International Tax NewsEdition 32October 2015

WelcomeKeeping up with the constant flow of international tax developments worldwide can be a real challenge for multinational companies. International Tax News is a monthly publication that offers updates and analysis on developments taking place around the world, authored by specialists in PwC’s global international tax network.

We hope that you will find this publication helpful, and look forward to your comments.

Shi‑Chieh ‘Suchi’ LeeGlobal Leader International Tax Services NetworkT: +1 646 471 5315E: suchi.lee@us.pwc.com

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In this issue

Tax Administration and Case LawTax legislation TreatiesProposed legislative changes

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Tax Legislation

Tax LegislationEgypt

Corporate and personal income tax developments

Amendments proposed by the Egyptian Ministry of Finance (MoF) to amend certain provisions of the current Egyptian Income Tax Law (Law no. 53 of 2014) have now been finalised and have entered into force on August 21, 2015. Notable aspects of the new law include a reduction in the corporate income tax (CIT) rate and changes in the tax treatment of dividend income.

The law also addresses the treatment of capital gains on listed and unlisted shares, confirming the two year suspension of capital gains tax on the disposal of listed shares.

The amendments to the Egyptian tax law mentioned below are subject to further clarifications by the Egyptian tax authority.

Corporate tax The CIT rate is reduced from 25% to 22.5%. This change should be effective from the current fiscal year (2015) on.

The temporary 5% surtax which was introduced in 2014 is abolished for any fiscal year ending after June 5, 2015.

Dividend income Dividends distributed by resident companies to resident or non‑resident individuals or companies are subject to a 10% withholding tax (WHT). The WHT rate is reduced to 5% for qualifying dividends (dividends earned from participations representing more than 25% of the shares or voting rights of the subsidiary company, subject to a two year minimum holding period).

The law clarifies that dividend income earned by resident companies and resident individuals from Egyptian companies is excluded from taxable income for income tax purposes and any associated costs are non‑deductible. It should be noted that the provision in the law stating that associated costs with respect to qualifying dividends are 10% of the dividend received (i.e. 90% participation exemption) has not been eliminated.

Profits of foreign companies operating in Egypt through a permanent establishment (PE) are deemed to have been distributed within 60 days following the PE’s fiscal year end. Such profits also attract a 5% WHT.

Dividends in the form of shares (i.e. stock dividends) and distributions made by free zone companies are not subject to dividend WHT.

Capital gains • Sale of listed shares: Capital gains realised from the sale of listed

Egyptian shares by both resident and non‑resident shareholders are subject to a 10% WHT. However, the application of this tax is suspended for two years as of May 17, 2015 (i.e. the date of the official announcement made by the Cabinet of Ministers regarding this exemption).

• Sale of unlisted shares: Capital gains realised from the sale of unlisted Egyptian shares by both resident and non‑resident shareholders are subject to the regular tax rate for corporate shareholders (22.5%) and individual shareholders (progressive rates of up to 22.5%). This is expected to apply to transactions from the effective date of the new law.

PwC observation:With the amended provisions of the Egyptian Income Tax Law now in force, non‑resident shareholders should consider the tax impact on any future disposals of their investments in Egypt and the tax inefficiencies associated with multi‑tier Egyptian corporate structures. Investors should consider alternative exit scenarios and explore whether taxation can be mitigated by using suitable treaty holding structures. Non‑resident investors should also be aware of possible notification obligations to the Egyptian Tax Authority when disposing of Egyptian shares. Further clarifications on the notification requirements for, and the payment of tax on the disposal of Egyptian shares by non‑residents shall be provided once the executive regulations (in connection with the amended provisions of the Egyptian Law now in force) are issued.

Abdallah ElAdlyCairoT: +20 2 2759 7887E: abdallah.eladly@eg.pwc.com

Amr ElMonayerCairoT: +20 2 2759 7879E: amr.elmonayer@eg.pwc.com

Jochem RosselDubaiT: +971 4 304 3445E: jochem.rossel@ae.pwc.com

• The 6% WHT applicable to capital gains realised by non‑residents from the sale of shares of Egyptian companies is eliminated. The new law provides that ‘the party executing the transaction shall notify the tax authority of the amount of capital gains realised’ and that ‘a reconciliation shall be made for the amount of tax due and payable by the non‑resident at the end of the fiscal year’. The executive regulations that will be issued in connection with the amended provisions of the law are expected to clarify the mechanism for notification and payment of tax on the disposal of Egyptian shares by non‑residents.

Foreign tax credits Resident individuals may deduct foreign taxes paid on income from commercial and industrial activities, non‑commercial professions, dividends, and capital gains derived from abroad, from taxes due in Egypt on such income, and within the limits of the taxes due in Egypt.

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Tax Legislation

Romania

Tax Amnesty Law

Law no. 209/2015 has been published regarding the cancellation of certain fiscal obligations.

Fiscal obligations have been cancelled in respect of:

• Reconsideration/reclassification of independent activities Differences in main fiscal obligations and corresponding ancillary fiscal obligations established by the tax authorities by tax decisions issued and communicated to taxpayers, as a result of reconsideration/reclassification of independent activities for fiscal periods ending before July 1, 2015 and that have not been paid by this Law’s date of entry into force, i.e. July 23, 2015, have been cancelled. The tax authorities do not reconsider/reclassify an activity as dependent and do not issue tax decisions in relation to such reconsideration/reclassification for periods ending before July 1, 2015.

• Granting of allowances for periods of delegation/secondment outside Romania Differences in main fiscal obligations and/or ancillary fiscal obligations established by the tax authorities by tax decisions issued and communicated to taxpayers, as a result of reclassification of amounts representing the allowance received during delegation and secondment periods abroad by employees who rendered their activity on the territory of another country, for fiscal periods ending before July 1, 2015 and that have not been paid by this Law’s date of entry into force, i.e. July 23, 2015, have been cancelled. The tax authorities do not reclassify such amounts and do not issue tax decisions for periods ending before July 1, 2015.

• Individuals who do not derive any income or who obtain income below the national minimum gross salary (health fund contributions) Health fund contributions and corresponding ancillary fiscal obligations, established by tax decisions issued and communicated to taxpayers, have been cancelled for the period January 1, 2012 ‑ June 30, 2015 for individuals whose monthly base for calculating such contributions is lower than the national minimum gross salary. The tax authorities do not issue tax decisions for the period January 1, 2012 ‑ June 30, 2015. These provisions also apply to individuals who do not obtain any income and whose monthly base for calculating health fund contributions is the national minimum gross salary.

Mihaela Mitroi Ionut SimionBucharest BucharestT: +40 21 225 3000E: mihaela.mitroi@ro.pwc.com

T: +40 21 225 3000E: ionut.simion@ro.pwc.com

PwC observation:The Tax Amnesty Law has already entered into force on July 23, 2015. All of the above‑mentioned fiscal obligations are cancelled ex officio through issuance of a tax decision.

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Proposed Legislative Changes

Proposed legislative changesBrazil

Provisional Measure 685/2015 extended for another 60‑day period

On September 9, 2015, the Brazilian Congress extended the Provisional Measure 685 (‘PM 685/2015’) for another 60‑day period. The PM 685/2015 requires disclosure of certain transactions to the Brazilian Federal tax authorities.

By way of background, on July 21, 2015, the Brazilian government issued PM 685/2015 which, amongst other provisions, provides for new rules concerning the disclosure of certain transactions to the Brazilian Internal Federal Revenue Service (RFB). Broadly, PM 685/2015 provides that the following types of transactions occurring in the previous year should be disclosed to the RFB by September 30:

• Actions or operations that cannot be explained by relevant commercial/business/economic motivations

• Actions where the form of the transaction is unusual, uses indirect operations or specific contractual clauses to recharacterise (in whole or part) the typical contract, or

• Actions or operations explicitly provided for in a future act to be issued by the RFB.

The form, deadlines, and conditions for making this disclosure still need to be regulated by the RFB.

In Brazil, a Provisional Measure is a provisionary law issued by the executive branch of the Brazilian government that has the authority of law until it is acted upon by the Brazilian Congress within a prescribed 60‑day period. If Congress does not act within this initial period, then the measure expires unless extended for one additional 60‑day period. On September 9, 2015, the Brazilian Congress extended the PM 685/15 for an additional 60‑day period.

PM 685/2015 has already generated substantial debate in Brazil. There has been particular concern surrounding the potentially broad application of the rules as well as the lack of regulation and guidance accompanying the provisions. This concern seems to have been heard by the RFB, who confirmed: ‘The intention was to start chargingthe declaration this year. However, as the PM is under discussion in Congress and will need further clarification, only after we have a finalversion, will we standardise it and make it mandatory’.

The RFB also advised that following the discussion in the Brazilian Congress, the RFB will still open the regulations for the declaration for public consultation. As the Measure has apparently already received more than 200 amendments in the Brazilian Congress the RFB considered it more prudent to wait to provide greater legal security to everyone.

Recently, a legal entity incorporated in Sao Paulo State obtained a preliminary injunction exempting it from the provisions of the PM 685/2015 by challenging its constitutionality. To date, the final decision in relation to this dispute has not been issued.

PwC observation:Brazilian taxpayers should continue to monitor the developments of the PM’s conversion into law.

Julio OliveiraPwC BrazilT: +55 11 3674E: julio.oliveira@br.pwc.com

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Proposed Legislative Changes

New Zealand

Tax relief for related party debt recapitalisations

The Minister of Revenue released a media statement in September confirming Cabinet has approved proposals to provide tax relief for related party debt remission and those proposals will be extended to apply to inbound cross‑border debt as well.

Current rules Under current tax rules, where debt is forgiven by the creditor, taxable debt remission income arises for the debtor. However, when these arrangements are between related parties, the creditor does not receive a tax deduction for the bad debt, which can result in tax asymmetry and ultimately over‑taxation.

This over‑taxation extends to debt recapitalisations between related parties as well. Inland Revenue’s current view is that capitalisation of a debt (as opposed to remitting debt) would potentially constitute tax avoidance and the amount would be treated as taxable remission income to the debtor.

This interpretation has been subject to much criticism from the tax community, which prompted Inland Revenue to rethink the current law and whether it achieves the appropriate policy outcome. Upon further consideration, Inland Revenue agreed that the outcome reached under the current tax law did not achieve the desired policy outcome.

Initial proposals - Issues Paper An Issues Paper was released in February 2015 which proposed that no debt remission income should arise for the debtor when the debtor and creditor are both in the New Zealand tax base (including controlled foreign company [CFC]) if they are either:

• members of the same wholly owned group of companies, or • the debtor is a company or partnership and certain other features

are met.

However, the Issues Paper left open the tax treatment of debt capitalisation in a cross‑border context (i.e. where the creditor is a non‑resident and debtor is a New Zealand resident) due to base erosion and profit shifting (BEPS) concerns.

Extension of the initial proposals The media statement confirmed that tax relief will be extended to inbound cross‑border debt as well (e.g. New Zealand subsidiaries of foreign companies).

The Minister of Revenue reiterated Officials’ view that when the two parties are within the same wholly owned group, the wealth of the group as a whole is not altered by the debt remission, so the tax outcome should reflect that. That is, it should not result in net taxable income.

The following summarises the key proposals following the release of the media statement and supporting technical information sheet:

• Core proposals: • there should be no debt remission income for the debtor when

the debtor is in the New Zealand tax base, including CFCs and New Zealand subsidiaries of foreign companies they are members of the same wholly owned group of companies, and

• the debtor is a company or partnership (including look‑through companies (LTC) and limited partnerships) • all of the relevant debt is owed to shareholders or partners in

the debtor, or• the relevant debt is remitted or capitalised pro‑rata to

ownership.

• The core proposals will extend to amounts lent by relatives of the owner (e.g. loan to an LTC by the spouse of the owner). Therefore, no debt remission income would arise in these circumstances.

• The core policy recommendation is that the tax result of debt capitalisation and debt remission should be symmetric. This is because debt capitalisation is commonly used as an alternative to debt remission. Debt remission will therefore be deemed to create ‘available subscribed capital’ for a corporate debtor and increase the cost of the creditor’s investment in the debtor.

The Minister of Revenue intends on introducing legislative amendments in early 2016. Once enacted, the legislation should apply retrospectively from April 1, 2006.

PwC observation:We believe the proposals put forward by Inland Revenue achieve a sensible policy outcome to address an Inland Revenue perceived anti‑avoidance problem of debt capitalisations for related party debt reorganisations. The conclusions reached in relation to cross‑border debt are a positive result.

This long awaited solution will be particularly welcomed by multinational groups with New Zealand subsidiaries that may be considering debt recapitalisations. For groups and businesses considering debt reorganisation, careful consideration should be given to whether action needs to be taken now or whether it is possible to wait until legislation is enacted next year for greater certainty.

Kate L Pearson Briar S WilliamsAuckland AucklandT: +64 9 355 8477E: kate.l.pearson@nz.pwc.com

T: +64 9 355 8531E: briar.s.williams@nz.pwc.com

Peter BoyceAucklandT: +64 9 355 8547E: peter.boyce@nz.pwc.com

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Russia

Draft Order of the ‘Russian FATCA’ was published

On May 8, 2015, the draft of the Order of the Federal Tax Service of the Russian Federation ‘On approval of forms for reporting by foreign financial institutions located outside the Russian Federation of bank accounts (deposits) opened with them by Russian individuals and legal entities directly or indirectly controlled by Russian individuals’ (hereinafter ‑ ‘the Order’) was published on the regulation.gv.ru website.

This document continues the topic of the so‑called ‘Russian Foreign Account Tax Compliance Act (FATCA)’ under which all foreign financial institutions are obliged to submit to Russian tax authorities reports on foreign bank accounts of Russian individuals and legal entities directly or indirectly controlled by Russian individuals.

The Order provides for reporting forms to be submitted by foreign financial institutions in respect of their clients ‑ Russian individuals and legal entities.

The Order provides for two forms, one in relation to Russian individuals and another for legal entities (Russian and foreign) directly or indirectly controlled by Russian individuals.

• Foreign financial institutions shall provide information regarding each account of the client (an individual or a legal entity), with ‘account’ meaning deposit account, custody account, and other types of accounts.

• Forms provide for provision of information regarding address of the client‑individual in the place of registration of the foreign financial account.

• Under the forms, information in respect of clients‑legal entities shall be provided for both Russian and foreign legal entities directly or indirectly controlled by Russian individuals.

Spain

Proposal to implement the Modified Nexus Approach in the Spanish current IP Box regime

In the 2016 Draft Budget, the Spanish government has introduced an amendment to the current Patent Box regime aimed at aligning the Spanish intellectual property (IP) box regime with the Modified Nexus Approach adopted by the Organisation for Economic Co‑operation and Development (OECD) and G20 member countries.

The amended IP regime would be applicable as from July 1, 2016. A transitional regime is also being proposed including a series of grandfathering provisions for agreements already in place before July 1, 2016.

PwC observation:Russia continues works on law that would oblige all foreign financial institutions to submit to Russian tax authorities reports on foreign bank accounts of Russian individuals and legal entities directly or indirectly controlled by Russian individuals. We will monitor closely the legislative procedure.

Proposed Legislative Changes

Natalia Kuznetsova Mikhail FilinovMoscow MoscowT: +7 495 967 6365E: natalia.kuznetsova@ru.pwc.com

T: +7 495 967 6365E: mikhail.filinov@ru.pwc.com

Carlos Concha Clara Yago DomingoMadrid New YorkT: +34 915 684 365E: carlos.concha.carballido@es.pwc.com

T: +1 646 471 3262E: clara.yago@us.pwc.com

PwC observation:The impact of the proposed amendment will need to be analysed including the potential reduction of the tax benefits and the cost of tracking IP expenses as requested by the proposed new Patent Box regime.

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United Arab Emirates

Update on corporate tax proposal

Over the recent months, the Undersecretary of the United Arab Emirates (UAE) Ministry of Finance (MoF) has made announcements concerning draft corporate tax and value added tax (VAT) laws. The timing and nature of these proposals for tax reform is not yet clear.

The UAE have been studying the possibility of introducing a corporate tax (CT) over the recent years in alignment with other countries in the Middle East region. It is worth noting that the UAE, along with Bahrain, is the only country in the Gulf Cooperation Council (GCC) not to levy corporate tax.

According to the recently issued UAE MoF 2014 annual report, the CT policy principles have been approved by the UAE Cabinet, however, a CT draft law would still need to go through the legislative approval process including the agreement of various government stakeholders.

As such, and similarly to VAT, there is still no visibility on a potential implementation date for the CT, which would also be subject to the tax administration readiness.

PwC observation:An introduction of a CT regime will clearly affect entities established or operating in the UAE. Taxpayers could consider if there is a permanent establishment (PE) risk in the UAE in order to assess whether there will be a likely tax exposure once the regimes are implemented and in force. There have, however, still been no official announcements with regard to a potential implementation date and time frame.

Jeanine DaouDubaiT: +971 4 304 3744E: jeanine.daou@ae.pwc.com

Proposed Legislative Changes

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Tax Administration and Case LawUnited States

Regardless of IRS action, foreign implementation of CbCR means many US companies must file by end of 2017

Action 13 of the Organisation for Economic Co‑operation and Development’s (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS) strives to enhance transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations through increased transfer pricing documentation requirements, specifically including a new country‑by‑country report (CbC report) and a master file.

The OECD has recommended that the first CbC reports be required to be filed for multinational enterprises’ (MNEs) fiscal years beginning on or after January 1, 2016. The OECD also recommends that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file it, meaning that the first reports would be filed by December 31, 2017, for companies with fiscal years starting January 1, 2016.

Questions have arisen, however, regarding the US Treasury Department’s authority to require CbC reporting (CbCR) by US‑headquartered companies, and whether the Internal Revenue Service (IRS) may delay implementation for one year. However, even if the US does not implement CbCR, or delays implementation for one year, US‑parented MNE groups will be required to file reports by the end of 2017 if the group includes entities with operations in a foreign country in which CbCR requirements have been implemented.

Under the ‘secondary mechanism’ recommended by the OECD and already adopted by one country, the filing obligation would fall on any ‘constituent entity’ of the MNE group operating in a country adopting the OECD’s recommended approach. It is important to note that, under this approach, even though the obligation would fall to a constituent entity lower down in the MNE’s chain of companies, the CbC report would need to include data for every jurisdiction in which the MNE group operates.

It is also important to remember that the new master file report must be filed directly with the tax administrations in each relevant jurisdiction as required by those administrations. Consequently, US‑parented MNEs must file a master file report covering the entire MNE group in any jurisdiction in which they do business if that jurisdiction implements master filing reporting requirements.

PwC observation:The obligation for US‑parented companies to file CbC reports for fiscal years beginning on or after January 1, 2016, does not depend solely on whether or when the US implements CbCR. If the US does not implement CbCR, or delays implementation, many US‑parented MNE groups nonetheless would have to file CbC reports by the end of 2017, due to implementation of CbCR in foreign countries in which they are doing business. The new Spanish regulations implementing the OECD recommendations are an example of how foreign implementation of CbCR obligations could affect US‑parented companies to require CbCR. As another recent example, the Australian Treasury has released exposure draft legislation to implement the OECD’s recommendation on CbCR, to similar effect.

The impact of the new CbC and master file reports is significant in terms of the amount and type of information to be collected and included in transfer pricing documentation. Penalties may be assessed by local tax authorities to the extent a taxpayer does not prepare proper documentation. Accordingly, taxpayers should start assessing their ability to comply with these new requirements, the potential of the new documentation requirements to trigger increased transfer pricing disputes, and the potential for public disclosure of sensitive commercial information.

David Ernick Isabel VerlindenWashington D.C. BrusselsT: +1 202 414 1491E: david.ernick@us.pwc.com

T: +32 2 710 44 22E: isabel.verlinden@be.pwc.com

David SwensonWashington D.C.T: +1 202 414 4650E: david.swenson@us.pwc.com

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United States

Regulations expand Section 956 to partnerships and other circumstances and modify the active rents and royalties exception under Section 954

On September 1, 2015, the Internal Revenue Service (IRS) and the Treasury Department issued proposed regulations under Section 956 (REG‑155164‑09) and temporary and final regulations under Sections 954 and 956 (T.D. 9733). The long‑awaited guidance addresses the treatment of loans from a controlled foreign corporation (CFC) to a foreign partnership under Section 956, the treatment of other non‑partnership transactions under Section 956, and the foreign personal holding company income (FPHCI) provisions of Section 954.

The proposed regulations provide guidance on whether CFC loans to foreign partnerships constitute United States property (US property) within the meaning of Section 956 and, in addition, clarify how to measure a CFC’s investment in US property owned through a partnership under the ’Brown Group regulations’ (i.e. Reg. Sec. 1.956‑2(a)(3)). In the regulation package, the IRS and the Treasury Department request comments on the treatment of multiple CFC guarantees of a single loan and other topics. The proposed Section 956 regulations are generally effective for taxable years of CFCs ending on or after the date that the proposed regulations become final regulations with respect to transactions entered into on or after September 1, 2015.

The temporary regulations expand the scope of the Section 956 anti‑avoidance provisions by including transactions involving the funding of partnerships and certain distributions made by leveraged foreign partnerships. The temporary regulations provide that ‘funding’ for purposes of the Section 956 anti‑avoidance regulations is not limited to funding through debt or capital contributions. The change in the definition of ‘funding’ may affect any structure, whether or not partnerships are involved. As further discussed below, the temporary Section 956 regulations are generally applicable to transactions entered into on or after September 1, 2015.

The temporary regulations also modify the active rents and royalties exception under Section 954(c)(2)(A) by restricting the application of the active development tests to activities conducted by a CFC’s own officers and staff of employees and expanding the application of the active marketing tests to substantial marketing organisations located in more than one country. The changes to the Section 954 active rents and royalties exceptions generally are effective for rents or royalties received or accrued during taxable years of CFCs ending on or after September 1, 2015. In the case of the ‘active development tests,’ the new regulations are effective only with respect to licensed or leased property that is manufactured, produced, developed, created, or acquired and to which substantial value has been added on or after September 1, 2015. In the case of the ‘active marketing tests’, the new regulations are effective only to the extent of rents or royalties received or accrued on or after September 1, 2015.

PwC observation:The temporary regulations are effective immediately and may impact a large number of taxpayers, including those without partnerships in their structures. In this respect, the scope of the revised anti‑avoidance rule could be interpreted broadly unless further guidance clarifies.

The proposed regulations take a broader approach to foreign partnership obligations than do the temporary regulations. Although the proposed regulations would not become effective until finalised, they would impact transactions entered into on or after September 1, 2015. Consequently, structures not subject to the temporary regulations should still be evaluated under the proposed regulations.

Treasury and the IRS have requested comments in respect of these regulations by December 1, 2015.

David Ernick Adam Katz

Washington D.C. New York

T: +1 202 414 1491E: david.ernick@us.pwc.com

T: +1 646 471 3215E: adam.katz@us.pwc.com

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TreatiesChina

Agreement signed with Taiwan for the avoidance of double taxation and enhanced collaboration in tax matters

On August 25, 2015, Mainland China and Taiwan signed a breakthrough Agreement for the Avoidance of Double Taxation and Enhanced Collaboration in Tax Matters (Cross‑strait DTT). The agreement mainly follows the Organisation for Economic Co‑operation and Development (OECD) Model Convention with the following key features:

Applicable scope of the DTT Due to historical reasons, investments by Taiwan investors into mainland China were commonly structured through a company located in a third jurisdiction. To address the applicability of the DTT to such indirect investments, the Cross‑strait DTT particularly provides that where the effective management of a third‑jurisdiction incorporated company is situated in one of the contracting parties, it could be recognised as the tax resident of that party.

Permanent establishment (PE) The time threshold for construction and installation projects to create a PE is 12 months, while that for the provision of services is a period or periods aggregating 183 days or more within any 12‑month period.

Passive income/capital gains • Dividends: A 5% preferential withholding income tax (WHT) rate

applies in the situation where the recipient is a company which directly holds at least 25% of the capital of the company paying the dividends. Otherwise, the WHT rate is 10%.

• Interests: A preferential WHT rate of 7% applies. Meanwhile, interests received by certain governmental departments and institutions, as well as interests on certain recognised loans to promote exports are exempt from WHT.

• Royalties: A preferential WHT rate of 7% applies. It is worth noting that rental payments for the use of industrial, commercial, or scientific equipment are not included in the definition of ‘royalty’ under the DTT.

• Capital gains: The taxation rights on gains derived from equity transfer shall be allocated as follows:• The taxation rights on the transfer of the equity of a

‘property‑rich company’ shall lie with the source jurisdiction. • For other situations, the taxation rights shall lie with the

resident jurisdiction, unless the resident jurisdiction provides tax exemption treatment on such gains and the transferor directly or indirectly holds at least 25% of the equity interests of that company at any time during the 12‑month period preceding such transfer.

Shipping and air transport The DTT clarifies that business profits derived from shipping and air transport, including incidental income derived from businesses associated with shipping and air transport, shall only be subject to tax in the resident jurisdiction. Such exemption treatment not only applies to income tax, but also to business tax, value‑added tax (VAT) and other similar taxes.

Provisions of anti-tax avoidance The DTT includes an anti‑treaty abuse clause to counter arrangements or transactions entered into mainly for the purpose of obtaining the tax benefits under the DTT. In addition, the DTT allows both parties to invoke domestic rules against abusive arrangements. The inclusion of these provisions is consistent with the international practice.

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Matthew MuiChinaT: +86 10 6533 3028E: matthew.mui@cn.pwc.com

PwC observation:Given the special investment structure, and economic and trade relations between mainland China and Taiwan, the DTT provides more favourable treatments compared to other DTTs signed by mainland China, for instance, the allocation of taxation rights on capital gains, the applicability of the DTT to investments in mainland China via a third jurisdiction, etc.

The DTT will enter into force after the completion of the ratification procedures by both contracting parties and apply to income derived on and after January 1, of the year following its entry into force. Relevant taxpayers are suggested to study the provisions in the DTT, review their existing contracts and business arrangements, and assess its impacts on their cross‑strait businesses and investments.

In addition, for Taiwan investors investing in mainland China via the indirect structure, the DTT allows the third‑jurisdiction incorporated company to be treated as a Taiwan tax resident based on the principle of ‘place of effective management’. This treatment not only permits such non‑Taiwan incorporated companies to be eligible for the DTT, but could also give rise to Taiwan tax consequences. Taiwan investors are suggested to do a comprehensive analysis on the impact before going for the application. Moreover, with the improvement of the cross‑strait direct investment, in particular with the conclusion of the DTT, Taiwan investors may review their current investment structure and consider the possibility of restructuring to optimise their structures.

Measures to avoid double taxation According to the DTT, Taiwan residents could claim foreign tax credit (FTC) for the income tax paid in mainland China, which is consistent with Taiwan’s domestic tax law. From the mainland China perspective, the DTT reiterates that the FTC rules are stipulated in mainland China’s domestic tax law. In addition, the qualified shareholding ratio for China tax resident enterprises (TREs) to claim the FTC for the Taiwan tax indirectly borne by the China TREs on their Taiwan‑sourced dividends is reduced from 20% to 10%.

Exchange of information (EoI) and collaboration in tax matters Given the special conditions between mainland China and Taiwan, the DTT largely restricts the scope of EoI, such as no retrospective EoI for information obtained prior to the effective date of the DTT, no automatic EoI or spontaneous EoI, and no application of information exchanged in criminal cases. Meanwhile, the DTT also innovatively includes ‘collaboration in tax matters’ in its title. Specifically, the DTT sets forth a mechanism for the tax authorities across the strait to enhance communication and collaboration, and also introduces, in principle, an article of assistance in tax collection.

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Cyprus

First DTT with Iran signed

A first double tax treaty (DTT) between Cyprus and Iran was signed on August 4, 2015 and has been ratified by Cyprus on August 25, 2015. The treaty will take effect from January 1, in the year following that in which all legal formalities to bring the treaty into force are completed.

The DTT provides for the following withholding tax (WHT) rates on dividends, interest, and royalties:

• 5% on the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25% of the capital of the company paying the dividends.

• 10% on the gross amount of the dividends in all other cases.• 5% on interest (with the exception of interest derived by certain

national or local government organisations for which no WHT applies).

• 6% on royalties in all cases.

Regarding capital gains, under the DTT Cyprus retains the taxation rights on disposals of shares in Iranian companies except in the case where more than 50% of the value of the shares is derived directly from immovable property situated in Iran.

PwC observation:This new DTT is expected to open the way for new investment opportunities and trade relations between Cyprus and Iran.

We note that regardless of the WHT on dividends and interest provided for in the DTT, Cyprus domestic law provides unconditionally for no Cyprus WHT on dividend and interest payments to non‑Cyprus tax residents.

Further, irrespective of the WHT on royalties provided for in the DTT, the Cyprus domestic law only applies WHT on payments to non‑Cyprus tax residents in cases where the royalty relates to rights used within Cyprus.

Dinos Kapsalis Stelios Violaris

Limassol Nicosia

T: +357 225 555 208E: dinos.kapsalis@cy.pwc.com

T: +357 225 553 00E: stelios.violaris@cy.pwc.com

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Hong Kong

The DTT with Italy entered into force on August 10, 2015

The Hong Kong‑Italy double tax treaty (DTT) that was signed in January 2013 entered into force on August 10, 2015. The DTT will be effective in Hong Kong from April 1, 2016.

Jeroen Schmitz Ramon HogenboomAmsterdam AmsterdamT: +31 88 792 7352E: jeroen.schmitz@nl.pwc.com

T: +31 88 792 6717E: ramon.hogenboom@nl.pwc.com

Peter RuigeAmsterdamT: +31 88 792 3408E: pieter.ruige@nl.pwc.com

PwC observation:With the entering into force of the Hong Kong‑Italy DTT and Hong Kong’s continuous commitment to increased tax transparency and cross‑border tax cooperation, it is expected that Hong Kong may be removed from the list of jurisdictions with low level of taxation or lack of adequate exchange of information maintained by the Italian government in the near future. Hong Kong companies investing in Italy can also benefit from the reduced withholding tax rates on dividends, interest, and royalties as well as the permanent establishment protection for business profits under the DTT when it becomes effective in Italy from January 1, 2016.

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T: +49 69 9585 5378 E: anja.ellmer@de.pwc.com

www.pwc.com/its

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Design Services 29268 (09/15).