity.

The exemption method is presented as a method to be used of preventing double taxation of income derived from abroad by a permanent establishment of a Ro‐manian legal entity, if the DTT provides for the use of this method.

The deadline for declaring and paying the corporate income tax due for the last quarter of the fiscal year by taxpayers applying the advanced payments system, whereby quarterly payments are determined as one fourth of the profit tax due for the preceding year, has been amended. For the last quarter of the fiscal year, the deadline for the obligation to declare and make advance payment will be the twenty‐fifth of the last month of that fiscal year.

The dividend tax allowance for the dividend distribution between Romanian legal entities will be decreased from 16% to 5%, as of 1 January 2017. Similar to the cur‐rent provision, the tax is eliminated if a shareholding percentage of a minimum of 10% for an uninterrupted period of at least one year.

Micro‐companies income tax

An addition has been brought with respect to the exchange rate used for deter‐mining the qualification under the turnover criteria of EUR 65,000, the exchange rate to be used is the one available at the end of the financial year.

Taxpayers operating in the oil sector are excluded from the scope of micro‐companies income tax;

A reduced rate of 1% has been introduced for newly set up Romanian legal enti‐ties which have at least one employee and have been incorporated for a minimum period of 48 months, with their shareholders not having held equity in other legal entities. This rate is only applied to the first 24 months from registration of the le‐gal entity; the law also provides other requirements for the application of the re‐duced rate;

The method for calculating the corporate income tax for taxpayers which shift from micro‐companies regime to corporate income tax regime during a fiscal year has been amended. For the purpose of calculating the corporate income tax, only the revenues and expenses recorded starting with the quarter in which the shift was made are taken into consideration. Under the current legislation, all revenues and expenses recorded since the beginning of the fiscal year are considered;

New deductions to the taxable base have been introduced, including the revenues obtained from a state with which Romania has concluded a DTT if these revenues have been taxed in the foreign state.


Income tax Tax residence of individuals

Non‐resident individuals who fulfil the Romanian residency criteria stipulated by the Fiscal Code have the obligation to declare the income derived from any source, from Romania and from abroad, as of the date they become tax residents.

Income from independent activities

The deductible expenses percentage used for determining the net income derived from intellectual property rights, including from creating art monuments, has been increased to 40%.

The deadline for submitting the return regarding the estimated income / income norm, for taxpayers who start their activity during the year, has been modified; specifically, the return has to be submitted within 30 days as of the activity start‐ing.

Income obtained from activities rendered based on civil contracts / conventions, concluded in accordance with the Civil Code, as well as based on agent contracts, have been excluded from the category of income from independent activities for which the income tax representing anticipated payments is withheld at source.

In the case of taxpayers who derive income from intellectual property rights and who opt for the determination of their income tax withheld at source as final tax (16%), for income tax calculation purposes, deductibility is allowed for the fixed deductible expenses percentage, as appropriate, and mandatory social contribu‐tions withheld at source.

Salary income and income treated as salary

Gift tickets are non‐taxable if they are granted within certain limits, on certain oc‐casions and to certain beneficiaries.

Benefits from the personal usage of vehicles are non‐taxable, under certain condi‐tions.

Provisions in respect of the non‐taxability, within certain limits and under certain conditions, of the allowances and any other amounts of the same nature received during business trips to another town, inside the country or abroad, for the pur‐pose of rendering the activity, have also been introduced for administrators named as per constitutive deeds, administration / mandate agreement, for direc‐tors rendering their activity based on mandate agreement according to the law, for the members of directorship in companies managed under a dual system, as well as the supervisory board, and for managers rendering their activity based on management agreements as per the law.

The monthly gross salary income level, up to which the personal deductions, set as fixed amounts in the Fiscal Code, are granted, has been increased to RON 1,500.

Voluntary health insurance premiums, as per Law no. 95/2006, borne by employ‐ees, are deductible for salary income tax calculation purposes (at the location where the main job function is exercised by an employee), to the limit of EUR 400 per year, equivalent in Romanian currency.

In addition, voluntary health insurance premiums, as per Law no. 95/2006, borne by the employer on behalf of its employees, are salary income tax exempt to the limit of EUR 400 per year for each individual.

The deadline for submitting the informative declaration regarding the start or the end of an individual’s activity in Romania who obtains salary income from abroad


has been modified; this declaration has to be submitted within 30 days as of the activity start / end date.

Rental income

The deductible expenses percentage applicable when determining the net rental income, as well as the net income from the lease of agricultural assets, has been increased to 40%.

Investment income

The income obtained from Romania from the transfer of securities has been de‐fined;

For determining the gain / loss derived from the transfer of securities, other than derivative financial instruments, their fiscal value should be considered;

Provisions regarding the gain / loss derived from transactions with financial gold have been introduced;

The annual gain / loss derived from the transfer of securities is determined by the taxpayers, based on the tax return concerning the income derived.

Starting with 1 January 2017, the dividend income is taxed at a 5% income tax rate.

Income from pensions

The non‐taxable monthly amount in respect of income from pensions has been increased to RON 1,050; this threshold will be further increased by RON 50 per year, until the non‐taxable threshold reaches the amount of RON 1,200 per month.

Income from other sources

Income from activities, other than production activities, commerce, provision of services, liberal professions and other than from intellectual property rights has been included in this category.

Social security contributions

Gifts in cash or in kind granted to employees by their employers for Easter, 1 June, Christmas or other similar holidays of other religions which do not exceed the amount of RON 150 per individual on each occasion are not included in the calcu‐lation base for social security contributions.

Voluntary health insurance premiums, as regulated by Law no. 95/2006, borne by employers for employees, are not included in the calculation base for social secu‐rity contributions within the limit of EUR 400/year/individual.

Similar to the income tax provisions, indemnities and any other similar amounts received by administrators appointed as per constitutive deeds or administration / mandate agreements, by directors who render their activity based on a mandate agreement according to the law, by board members of companies managed under a dual system, supervisory board members, and by managers who render their ac‐tivity based on the management agreements as per the law, while on business trips in Romania or abroad, for the purpose of rendering their activity, are not in‐cluded in the social security calculation base within certain limits and conditions.


Under certain conditions, the benefit in kind representing the usage of company cars for personal purposes is not included in the social security contributions cal‐culation base.

For income obtained as of 1 January 2017, the monthly calculation base for health insurance contributions is capped at the level of five times the national monthly average gross salary earnings used for the substantiation of the state social insur‐ance budget.

The monthly calculation base for health insurance contributions for individuals deriving pension income is that portion of income which exceeds the value of a pension point, as set for the tax year concerned.

Investment income or income from other sources derived starting 1 January 2017 is subject to health insurance contribution even when the individuals derive other types of income (e.g. salaries, pensions, freelancing activities).

For income from freelancing activities, agriculture, forestry, fishing, income from partnerships with a legal entity, rental income, investment or for income from other sources derived starting 1 January 2017, the annual health insurance contri‐bution is set by annual tax decisions. The annual contribution calculation base, de‐termined as a sum of the monthly calculation bases on which the health insurance contribution is due, cannot be lower than the value of 12 national minimum gross salaries or higher than the value of five times the national monthly average gross salary earnings multiplied by 12. Only for the purpose of calculating the minimum threshold mentioned above are salaries and income treated as salary also taken into account.

Individuals who do not derive income and do not qualify for the exemption from paying health insurance contributions or for whom the contribution is not borne from other sources are liable for monthly health insurance contributions and have the obligation to register with the competent tax authorities. The payment of the contribution is performed quarterly, by the twenty‐fifth of the last month of each quarter.

The pension contribution is due by individuals deriving income from freelancing activities even if they are liable to pay this contribution on other types of income (e.g. salary income).

For individuals who derive income from freelancing activities and who determine their annual net income based on the real system, the monthly health insurance contribution calculation basis, for social contributions advance payments repre‐sents 35% of the value of the national monthly average gross salary earning used for the substantiation of the state social insurance budget. The monthly health in‐surance contribution calculation basis is recalculated in year following the year in which the income is derived and it is determined as the difference between the gross income derived and the expenses incurred for the purposes of carrying out the freelancing activity. The monthly calculation basis cannot be lower than 35% of the value of the national monthly average gross salary earning or higher than five times the same amount.

Withholding tax

The scope of withholding income tax due by non‐residents from rendering of ser‐vices, regardless the place of supply, is restricted only to management or consult‐ing services in any field of activity.

The tax rate for dividend revenues derived by non‐residents from Romania has been reduced from 16% to 5%, as of 1 January 2017, similarly to the amendment brought in the case of distribution of dividends to Romanian legal entities.


A new article regarding non‐taxable revenues derived by non‐residents from Ro‐mania has been introduced.

The exemption for the interest related to financial instruments / receivables is‐sued by Romanian companies traded on a regulated stock exchange market and which is paid to a non‐affiliated party of the issuer has been reintroduced.

The obligation of electronic submission of the informative statement regarding withholding tax has been introduced.

Value added tax

The standard VAT rate will be reduced from 24% to 20% as of 2016 and to 19 % as of 1 January 2017;

Reduction from a 9% to a 5% VAT rate for the supply of school manuals, books, newspapers and some magazines, as well as for the supply of services consisting in the allowance of access to castles, museums, cinemas, etc.;

Inclusion of sports events in the category of operations which are subject to the reduced VAT rate of 5%;

The threshold for the application of a 5% reduced VAT rate applicable to social housing has been raised to RON 450,000.

Extension of the application of the reverse‐charge mechanism to: - The supply of buildings, parts of buildings and plots of land for which VAT is

applied; - The supply of mobile phones, PC tablets, laptops, gaming consoles and devices

with integrated circuits, until 31 December 2018;

VAT will not be adjusted for scrapped capital goods. Capital goods are meant to also include fixed tangible assets with a depreciation period of less than five years;

Taxable persons performing acquisitions meant for investments to be used for operations both with and without deduction right will be able to deduct fully VAT during the investment process, after which the deducted VAT will be adjusted ac‐cordingly.

The provisional pro‐rate can be calculated at any time during the year;

Companies surpassing the VAT registration threshold will be obligated to collect VAT for the advanced payments received before registering for VAT purposes re‐lated to goods delivered / service performed after the registration date;

Companies can recover VAT if their clients have commenced the insolvency pro‐cedure and have begun a reorganisation plan accepted and confirmed by a judicial ruling;

Transcription of CJUE decision no.‐183/14 Salomie and Oltean, by virtue of which, for taxable persons not registered for VAT purposes performing taxable opera‐tions, the tax authorities will establish VAT liabilities based on the differences be‐tween output and input VAT

A transfer of assets which form a line of business performed during a division, merger, sale or as a capital infusion to company assets is outside the scope of VAT only if the receiver of the assets is a taxable person established in Romania;

Where such as annulment of a contract / endowment of price reductions for which the supplier has not issued an invoice within the legal deadline, the benefi‐ciary is obligated to issue an invoice for the adjustment of the taxable base;

Exclusion of the joint responsibility. Excise duties


As of 2016, the excise duties for beer, sparkling wines, fermented sparkling bever‐ages, sparkling apple and pear cider, intermediary products and ethylic alcohol will be reduced. As of 2017, the excise duties for gas oil and diesel will also be re‐duced.

Excise duties for cigarettes and still fermented beverages, other than beer and wines, have been increased;

Transporters benefit from a reduced excise duty level for diesel until the end of 2016;

Excise duties for coffee, yachts, gold and / or platinum jewellery, natural fur gar‐ments, vehicles with an engine capacity larger than 3,000 ccm, weapons and am‐munition, as well as the tax on crude oil from internal production have been elim‐inated;

Excise duties have been introduced for liquids with nicotine content destined for inhalation and for heated tobacco products which, by heating, discharge an aero‐sol which can be inhaled (refills for electronic cigarettes);

Excise duties for any product re‐introduced into the tax warehouse are reim‐bursed;

Adjacent production activities are permitted in the tax warehouse;

The validity period of the authorisation for a tax warehouse has been extended to five years;

Differences between quantities registered at the moment of dispatch of the excis‐able goods under a duty suspension arrangement and the quantities registered upon reception, which can be attributed to the error margin of the weighting equipment, are accepted;

Heavy fuel oil and energy products treated as such are not marked and coloured if they are transported by fixed pipelines or the excise duties are paid at the level of the diesel;

The restriction regarding the sale below costs of excisable goods has been exclud‐ed.

Local taxes

Local authorities have been granted the authority to increase local taxes allow‐ances by 50%; previously these could have only been increased by no more than 20%.

Local authorities have been granted the authority to increase by up to 500% the tax due for agricultural land which has not been processed for a period of two consecutive years, starting with the third year.

The building tax calculation method has been amended by differentiating be‐tween building depending on their destination:

residential buildings – tax rate between 0.08% and 0.2% (applicable to the taxable value as per the specific table provided by the law for individuals and the value re‐sulted from the evaluation report for legal entities);

non‐residential buildings – tax rate between 0.2% and 1.3%; in the case of a build‐ing used for agricultural purposes, the applicable tax rate is 0.4%;

The coefficient used in determining the total surface of a building in cases where the external dimensions cannot be actually measured has been increased from 1.2 to 1.4.

The provision regarding the increase of building tax for individuals owning more than one building has been eliminated.

The increased tax rate for building tax due by legal entities is of 5% (if no revalua‐tion was performed during the last 3 years);


If a building was acquired during a fiscal year, the building tax for the entire year is due by the seller. The buyer is liable to pay the tax starting with the next year.

The exemption from land tax for land related to buildings, for the surface covered by the building has been removed;

The local authorities have been granted the authority to decide on tax exemptions for certain types of buildings / land.

The percentage by which the car tax for hybrid cars is reduced has been lowered from 95% to 50%.

Construction tax

As of 1 January 2016, the construction tax for agricultural constructions is elimi‐nated, but for other constructions it will be eliminated as of 1 January 2017.

[Source: Law no. 227/2015 regarding the Fiscal Code, published in the Official Gazette no. 688/10.09.2015]

The takeaway General provisions

The predictability of taxation has been increased. New clarifications have been brought to the definition of certain terms and con‐cepts.

Additions have been made to the substance and anti‐abuse general rules and new anti‐abuse rules have been introduced in connection with implementing European Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.

Corporate income tax

Non‐resident entities with their place of effective management in Romania are considered Romanian taxpayers.

The expenses incurred for business purposes are considered deductible when cal‐culating profit tax. The current provisions state that only the expenses incurred for the purpose of obtaining taxable income are deductible.

The tax on dividend distributions between Romanian legal entities is to be re‐duced to 5% as of 1 January 2017.

Tax on microenterprise entities

For newly set up companies a micro‐companies tax rate of 1% has been intro‐duced, if certain conditions are met.

Companies operating in the oil and gas sector have been excluded from the micro‐companies regime.

Income tax

The deductible expenses percentage used for determining the net income derived from intellectual property rights, including from creating art monuments, as well as for rental income, including the lease of agricultural assets, has been increased to 40%;


Voluntary health insurance premiums, borne by employees, are deductible for salary income tax calculation purposes while those borne by the employer on be‐half of its employees are salary income tax exempt, with each limited to EUR 400 per year per individual;

For determining the gain / loss derived from the transfer of securities, other than derivative financial instruments, their fiscal value should be considered.

The annual gain / loss derived from the transfer of securities is determined by the taxpayers, based on the tax return concerning the income derived;

As of 1 January 2017, the dividend income is taxed at a 5% income tax rate.

Social security contributions

As of 1 January 2016, individuals deriving income from freelancing activities are liable to pay pension contributions, even if they derive other income, such as sala‐ry income.

The health insurance calculation base for individuals deriving income from free‐lancing activities is set between 35% of the value of the national monthly average gross salary earning and five times the same amount.

As of 1 January 2017, the health insurance monthly calculation base is capped at the value of five times the national monthly average gross salary earning.

Withholding tax

The withholding tax for dividends paid to residents of the states with which Ro‐mania has concluded DTTs is to be reduced to 5%, as of 1 January 2017.

The annual informative statement is to be submitted electronically. Value added tax The new Fiscal Code will enter into force on 1 January 2016, bringing the following amendments:

The standard VAT rate will be reduced from 24% to 20% as of January 2016 and to 19% as of January 2017;

The reverse‐charge mechanism will be applied to the supply of buildings, parts of buildings and plots of land of any kind, as well as for the supply of mobile phones, PC tablets, laptops, gaming consoles and devices with integrated circuits;

Application of the reduced VAT rate of 5% to the supply of school manuals, books, newspapers and some magazines, as well as to the supply of services consisting in the allowance of access to castles, museums, cinemas etc.;

The threshold for applying the 5% VAT rate for social housing has been increased to RON 450,000.

Excise duties The new Fiscal Code will enter into force on 1 January 2016, bringing the following amendments:

The excise duty levels have changed for most excisable products;

Un‐harmonied excise duties for coffee, yachts, gold and /or platinum jewellery, natural fur garments, vehicles with an engine capacity larger than 3,000 ccm, weapons and ammunition have been eliminated;


1http://www.pwc.ru/ru/tax‐consulting‐services/legislation/court‐practice‐permanent‐establishment.jhtml1

Excise duties have been introduced for liquids with nicotine content destined for inhalation and for heated tobacco products which, by heating, discharge an aero‐sol which can be inhaled;

Local taxes

Local authorities have been granted the authority to increase local tax rates by up to 50%.

The building tax calculation method has been changed by differentiating between buildings with residential and non‐residential use.

Construction tax

The tax on special constructions is to be eliminated as of 1 January 2017. As an exception, for agricultural constructions the tax will be eliminated as of 1 January 2016.

Your local contact person: Daniel Anghel, Partner, Tax Services, Tel: +40 21 225.3686 Mihaela Mitroi, Partner, Tax and Legal Services Leader Tel: +40 21 225 3672

Russia Court practice news — allocation of expenses to a PE in Russia In brief In December we informed you about a dispute between Freshfields Bruckhaus Derin‐ger LLP and the Russian tax authorities. Back then, the company had only lost the dispute in the first instance. On 29 July 2015, the Moscow District Federal Arbitrazh Court (which is a third court instance) also upheld the tax authorities' position (http://kad.arbitr.ru/Card/a2b9607d‐704c‐48ec‐8af2‐11c9c1908e92). All Russian representative offices of foreign companies should consider this case. Furthermore, this may be of particular interest for Russian offices of law firms creat‐ed in the UK in form of a partnership. As of today, we can present the court's position:

The UK/Russia DTT does not apply to partnerships;

There must be an obvious connection between expenses transferred by a head office and the activities of a Russian permanent establishment.

In detail Please find more details on the dispute analysis in our December Tax Flash1. Here we just remind you of the key points in the case.


2UnderArticle1oftheUK/RussiaDoubleTaxationConvention,thisappliestopersonswhoareresidentsofoneorbothoftheContractingStates.UnderArticle3oftheConvention,theterm"person"comprisesanindividual,acompanyandanyotherbodyofpersons,butdoesnotincludeapartnership.

The Russian permanent establishment (PE) of a foreign LLP reduced its taxable profit in 2009‐2011 by deducting costs transferred by its head office, Freshfields Bruckhaus Deringer LLP (registered in the UK). The tax authorities’ position that was upheld by court

Application of the UK/Russia DTT When de3ducting the costs transferred by the head office, the taxpayer relied on Article 7 of the UK/Russia DTT. However, the tax authorities stated that this DTT gen‐erally does not apply to entities incorporated as LLPs because, under this DTT, the term "person" directly excludes partnerships2. Under UK law, a partnership has "look‐through" status (i.e., the taxpayer is not the partnership itself, but its partners are). Therefore, the court agreed to prohibit the transfer of expenses from the LLP to the permanent establishment. The court did not accept the taxpayer's arguments about the option of allocation the expenses under six treaties with European countries, where individual partners are residents.

Deductibility of costs as direct expenses of the Moscow office The parties also disputed whether it is possible to deduct the expenses as direct ex‐penses of the PE. The tax authorities challenged deduction of the disputed expenses when they are qualified as such because, inter alia, the provided documents did not show the link of expenses with the Moscow PE’s activities. The first instance court discusses in detail all transferred costs (e.g. costs of buying books). The decision indicates that the pre‐sented documentation cannot be relied on to conclude what books had been pur‐chased or whether they had been transferred to the Moscow office and used in its activity. An invoice was issued to the London office with the handwritten names of various cities and sums next to them.

New standard of the Russian Tax Code for determining profits of PE The taxpayer, among other things, tried to appeal to a new standard in the Russian Tax Code, which stipulates that a PE should be taxed depending on its functions, as‐sets and risks (Article 307.9 of the Russian Tax Code, introduced by the Federal Law No. 227‐FZ of 18 July 2011). The court stated that, firstly, the standard has only been in effect since 1 January 2012 and, secondly, it does not introduce a new right for taxpayers to account for allocated expenses, which is a right stipulated only by inter‐national treaties. The takeaway We recommend you to compare your situation with the case examined by court and, in the future, devote more attention to the quality of the documents certifying ex‐


3TheLaw“OnChangestotheTaxCodeofUkraineinrespectofimprovementofthetaxcontrolontransferpricing”№609‐VIIIdated15July2015.4DecreeoftheCabinetofMinistersofUkraineNo.538dated29July2015.

penses transferred and the link between the expenses and activities of your PE. Your contact person in Germany: Tanja Galander, telephone: +49 30 2636‐5483 Ekaterina Cherkasova, telephone: +49 30 2636‐1523 Russia‐Blog: http://blogs.pwc.de/russland‐news

Ukraine Сhanges in Transfer Pricing legislation On 13 August 2015 changes* to the Tax Code of Ukraine in respect of transfer pricing (further ‒ “TP”) regulations сome into force. The major changes are the following:

The threshold for controlled transactions has been increased to UAH 5 mln. with one counterparty (provided the total annual revenue of the taxpayer exceeds UAH 50 mln.);

The criteria for recognition of controlled transactions have been removed for VAT purposes;

The list of financial indicators used to provide conformity with the arm’s length principle is reinstated;

The provision with regard to controlled transactions performed with the involve‐ment of intermediaries (non‐related parties) is specified;

Penalties for non‐provision (late provision) of the report on controlled transac‐tions have been changed to 300 minimum wages and for non‐inclusion of con‐trolled transactions into the TP report (1% of the amount of the undeclared con‐trolled transactions but should not exceed 300 times the minimum wage);

The provision on the necessity to file an annex to the corporate profit tax return if the volume of controlled transactions with one counterparty does not exceed UAH 5 mln. was removed;

The provision which stated that the submission of a report on controlled transac‐tions is considered a ground for performing an audit to verify the conformity of the terms of controlled transactions with the arm's length principle, was removed;

The term for the provision of additional information upon tax authorities’ request was extended to 30 calendar days (instead of 10 days);

A report on controlled transactions and TP documentation in respect of controlled transactions, performed in 2015, should be prepared in accordance with the pro‐visions of the Law3.

The list of banks – financial guarantors for the purposes of an automatic VAT refund ‐ is approved The Cabinet of Ministers of Ukraine has adopted the Decree4 listing the banks whose financial guarantee entitles a taxpayer to an automatic VAT refund. The list includes only three banks, all of which are state‐owned:


5NBUResolutionNo.581dated3September2015.6DecreeofthePresidentNo.549/2015dated16September2015.7OrderoftheCabinetofMinistersofUkraine№977‐р“Onadoptionofthelistofcountries(territories)thatmeetthecriteriaestablishedbysubsection39.2.1.2ofsubparagraph39.2.1ofparagraph39.2ofArticle39oftheTaxCodeofUkraine”dated16September2015.

PJSC State Savings Bank of Ukraine (Oshchadbank);

PJSC State Export‐Import Bank of Ukraine;

PJSC Joint‐Stock Bank Ukrgasbank. The National Bank of Ukraine prolongs most of the currency control restrictions On 3 September 2015 the National Bank of Ukraine (the “NBU”) prolonged most of temporary currency control restrictions5 currently in place. Moreover, the NBU intro‐duced certain additional restrictions and, in particular, a ban was introduced on: - registering changes in loan agreements with non‐residents, whereby the parties are changed (with certain exceptions);

- purchasing foreign currency for payments under import transactions, when the goods underwent custom clearance before 1 January 2014 and the debt‐or/creditor was changed.

At the same time, the NBU decided to ease certain restrictions, in particular: - an offset under trade agreements in foreign currency other than hard currencies (e.g. except for USD, EUR and RUB) in the amount not more than USD 500,000 un‐der one agreement is now allowed;

- the mandatory submission of a certificate from the State Fiscal Service on the ab‐sence of tax debt for the purchase/transfer of foreign currency under import transactions is now cancelled;

- the transfer of foreign currency based on NBU individual licences is allowed, pro‐vided that the amount of the transfer shall not exceed USD 50,000 within one cal‐endar month.

The President of Ukraine has enacted a list of persons falling under special econom‐ic and other restrictive measures (sanctions) On 16 September 2015 the President of Ukraine disclosed a list of persons falling under special economic and other restrictive measures (sanctions), adopted by the National Security and Defence Council of Ukraine6. The list of persons includes both individuals and legal entities. The special sanctions are established for the term of 1 (one) year. The type of sanc‐tions depend on the specific person and may include, prohibition to enter into Ukraine, blocking of assets, restriction of trade transactions, etc. The Cabinet of Ministers updated the list of countries (territories) which meet the criteria for a low‐tax jurisdiction under TP control

On 16 September 2015 the Cabinet of Ministers of Ukraine issued an Order7 on adop‐tion of the new list of countries (territories), transactions with which are subject to transfer pricing (hereinafter – “TP”) control.


The following jurisdictions are now excluded from the previous list of countries: Georgia, Guadeloupe, Jamaica, Lebanon, Luxembourg, Malta, Morocco, Singapore, Switzerland and the United Arab Emirates. The order came into force on 16 September 2015.

Blog Please visit our blog for additional information about Eastern Europe. http://blogs.pwc.de/blickpunkt‐osteuropa

Osteuropa kompakt Issue 130/131, August/September 2015

Die Beiträge sind als Hinweise für unsere Mandanten bestimmt. Für die Lösung einschlägiger Probleme greifen Sie bitte auf die angegebenen Quellen oder die Unterstützung unserer Büros zurück. Teile dieser Veröffentlichung/Information dürfen nur nach vorheriger schriftlicher Zustimmung durch den Herausgeber nachgedruckt und vervielfältigt werden. Meinungsbeiträge geben die Auffassung der einzelnen Autoren wieder. Mai 2015 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft. Alle Rechte vorbehalten. „PwC“ bezeichnet in diesem Dokument die PricewaterhouseCoopers Aktiengesell-schaft Wirtschaftsprüfungsgesellschaft, die eine Mitgliedsgesellschaft der PricewaterhouseCoopers International Limited (PwCIL) ist. Jede der Mitgliedsgesellschaften der PwCIL ist eine rechtlich selbstständige Gesellschaft.

www.pwc.de

42

About us Your contact persons Ina Enache

Tel.: +49 30 2636‐1249 [email protected]

Tanja Galander Tel.: +49 30 2636‐5483 [email protected]

Daniel Kast Tel.: +49 30 2636‐5252 [email protected] Prof.Dr. Adrian Cloer Tel.: +49 30 2636‐4070 [email protected]

Subscription and unsubscription If you want to subscribe for the newsletter, please send a blank e‐mail with the subject

heading „Subscribe“ to: [email protected]. If you want to unsubscribe for the newsletter, please send a blank e‐mail with the sub‐

ject heading „Unsubscribe“ to: [email protected].

OEK Aug-Sept 2015 - PwC...2015 Tax and economic news Issue 130/131, August/September 2015 Tax and...

Documents

Transcript of OEK Aug-Sept 2015 - PwC...2015 Tax and economic news Issue 130/131, August/September 2015 Tax and...