Global Corporate Tax Handbook 2016 New countries: Kenya, Mongolia, Vietnam Covering 101 tax jurisdictions worldwide, these books provide the largest most authoritative survey of tax systems throughout the world. The Global Corporate Tax Handbook and the Global Individual Tax Handbook are designed to be used as a set - buy these two books as a set. The titles complement each other to provide the reader with a complete overview of the tax system in each country. Similar to the other titles in the Global Tax Series the country chapters follow a common layout that allows rapid and accurate access to precise information and enables direct comparison between countries. Countries covered Albania, Algeria, Argentina, Australia, Austria, Bangladesh, Barbados, Belarus, Belgium, Bolivia, Brazil, Bulgaria, Canada, Cayman Islands, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, European Union, Finland, France, Gabon, Germany, Gibraltar, Greece, Guatemala, Guernsey, Honduras, Hong Kong, Hungary, Iceland, India, Indonesia, Iran, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Kenya, Korea, Latvia, Lebanon, Liechtenstein, Lithuania, Luxembourg, Macedonia, Madagascar, Malaysia, Malta, Mauritius, Mexico, Moldova, Monaco, Mongolia, Montenegro, Morocco, Netherlands, New Zealand, Nicaragua, Nigeria, Norway, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland (and selected cantons), Taiwan, Thailand, Tunisia, Turkey, Ukraine, United Kingdom, United States, Uruguay, Venezuela, Vietnam. Title: Editor(s): Date of publication: ISBN: Type of publication: Number of pages: Terms: Price (print): Price (eBook):

Global Corporate Tax Handbook 2016 M. Schellekens et al June 2016 978-90-8722-367-0(print), 978-90-8722-368-7 (eBook) Print and eBook 1,446 pp. Price includes delivery EUR 430 / USD 565 (VAT excl.) EUR 335 / USD 450 (VAT excl.)

Order information To order the book, please visit www.ibfd.org/IBFD-Products/shop. You can purchase a copy of the book by means of your credit card, or on the basis of an invoice. Our books encompass a wide variety of topics, and are available in one or more of the following formats: • IBFD Print books • IBFD eBooks – downloadable on a variety of electronic devices • IBFD Online books – accessible online through the IBFD Tax Research Platform

IBFD, Your Portal to Cross-Border Tax Expertise

Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Monia Naoum Asia-Pacific: Mei-June Soo, Ying Zhang Caribbean: María Alejandra Muñoz Europe: Khadija Baggerman, Magdalena van Doorn-Olejnicka, Larisa Gerzova, Katja Jacobs, Marjolein Kinds, Ivana Kireta, Andreas Perdelwitz, Marnix Schellekens Middle East: Ridha Hamzaoui, Monia Naoum Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Carlos Gutierrez, Luis Nouel North America: John Rienstra, Julie Rogers-Glabush

IBFD Visitors’ address: Rietlandpark 301 1019 DW Amsterdam The Netherlands Postal address: P.O. Box 20237 1000 HE Amsterdam The Netherlands Tel.: 31-20-554 0100 Fax: 31-20-622 8658 www.ibfd.org

© 2016 IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: [email protected]. Disclaimer This publication has been carefully compiled by the IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. The IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. The IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, the IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on the IBFD’s part. In no event shall the IBFD’s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice.

Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

ISBN 978-90-8722-367-0 (print) ISBN 978-90-8722-368-7 (eBook) ISSN 1872-6747 NUR 826

Table of Contents Albania

9

Algeria

17

Argentina

35

Australia

51

European Union Appendices: – Merger Directive – Parent-Subsidiary Directive (recast) – Interest and Royalties Directive

395

Liechtenstein

763

415

Lithuania

771

423

Luxembourg

785

431

Macedonia

801

Austria

63

Finland

437

Madagascar

809

Bangladesh

77

France

451

Malaysia

821

Barbados

93

Gabon

469

Malta

833

Belarus

105

Germany

485

Mauritius

845

Belgium

117

Gibraltar

499

Mexico

857

Bolivia

135

Greece

505

Moldova

879

Brazil

147

Guatemala

519

Monaco

891

Bulgaria

177

Guernsey

531

Mongolia

899

Canada

187

Honduras

539

Montenegro

907

Cayman Islands

203

Hong Kong

551

Morocco

913

Chile

207

Hungary

565

Netherlands

929

China (People’s Rep.)

227

Iceland

583

New Zealand

945

Colombia

251

India

593

Nicaragua

955

Costa Rica

269

Indonesia

607

Nigeria

967

Croatia

281

Iran

619

Norway

985

Cyprus

291

Ireland

631

Oman

997

Czech Republic

303

Isle of Man

647

Pakistan

1007

Denmark

315

Israel

653

Panama

1023

Dominican Republic

329

Italy

663

Paraguay

1041

Ecuador

343

Japan

681

Peru

1051

Egypt

361

Jersey

699

Philippines

1063

El Salvador

373

Kenya

707

Poland

1077

Estonia

385

Korea (Rep.)

723

Portugal

1089

Latvia

737

Qatar

1109

Lebanon

751

Romania

1119

7

Russia

1131

Spain

1231

Turkey

1331

Saudi Arabia

1149

Sweden

1247

Ukraine

1347

Serbia

1161

1359

1169

1261

United Kingdom

Singapore

Switzerland and selected cantons

1381

1181

1283

United States

Slovak Republic

Taiwan

1407

1193

1299

Uruguay

Slovenia

Thailand

1421

1203

1311

Venezuela

South Africa

Tunisia

Vietnam

1435

8

Sample chapter

Australia This chapter is based on information available up to 1 February 2016.

Introduction The Commonwealth of Australia is comprised of six states and two territories. For tax purposes, Australia includes Norfolk Island, Christmas Island, the Cocos (Keeling) Islands, the Ashmore and Cartier Islands, and the Coral Sea Islands. Companies are subject to income tax on their taxable income. Net capital gains are included in taxable income and are subject to income tax as well. Goods and services tax (GST) is levied on taxable supplies of goods and services and on taxable importations.

– – –

The Australian income tax system is implemented by way of a number of separate acts of Parliament. The Income Tax Assessment Act (ITAA 36), first passed in 1936 and amended in every subsequent year, and the Income Tax Assessment Act 1997 (ITAA 97) are the principal Acts dealing with income tax. The purpose of the 1997 Act is to progressively rewrite and replace the 1936 Act. Currently, both Acts are in operation.

imputation credits to reduce its tax liability. Thus, a receipt of a fully franked dividend by a corporate taxpayer in a taxable position will not result in an additional tax payable by that taxpayer on the dividend. A receipt of franking credits by a corporate taxpayer increases its franking account balance the same way as a payment of income tax on its income. This allows distribution of the credits to the recipient’s shareholders; corporate taxpayers may convert the excess credits to tax losses (see section 1.5.1.); excess franking credits of individuals and pension funds are refunded; and payments of fully franked dividends to non-residents are not subject to dividend withholding tax.

Under the Trans-Tasman imputation system, an Australian company may elect into the New Zealand imputation system, whereby its New Zealand investors are allowed to use New Zealand imputation credits in respect of the company’s New Zealand income. Conversely, companies resident in New Zealand may elect for the Australian imputation system to apply, so that any tax paid in Australia may be distributed to Australian shareholders.

Neither the ITAA 36 nor the ITAA 97 imposes income tax, which is imposed by various rating acts. The most important of these for income tax purposes are the Income Tax Rates Act 1986 and the Income Tax Act 1986, which declare the rates of income tax and impose income tax on all types of taxpayers (companies, individuals, trustees, etc.).

1.2. Taxable persons Corporate income tax is levied on companies, limited partnerships and certain trusts (corporate unit trusts and public trading trusts).

Other government imposts are imposed and governed by other legislation.

The term “company”, as defined in the Income Tax Assessment Act 1997, includes bodies corporate, any other unincorporated associations or bodies of persons, but excludes partnerships or non-entity joint ventures. This chapter is restricted to Australian-incorporated public companies (generally, listed companies or subsidiaries of public companies) and private companies, categorized as such under the tax rules.

Income tax, fringe benefits tax and goods and services tax are collected by the Australian Taxation Office (ATO), which is headed by the Commissioner of Taxation. The currency is the Australian dollar (AUD).

1. Corporate Income Tax

Partnerships, other than limited partnerships, are not separate taxable persons. However, partnerships are required to calculate net income and lodge income tax returns. A partnership’s tax and capital losses are allocated to the partners. Special loss quarantining rules apply to foreign hybrid partnerships.

1.1. Type of tax system Australia operates a full imputation system where income of a corporate taxpayer is not subject to further taxation in the hands of the shareholders: – payments of income tax by a resident company give rise to “imputation” or franking credits that are accounted for in a “franking account”. The company distributes its imputation credits with its dividends, thus making the dividends “franked”. A distribution of franked dividends reduces the company’s imputation credit balance; – a recipient (corporate or individual) of a franked dividend is required to gross up its dividend income by the received imputation credits and may use the

1.2.1. Residence

A company is resident in Australia if it is incorporated in Australia, or it carries on a business in Australia and either its place of central management and control is in Australia or its controlling shareholders are residents of Australia.

51

Australia

Corporate Taxation

Domestic dividends are taxable, but a credit is available for imputation credits attached to the dividend (see section 1.1.). This treatment makes fully franked dividends tax free for corporate recipients.

1.3. Taxable income 1.3.1. General

Resident companies are subject to income tax on their worldwide taxable income, including net capital gains.

1.3.3. Deductions

The taxable income for an income year is determined by subtracting allowable deductions from assessable income. Assessable income is comprised of ordinary income (i.e. income under the ordinary concepts, such as income from business, interest or royalties) and statutory income (i.e. assessable income under the statute, such as net capital gains).

As a general rule, deductions are allowed for losses and outgoings incurred as part of income-producing activities or incurred with an intention to derive assessable income. Losses or outgoings of a capital, private or domestic nature or incurred in relation to gaining exempt (or nonassessable non-exempt) income are not deductible (unless specifically allowed). In addition, no deduction is allowed where a specific legislative provision makes an expense non-deductible. An extensive body of case law deals with the deductibility of expenses, including timing aspects.

An amount is included in assessable income when it is “derived”. The timing of derivation often depends on the type of income. Some taxpayers are allowed to calculate their taxable income on a cash basis. The Taxation of Financial Arrangements (TOFA) rules, which apply to eligible taxpayers from the income year starting on 1 July 2010 (or the substituted accounting period for the 2010 income year), broadly aim to align the tax treatment of financial arrangements with their accounting treatment. The TOFA rules apply to the following taxpayers: – entities with annual turnover or aggregate financial assets of AUD 100 million or more and with aggregate assets of AUD 300 million or more; – superannuation funds, managed investment schemes or entities with a similar status under a foreign law with annual turnover or aggregate financial assets of AUD 100 million or more; or – financial entities with annual turnover of AUD 20 million or more.

Deductible items include, for example, general regular business expenditures, interest, borrowing expenses (amortized over 5 years or the term of the loan), bad debts (subject to conditions), repairs, capital allowances (depreciation), rates and land taxes, tax compliance costs, etc. Legislation governs the deductibility of specific types of expenses (for example, the deductibility of entertainment expenses and prepaid expenses is subject to limitations, whereas fines and penalties are non-deductible). The deductibility of bad debts is subject to the continuity of ownership and same business tests (see section 1.5.1.). Generally, dividends are not deductible, while interest expenses are. A classification of a payment as a dividend or interest will depend on the application of the debt/equity rules to the arrangement that gives rise to the payment. In addition, low-interest loans to shareholders of private companies and certain capital distributions may be treated as payments of dividends.

Taxpayers that are not subject to the TOFA rules may elect into the rules with the effect that all their financial arrangements will become subject to the rules from the beginning of the income year in which the election is made.

Royalty expenses incurred in earning assessable income are deductible.

The TOFA rules apply to “financial arrangements” entered into by the taxpayer from the beginning of the income year for which the election is made. In addition, the rules may apply, by election, to arrangements entered into before the TOFA commencement.

Certain business-related expenses that would not normally be deductible due to them having a capital character, such as pre-establishment or due-diligence costs, may be amortized over 5 years. Expenses can be deducted when “incurred” for tax purposes. For expenses other than in relation to financial arrangements, a deduction may be claimed when statutory rules allow the deduction for that type of expenses (e.g. superannuation expenses cannot be claimed until paid). If no statutory rules apply to an expenditure, it will be deductible when the taxpayer fully subjects itself to the expenditure (i.e. when the liability “comes home”). There is a large body of case law dealing with the timing of deductions.

Taxpayers subject to TOFA may be eligible for a number of elective methods of calculating gains and losses from financial arrangements to align taxation of these gains and losses with their recognition in the accounts. 1.3.2. Exempt income

Income is exempt if it is: – derived by an exempt taxpayer (see section 1.2.); – exempt income, e.g. foreign income of a non-resident; or – non-assessable non-exempt income, e.g. foreign non-portfolio dividends derived by a company (see section 6.1.1.).

From 1 July 2010 (or 1 July 2009 by election, adjusted for the appropriate substituted accounting period), the deductibility of losses from financial arrangements is subject to the TOFA rules (see section 1.3.1.). The exact timing of deductions from financial arrangements may depend on TOFA elections made by the taxpayer. In many cases, the timing of deductions under TOFA rules will follow the timing of recognition of the expenses for accounting purposes.

Exempt income may be taken into account in tax computations, particularly in the calculation of a tax loss. In contrast, non-assessable non-exempt income is disregarded.

52

Corporate Taxation

Australia

Valuation of inventory

and a capital gain, the amount is taxed only once as ordinary income.

Inventory (trading stock) may be valued at cost (using the full absorption costing method), market selling value or replacement value. The following valuation methods are acceptable: FIFO, average cost, standard cost and retail inventory.

Capital gains are calculated by subtracting the cost base of the asset subject to the CGT event which gave rise to the gain, from the capital proceeds from the event. The calculation of the cost base and capital proceeds may be subject to special rules in some circumstances, e.g. market value substitution.

The value of trading stock at the beginning of the income year is allowed as a deduction and the value at the end of the year is assessable.

Indexation may be applied to the cost base of capital assets acquired before 30 September 1999; however, the indexation was frozen as at that date. Capital gains or losses related to assets acquired before the introduction of capital gains tax (20 September 1985) are disregarded (subject to the maintenance of the majority of shareholders).

Consumables may be written off when purchased. 1.3.4. Depreciation and amortization

Business tangible assets can be depreciated using the prime-cost or diminishing-value method over the useful life of an asset, which is either the standard effective life as determined by the Commissioner or the useful life as determined by the taxpayer. Normally, the taxpayer is expected to provide justification if the useful life of an asset is shorter than the effective life prescribed by the Commissioner.

A number of rollover reliefs may be available, for example rollovers dealing with involuntary disposals, a transfer of assets to a wholly owned company, exchanges of shares in the same company or an interposed entity, scrip-for-scrip exchanges and demergers. Concessional rules may apply to the taxation of capital gains of a small business. Capital gains made by listed investment companies may be subject to concessional treatment in the hands of shareholders, when distributed as dividends.

Most buildings and fixtures are depreciated using the prime-cost method at 2.5% per year of the initial construction costs (i.e. not the acquisition price). Specified intangible assets (patents, copyright, software, etc.) can be amortized over a specified effective life. For example, most software is amortized over 5 years.

1.5. Losses 1.5.1. Ordinary losses

Amortization of goodwill is not deductible.

A loss is an excess of allowable deductions over assessable and exempt income (see section 1.3.2.) for an income year. Losses can be carried forward indefinitely. Companies may choose to utilize a prior year loss in the current year or continue to carry it forward. In some cases, companies may convert excess imputation credits into tax losses.

It is not compulsory to deduct depreciation expense, but it is not possible to defer depreciation once the asset is installed and ready for use. Small businesses are allowed to immediately write off business assets purchased between 12 May 2015 and 30 June 2017 for less than AUD 20,000. For other businesses, the immediate write-off threshold is AUD 100.

A prior year loss may only be used to reduce taxable income of a future year if the continuity of ownership test or the same business test is met in respect of the loss. Prior year losses must be used to reduce exempt income of the utilization year before reducing taxable income for that year.

1.3.5. Reserves and provisions

Generally, income is recognized when earned and deductions are allowed when the underlying expenses are incurred (the exact timing will depend on whether the cash or accrual method is used). Accordingly, reserves or provisions normally cannot be taken into account for tax purposes. Some provisions cannot be deducted until paid, for example a pension liability in relation to employees, even if incurred, is not allowed as a deduction until paid.

A limited loss carry-back was available for the 2013 income year only. Special rules apply to losses of companies joining a tax consolidated group (see section 2.). Future availability of net unrealized losses existing at the time of a breach of the continuity of ownership test is also subject to the same business test. A similar rule applies to bad debts from debts existing at the time of breach of the continuity of ownership test. In addition, losses from transfers within a 75%-owned group are deferred until the transferred asset leaves the group.

As an exception, a deduction for an actuarial estimate of net future claims is allowed for insurers, reinsurers and self-insurers.

1.4. Capital gains Capital gains arise only in relation to specified capital gains tax (CGT) “events” (e.g. event A1 for disposal of an asset, event E1 for creating a trust or event I1 for an entity becoming a non-resident). Specific tax rules govern the taxation of capital gains and losses made as a result of each CGT event. Net capital gains are included in taxable income. Where a gain is both ordinary income

1.5.2. Capital losses

Capital losses arise in relation to specified capital gains tax (CGT) events (see section 1.4.). Net capital losses are carried forward indefinitely, but can only be offset against future capital gains.

53

Australia

Corporate Taxation

Prior year capital losses may only be used if the continuity of ownership test is met by the taxpayer or the same business test is met in relation to the losses. Special rules apply to losses of companies that form a tax consolidated group (see section 2.).

1.8.2. Tax returns and assessment

Corporate income tax returns must be filed by the 15th day of the 7th month after the end of the balancing period (i.e. by 15 January of the following year for a 30 June year-end). An extension may be granted if the tax return is lodged by a tax agent.

Future availability of net unrealized capital losses existing at the time of a breach of the continuity of ownership test is subject to the same business test. In addition, capital losses from transfers within 75%-owned groups are deferred until the transferred asset leaves the group.

Companies self-assess their tax liability. Nil returns are treated as assessments. Generally, assessments can be amended by the taxpayer or the ATO within a period of 4 years (2 years for small business taxpayers) after the assessment is made; however, in some cases there is a longer limit (e.g. transfer pricing adjustments) or no time limit (e.g. fraud or evasion) for an amendment of an assessment.

Capital losses related to assets acquired before the introduction of the capital gains tax (20 September 1985) are disregarded (subject to the maintenance of the majority of shareholders).

1.6. Rates

1.8.3. Payment of tax

1.6.1. Income and capital gains

Generally, business taxpayers are required to make quarterly instalments by the 21st day following the end of every quarter. The instalment amount is based on the tax liability for the prior year. The final payment for the income year is required to be made by the first of the 6th month following the end of the relevant year (i.e. by 1 December for a 30 June year-end). The final payment is calculated as the self-assessed tax liability as shown in the tax return, less four instalments made for that year. If the instalments exceed the self-assessed liability, the balance is refunded.

Corporate income tax is levied at 30% on income and net capital gains. From 1 July 2015, the tax rate for small business companies (generally, companies with an annual business turnover of less than AUD 2 million) is reduced to 28.5%. Previously, the corporate tax rate was 34% (before 1 July 2001) and 36% (before 1 July 2000). 1.6.2. Withholding taxes on domestic payments

See section 6.3. for withholding rates on payments to non-residents.

From 1 July 2015, corporate tax entities with a base assessment instalment income of at least AUD 100 million are required to pay PAYG (pay-as-you-go) instalments on a monthly basis. The threshold will be reduced to AUD 20 million by 1 July 2016 for corporate tax entities and by 1 July 2017 for other entities subject to the PAYG instalment regime.

1.7. Incentives

1.8.4. Rulings

Concessional treatment is allowed in respect of approved research and development expenditures (by way of a refundable or non-refundable tax credit in respect of the qualified expenditure) as well as certain environmental costs.

Taxpayers are able to request private, class or product rulings from the ATO. Broadly, a private ruling is a written opinion by the ATO on how tax provisions would apply to a specific taxpayer in relation to a specific scheme. Rulings are binding on the ATO in respect of the dealings with the taxpayer detailed in the ruling.

Generally, payments to resident companies do not attract withholding tax, unless specifically required by the relevant tax rules, for example, where no Australian Business Number of the recipient has been provided to the payer.

Primary producers, producers of Australian films, pooled development funds, venture capital entities (entities providing equity for small and medium-sized Australian enterprises), designated infrastructure projects and small business taxpayers enjoy additional taxation preferences.

In addition, the ATO regularly issues public rulings, which are binding on the ATO, and interpretative decisions, which are not. Generally, the Commissioner is prohibited from disclosing taxpayer related information. However, starting from the 2013/14 income year (i.e. the year ending on 30 June 2014), the Commissioner is required to publicly disclose certain tax information that relates to corporate taxpayers with total gross income of at least AUD 100 million during the income year (increased to AUD 200 million for private companies), or that have any PRRT (see section 3.1.) or MRRT (see section 3.2.) payable for the income year. It should be noted that a tax consolidated group (see section 2.1.) is treated as a single taxpayer and therefore income of all members of the group is counted towards the income of that single taxpayer.

1.8. Administration 1.8.1. Taxable period

Taxable income is calculated for an income year that generally runs from 1 July to 30 June. A different income year (substituted accounting period) may be allowed by the ATO.

54

Corporate Taxation

Australia

2. Transactions between Resident Companies

4. Taxes on Payroll

2.1. Group treatment

4.1. Payroll tax

Wholly owned groups can elect to be taxed on a consolidated basis. Only Australian entities can be members of a tax consolidated group. Transactions between the members of a consolidated group are ignored. An election to form a consolidated group is irrevocable and must cover all wholly owned resident subsidiaries. If a group is not consolidated, no rollovers or loss transfers are allowed between its Australian resident members.

Payroll tax is a state tax levied on employers and is calculated based on salaries and wages paid to employees, including fringe benefits (see section 4.3.). The taxable base is reduced by exemptions and allowances under the state payroll tax legislation and may be subject to grouping provisions. The tax rate ranges from 4.75% to 6.85%.

4.2. Social security contributions

The formation and dissolution of a group, and the joining and leaving of its members are governed by complex tax consolidation rules. Briefly, the tax cost base of assets of joining members, except the head company of the group, is reset based on the value of the membership interests in the member that holds the assets. The utilization of losses brought into a group may be subject to additional conditions and limitations. Upon a member leaving a group, the cost base of its membership interests in the leaving entity is reset based on the assets and liabilities leaving the group with the member.

No social security contributions are required to be made. However, employers are required to make mandatory contributions to their employees’ complying private pension funds, known as a superannuation charge, calculated from 1 July 2014 as 9.5% (increased to 10% from 1 July 2025) of gross salaries and wages. These payments are deductible to the employer when paid, subject to a cap of AUD 25,000 (see further Individual Taxation section 3.).

Australian companies with a common foreign controller, but no common Australian head company, may form a “multiple entry consolidated” group.

4.3. Other taxes Fringe benefits tax is a tax levied on and paid by the employer in respect of benefits provided to employees or a related party in connection with the employment, e.g. the provision of a motor vehicle, low-interest loans, fully paid holidays, accommodation and payment of expenses or school fees. The tax rate is 46.5%, which is increased to 49% from 1 April 2015 to 31 March 2017. Some benefits, for example shares and options provided to employees, are not subject to fringe benefits tax. Also, fringe benefits tax does not apply to benefits that would be deductible for the employee if they were acquired by the employee directly.

2.2. Intercompany dividends Unless paid between members of the same tax consolidated group (see section 2.1.), dividends are included in assessable income and a credit is allowed for the attached imputation credits (see section 1.1.). See section 6.1.1. for foreign-sourced dividends, and section 6.3.1. for dividends derived by non-residents. In addition, foreign conduit income dividends are not subject to tax.

The petroleum resource rent tax (PRRT) applies to all offshore petroleum projects, subject to exemptions. The tax is assessed either on a project basis or on a production licence area, and is levied on taxable profits derived from the recovery of oil petroleum including crude oil, natural gas and ethane. The taxable profit is the amount of assessable receipts less deductible expenditures prescribed by the legislation. The tax rate is 40% of the taxable profits. Any paid tax is allowed as a deduction in calculating the income tax liability of the payer.

Generally, the difference between the market value of shares or rights provided to employees (or parties related to employees) as consideration for performed services, and any amount spent by the employee in their acquisition is included in the employee’s assessable income. Concessional taxation is available in certain cases, in the form of an annual exemption of AUD 1,000, or in some circumstances in the form of a deferral of taxation for up to 15 years. The availability of the concessional treatment depends on the arrangement under which the shares or rights are granted and other factors, such as income of the employee. Under new rules effective from 1 July 2015, employees of start-up companies may be eligible for taxfree treatment of the discount.

3.2. Mineral resource rent tax

5. Taxes on Capital

The mineral resource rent tax (MRRT) was repealed with effect from 1 October 2014.

5.1. Net worth tax

3. Other Taxes on Income 3.1. Petroleum resource rent tax

There is no net worth tax.

5.2. Real estate tax All states and the Australian Capital Territory (ACT), excluding the Northern Territory, impose a tax on the

55

Australia

Corporate Taxation

unimproved value of land held in the state. The rates of land tax are progressive, vary from state to state (the range is from 0.15% to 3.7%) and are subject to tax-free thresholds (depending on the state, from AUD 0 in the ACT to AUD 600,000 in Queensland). Special rules apply with respect to the taxpayer’s principal place of residence and certain exemptions exist for land used for agricultural and forestry purposes.

6.1.4. Double taxation relief

An ordinary tax credit is granted, both unilaterally and under tax treaties, in respect of foreign income tax paid on income derived from foreign sources. A per-class limitation applied to foreign tax credits earned before 1 July 2008, i.e. a credit for foreign tax paid on income from one class was limited to the amount of Australian tax that would be payable on that class of income. Excess credits earned before 1 July 2008 could be carried forward for up to 5 years.

With the exception of the ACT, liability for land tax rests primarily with the owner of the property at a particular point in time. In the ACT, where all land is owned by the Commonwealth, land tax is imposed on lessees. In some jurisdictions, however, lessees may be deemed to be the owners for land tax purposes.

The foreign tax credit rules were replaced by the nonrefundable foreign income tax offset (FITO) rules from 1 July 2008. There is no per-class or per-country limitation for foreign tax credits earned on or after 1 July 2008. Generally, income (including net capital gains) of a resident derived from foreign sources is included in the resident’s assessable income and a tax offset (i.e. credit) is granted for the foreign tax paid on that income. The amount of the offset is the greater of the difference between the tax payable and the tax that would be payable excluding foreign income, and AUD 1,000. However, excess foreign tax offsets cannot be carried forward or back (i.e. excess foreign tax offsets earned after 30 June 2008 will be lost). Excess credits earned before 1 July 2008 were lost after 5 years if not utilized during that period.

A principal place of residence and primary production land are generally exempt from land tax, but there are certain qualifying criteria which vary between jurisdictions. Local authorities levy a tax on the unimproved value of land located in the municipality.

6. International Aspects 6.1. Resident companies A company is resident in Australia if it is incorporated in Australia, or if it carries on a business in Australia and either its place of central management and control is in Australia or its controlling shareholders are residents of Australia.

Generally, no credit for underlying tax is granted in respect of foreign dividends. See section 6.3.5. for a list of tax treaties in force.

6.1.1. Foreign income and capital gains

6.2. Non-resident companies

Resident companies are subject to income tax on their worldwide income, including net capital gains.

A non-resident company is a company that is not a resident of Australia (see section 6.1.).

However, foreign business income and capital gains derived from foreign permanent establishments carrying on an active business, as well as capital gains from the disposal of shares in a foreign company engaged in an active business (provided the Australian company had at least a 10% interest in the foreign company), are not subject to tax in Australia. Distributions from non-portfolio equity interests (10% or more voting power) are generally not subject to tax (and no foreign tax credit is allowed in respect of such distributions).

6.2.1. Taxes on income and capital gains

Broadly, non-residents are assessed only on income sourced in Australia, as well as on income deemed to be sourced in Australia, for example capital gains on taxable Australian property. Business income of non-residents derived through a permanent establishment in Australia (where a tax treaty applies) is subject to tax, and the ordinary rules for taxation of income of residents apply. However, the domestic definition of permanent establishment does not apply if there is no applicable tax treaty, in which case common law source rules will apply to determine whether the income of the non-resident is sourced in Australia and is therefore taxable in Australia.

Domestic losses can be deducted against foreign income. 6.1.2. Foreign losses

Foreign losses can be offset against domestic income. An unutilized foreign loss becomes a tax loss and can be carried forward subject to the same rules as those for domestic losses (see section 1.5.).

Franked dividends paid to non-resident shareholders are not subject to dividend withholding tax. Where the recipient is resident in New Zealand, special rules may apply under the Trans-Tasman imputation system (see section 1.1.).

6.1.3. Foreign capital

There is no net worth or real estate tax.

The ordinary tax rate applies to non-residents (see section 1.6.1.). Non-residents are subject to tax on capital gains only where the capital gains are from “taxable Australian

56

Corporate Taxation

Australia

concessional imputation rules under the Trans-Tasman imputation system (see section 1.1.).

property” assets. If a CGT event happens to a non-resident, capital gains and losses in respect of assets that are not taxable Australian property assets are disregarded.

Foreign income and capital gains may be declared as “foreign conduit income” and not subject to withholding tax when on-paid to non-residents.

Taxable Australian property includes Australian real property, non-portfolio indirect interests in Australian real property and assets used in carrying on a business through an Australian permanent establishment.

6.3.2. Interest

Income earned by a non-resident corporation through an Australian trust (fund) is subject to tax as follows: – Australian-sourced interest, dividends, royalties: as per applicable withholding rates (see section 6.3.); – net capital gains from taxable Australian property and other Australian-sourced income: where income is earned through a trust and (i) the trust qualifies as a “managed investment trust”, (ii) the payment is classified as a “fund payment” (essentially income that is not a dividend, interest or royalty) and (iii) the recipient is a resident of a country that has an effective information exchange agreement with Australia, the rate is a final tax of 15% from 1 July 2012; otherwise the rate is 30% as a non-final tax for corporate recipients; and – foreign income: not subject to tax.

Interest paid or accrued to non-residents (other than to an Australian permanent establishment of a non-resident) is subject to a final withholding tax of 10% on the gross amount, which may be reduced under a tax treaty. Certain interest payments are not subject to tax, for example interest on certain publicly offered debentures, etc. Interest withholding tax of 5% may apply to interest recorded in the books of an Australian branch of a foreign financial institution in respect of the notional borrowings from the non-resident. The definition of “interest” is broad and includes issue discounts, and is subject to the “debt/equity” rules, which consider the substance of the arrangement and may reclassify the payment as a dividend.

Non-residents are able to claim foreign tax credits for foreign tax paid in relation to their Australian assessable income (unless the foreign tax is levied on the residence basis).

6.3.3. Royalties

Royalties paid or accrued to non-residents (other than to a permanent establishment of a non-resident) are subject to a final withholding tax of 30% on the gross amount, which may be reduced under a tax treaty. The definition of royalties in the domestic legislation is broader than the definition in the tax treaties concluded by Australia or in the OECD Model Convention.

See section 6.3. for withholding taxes. 6.2.2. Taxes on capital

There is no net worth or real estate tax.

6.3.4. Other

6.2.3. Administration

Payments of management fees, fees for technical services and rental income are normally not subject to withholding tax if there is no permanent establishment and the fees are not of a type discussed below.

If income received by a non-resident is subject to a final withholding tax and the tax is properly withheld, there should be no filing requirements for the non-resident (see section 6.3.). Otherwise, the requirements for non-residents to file tax returns are the same as those for residents. See section 1.8. for tax compliance and administration.

Foreign insurers are taxed at 3% of gross premiums received (excluding life insurance premiums), as a final tax. Premiums paid to non-resident reinsurers are not deductible and not subject to withholding tax. However, if a resident insurer elects to treat premiums paid to a non-resident reinsurer as deductible, premium payments will also be subject to tax at 3% of the gross amount. The payment is not final for the reinsurer.

6.3. Withholding taxes on payments to nonresident companies 6.3.1. Dividends

Australia treats 5% of the gross fares or freight charges for transport from Australia of passengers, mail or freight by non-resident operators as taxable income of the operators. A non-final tax is withheld from payments to nonresidents relating to casino junkets (3%), entertainment and sports activities (corporate tax rate, or marginal tax rates for non-resident individuals), and contracts for works (5%).

Dividends paid to non-residents (other than to an Australian permanent establishment of a non-resident) are subject to a final withholding tax of 30% of the gross amount, which may be reduced under a tax treaty. Certain dividends are not subject to tax, for example fully franked dividends, distributions of conduit income, etc. The definition of a dividend is subject to the “debt/equity” rules, which consider the substance of the arrangement and may reclassify the payment as a payment of interest.

Income distributions to non-residents made by Australian managed investment trusts or intermediaries are subject to a final withholding tax, to the extent that the distribution is not a dividend, interest, royalty, foreign income or capital gains on assets that are not taxable Australian property assets (see section 6.2.1.).

Payments by a non-resident of dividends sourced from Australian profits may also be subject to Australian tax. Payments to residents of New Zealand may be subject to

57

Australia

Corporate Taxation

If non-resident beneficiaries are presently entitled to Australian-sourced income of an Australian resident trust (that is not a managed investment trust), the trustee is required to pay tax on behalf of the beneficiaries. A special withholding regime applies to natural resource payments.

Netherlands New Zealand Norway Papua New Guinea Philippines Poland Romania Russia Singapore Slovak Republic South Africa Spain Sri Lanka Sweden Switzerland Taiwan Thailand Timor-Leste21 Turkey United Kingdom United States Vietnam

There is no branch profits/remittance tax. It was proposed that, from 1 July 2016, non-residents be subject to a non-final 10% withholding tax on proceeds from a sale of taxable Australian property exceeding AUD 2.5 million. This proposal has not yet been enacted. 6.3.5. Withholding tax rates chart

The following chart contains the withholding tax rates that are applicable to dividend, interest and royalty payments from Australia to non-residents under the tax treaties in force as at the date of review. Where, in a particular case, a treaty rate is higher than the domestic rate, the latter is applicable. If the treaty provides for a rate lower than the domestic rate, the reduced treaty rate may be applied at source. Dividends1 Individuals, Qualifying companies companies (%) (%) Domestic Rates Companies: Individuals: Treaty Rates Treaty With: Argentina Austria Belgium Canada Chile China (People’s Rep.)7 Czech Republic Denmark Fiji Finland France Germany Hungary India Indonesia Ireland Italy Japan Kiribati Korea (Rep.) Malaysia Malta Mexico

0/30 0/30

0/30 n/a

Interest2

Royalties

(%)

(%)

0/5/10 0/10

30 30

1.

15 15 15 15 15

103 15 15 53 53

12 10 10 10 5/105

10/154 10 10 10 5/106

15

15

10

10

5/158 15 20 15 15 15 15 15 15 15 15 10 20 15 15 15 15

15 15 20 0/59 0/510 15 15 15 15 15 15 0/5/1513 20 15 03 15 03

10 10 10 0/105 0/105 10 10 15 10 10 10 0/105 10 15 15 15 10

10 10 15 5 511 10 10 10/1512 10/1512 10 10 511 15 15 15 10 10

2.

3.

4.

58

Dividends1 Individuals, Qualifying companies companies (%) (%) 15 15 15 0/59 15 0/59

Interest2

Royalties

(%) 10 0/105 0/105

(%) 10 5 5

15 15/2514 15 15 15 15

15 15/2514 15 53 516 15

10 15 10 10 10 10

10 15/2515 10 10 10 1017

15 15 15 15 15 15 10/1518 –19 15 15

15 53 15 15 15 0/59 10/1518 15/2019 15 53

10 0/105 10 10 10 0/105 10 10/2520 10 10

10 5 10 10 10 5 12.5 15 10 10

15 15 15

0/59 0/59 15

10 10 10

5 5 10

Many of the treaties state the application of a rate to “franked dividends”. It should be noted that the payment of a franked dividend does not attract dividend withholding tax in Australia regardless of whether there is a treaty or whether the treaty includes such a term. In practice, domestic dividend withholding rules apply only to the unfranked portion of the dividend. Many of the treaties provide for an exemption for certain types of interest, e.g. interest paid to public bodies and institutions or in relation to sales on credit. Such exemptions are not considered in this column. The Australian domestic rate for interest withholding tax is 10%. If a treaty provides for a higher rate, the domestic rate is levied instead. The rate generally applies with respect to participations of at least 10% of the capital or voting power, as the case may be. The protocol to the treaty with Chile provides that if, in either contracting state, the tax imposed on dividends and on profits out of which such dividends are paid exceeds in the aggregate 42%, the contracting states shall consult each other with a view to agreeing to any amendment of the paragraph 2 of the dividend article as appropriate. The lower rate applies to copyright on literary and any other artistic work, scientific, industrial or commercial equipment or information.

Corporate Taxation

Australia

5.

The lower rate applies to interest derived by a financial institution (as defined) which is unrelated to and dealing wholly independently with the payer. However, 10% applies if the interest is paid as part of an arrangement involving back-to-back loans, or other arrangements that are economically equivalent and intended to have a similar effect. In the treaty with Switzerland, the 0% rate also applies, in the case of Australia, to a resident of Australia deriving such interest from the carrying on of complying superannuation activities, but 10% applies if the beneficial owner of the interest participates directly or indirectly in the management, control or capital, or has an existing or contingent right to participate in the financial, operating or policy decisions, of the issuer of the debt-claim. The treaty with Chile has additional provisions for a higher rate on interest arising in Chile, and also contains a most-favoured nation clause in the protocol to the treaty, whereby if Chile agrees, in a tax treaty with any other country, to limit the withholding tax in Chile on interest derived by a financial institution to a rate lower than 5%, or derived by a government to a rate lower than 10%, Chile will enter into immediate negotiations with Australia with a view to making a comparable adjustment. 6. The lower rate applies to royalties for the use of, or the right to use, any industrial, commercial or scientific equipment. The protocol to the treaty contains a most-favoured nation clause, whereby if, in a tax treaty with any other State, Chile agrees that payments for industrial, commercial or scientific equipment will not be treated as royalties for the purposes of that treaty, or limits the tax charged in Chile on royalties arising in Chile to a rate below that provided for in paragraph 2 of Article 12 of this Convention, Chile shall without delay enter into negotiations with Australia with a view to providing the same treatment for Australia. 7. The treaty does not apply to Hong Kong or Macau. 8. A rate of 5% applies for dividends where the rate of tax does not exceed 5% under Australian law. 9. A rate of 5% applies where the beneficial owner is a company that holds directly at least 10% of the voting power in the paying company; a 0% rate applies where the beneficial owner is a company that has owned shares representing 80% or more of the voting power in the paying company for a 12-month period ending on the date the dividend is declared (subject to conditions of listing and entitlement to treaty benefits, etc.). Under the treaty with New Zealand, there is no withholding tax on dividends paid to a beneficial owner that holds directly no more than 10% of the voting power of the dividend-paying company, and the beneficial owner is the government, or political subdivision or a local authority thereof (including a government investment fund) or, under the treaty with Switzerland, a resident of Australia deriving such dividends from the carrying on of complying superannuation activities. Under the treaty with the United States, exceptions apply in the case of dividends paid by a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT). 10. The rates apply, in the case of Australia, to dividends paid to a company that holds directly at least 10% of the voting power of the dividend-paying company (0% applies if the underlying profits have been subject to tax at the normal corporate tax rate). 11. Royalties include forbearance payments and exclude payments for the use of spectrum licences (there is no exclusion in the treaty with Switzerland). 12. The lower rate applies to payments for the use of, the right to use or forbearance of the use or the right to use any industrial, commercial or scientific equipment, and the rendering of ancillary technical or consultancy services or technical assistance. In the treaty with Indonesia, the lower rate also applies to payments for the supply of scientific, technical, industrial or commercial knowledge or information. Different rates applied during the first 5 years of the treaty with India.

13. A 0% rate applies to dividends paid to a company that has owned directly at least 80% of the voting power of the dividend-paying company for the 12-month period ending on the date on which entitlement to the dividends is determined, and the recipient company is a publicly traded company, or at least 50% of the aggregate votes and value of its shares is owned directly or indirectly by up to 5 such publicly traded companies, or has received a determination of entitlement to the treaty benefits; 5% applies to dividends paid to a company that owns directly at least 10% of the voting power of the dividend-paying company. In the case of Australia, 15% applies to distributions from an Australian-managed investment trust other than to a Japanese beneficial owner which holds, or has held at any time in the 12-month period preceding the date on which the distributions are made, directly or indirectly, at least 10% of the capital in the investment trust. 14. The lower rate applies if double tax relief by way of a rebate or credit is given to the beneficial owner of the dividends (being a company) in accordance with article 24 of the treaty. 15. The lower rate applies where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities. 16. The rate applies to dividends paid to a company (other than a partnership) which holds directly at least 10% of the capital of the paying company, which invested at least AUD 700,000 or an equivalent amount in Russian roubles in the payer’s capital. 17. The rate does not apply to payments in respect of the operation of mines or quarries, the exploitation of natural resources, or for the use of, or the right to use, motion picture films, tapes for use in connection with radio broadcasting or films or video tapes for use in connection with television. 18. The lower rate applies to franked dividends. In practice, domestic dividend withholding rules apply only to the unfranked portion of the dividend. 19. Where the beneficial owner of the dividends is a company, excluding a partnership, which holds directly at least 25% of the capital of the dividend-paying company: 15% if the paying company is engaged in an industrial undertaking, 20% if otherwise. In all other cases, the domestic rate applies. 20. The lower rate applies for interest paid to financial institutions. 21. The Timor Sea Treaty in relation to the petroleum-related activities conducted in the Joint Petroleum Development Area. Special provisions apply to income of third country residents under the treaty. Under the 2006 Treaty on Certain Maritime Arrangements in the Timor Sea, the Timor Sea Treaty is valid until 2057.

7. Anti-Avoidance 7.1. General The Commissioner may apply a general anti-avoidance rule to disregard a tax benefit from schemes entered into with a primary or dominant purpose of obtaining the tax benefit. The general anti-avoidance rule was amended with effect from 16 November 2012 to ensure its effective operation, in particular to strengthen the ability of the Commissioner to demonstrate that the taxpayer obtained a tax benefit from the scheme. There is no specific legislation that aims at counteracting transactions in or with residents in tax havens, although the general anti-avoidance rule, CFC or transferor trust rules (see section 7.4.) may apply to such transactions. Transactions with specified tax havens must be reported in a resident’s tax return. There are a number of specific anti-avoidance rules, such as the following: – value shifting rules may apply to transfers not made at arm’s length between commonly controlled entities or to schemes shifting value between share or

59

Australia

–

– – – –

Corporate Taxation

The rules do not require the preparation of transfer pricing documentation, but the lack of documentation prepared before the lodgement of the relevant income tax return will prevent the taxpayer from arguing a reasonable position for the purposes of determining the level of tax shortfall penalties. The government has announced that it intends to require, from 1 January 2016, all large multinational companies operating in Australia to submit the global master file, local file and all country-bycountry reports to the ATO together with the tax return.

debt interests. The result of a value shift may be an adjustment of the cost base of membership interests or recognition of a capital gain; specific anti-avoidance rules apply to transactions between a closely held company and its shareholders. In particular, certain undocumented loans to shareholders may be reclassified as dividend payments; income derived via a personal services company may be attributed to the shareholder providing the services; the operation of the imputation regime is subject to a number of specific anti-avoidance provisions; deductions related to asset financing (e.g. tax-preferred use of assets, limited recourse debts) may be subject to specific anti-avoidance rules; and imputation credits may be disallowed in arrangements designed to manipulate the imputation system.

In the attribution of profits to permanent establishments, the single entity approach (and not the Authorized OECD Approach) should be followed. Amendments under these rules must be made within 7 years after the assessment (in contrast to the general term of 4 years). Repealed transfer pricing rules

Promoters of tax exploitation schemes may be subject to civil penalties under the promoter penalty rules.

Prior to 1 July 2013, Australia had two sets of transfer pricing provisions operating concurrently. As such, a transfer pricing adjustment for periods before 1 July 2013 may be made under either domestic law in respect of international non-arm’s length dealings or directly under an applicable tax treaty.

From 1 January 2016, the ATO may apply a new multinational anti-avoidance rule where it determines that an entity that makes supplies to customers in Australia is entering into a scheme with a principal purpose of avoiding the existence of a permanent establishment of that entity in Australia. The Commissioner may also apply a penalty of up to 120% of the additional tax imposed under the multinational anti-avoidance rule.

Under the domestic rules (division 13 of the ITAA36), the transfer pricing rules can apply to any international dealings, including dealings with related or unrelated parties. The sole test is whether international dealings are at arm’s length (see also section 7.1. for value shifting rules). Any pricing methodology can be used and there is no mandatory requirement for contemporaneous transfer pricing documentation. While the ATO had been administering the domestic rules in line with the OECD Transfer Pricing Guidelines, the Full Federal Court in the SNF case ruled that the use of the OECD Guidelines, and in particular profit-based methods, may not be justified by the domestic legislation.

7.2. Transfer pricing Current transfer pricing rules The updated transfer pricing rules in subdivisions 815-B and 815-C came into effect from 1 July 2013. These rules apply to transfer pricing adjustments for the purposes of both tax treaties and domestic rules. Importantly, their application under a tax treaty is not constrained by the application under the domestic rules.

As a result, the government introduced new transfer pricing provisions (division 815 of the ITAA97) that operated concurrently with the existing rules and ensured that the treaty transfer pricing rules could be applied independently from the domestic provisions and that in the application of the treaty rules regard be given to the relevant OECD documents. In addition, these rules allowed the application of the transfer pricing rules to determine the debt of an entity even where the overall debt satisfied the thin capitalization test (see section 7.3). The new rules were enacted in 2012 with effect from 1 July 2004.

Australia’s transfer pricing provisions are not anti-avoidance provisions in the sense that they do not require the existence of a tax avoidance purpose before they can be applied. All that is required is that an international transaction be carried out for a non-arm’s length consideration. Conversely, the provisions can only be applied where the consideration is not at arm’s length. The application of the transfer pricing provisions does not require the international parties to be related. The current rules seek to apply the 2010 OECD Transfer Pricing Guidelines and 2010 OECD MTC Commentaries (to the extent allowed by the actual treaty wording) to determine whether an entity received a transfer pricing benefit from the operation of non-arm’s length “conditions” and, if a transfer pricing benefit has been received, to ascertain the Australian tax liability based on arm’s length conditions. The definition of arm’s length conditions includes commercial, financial and other relevant conditions that relate to cross-border dealings.

Country-by-country reporting For income years starting on or after 1 January 2016, Australian taxpayers that are members of large global groups (annual group turnover of AUD 1 billion or more) are required to provide to the ATO a master file, a local Australian file and a country-by-country report. The master file and country-by-country report may be provided through a foreign tax authority sharing this information with the ATO. While the contents of these reports are expected to be broadly in line with the relevant OECD requirements, the ATO has not yet released detailed requirements for these reports.

The conditions may operate in respect of dealings with related as well as unrelated parties; also in respect of dealings with partnerships and trusts.

60

Corporate Taxation

Australia

The calculation of attributable income depends on whether the CFC is a resident in a listed or unlisted country. Listed countries are Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States. If the CFC passes the active income test, there is no attribution of income other than specified income, which is attributed unconditionally (e.g. notional FIF (see below) income of the CFC). If the CFC fails the active income test, only specified concessionally taxed income will be attributed if the CFC is a resident in a listed country; if the CFC is a resident in an unlisted country, “tainted” income of the CFC is attributed (which is, generally, income from dealing with Australian residents and passive income).

In addition, Australian taxpayers that are members of large global groups may be required to prepare and file with the ATO a set of general purpose financial statements. The ATO is then required to submit a copy of these statements to the Australian Securities and Investment Commission. Advance pricing agreements (APAs) Taxpayers are able to approach the ATO to negotiate unilateral, bilateral or multilateral APAs that normally cover a period of 3 to 5 years.

7.3. Thin capitalization

Attributable income is taxed as statutory income in the hands of the attributable taxpayer (i.e. not as dividends). Subsequent distribution of attributed income is not subject to Australian tax, but a foreign tax credit for foreign tax paid on the distribution may be claimed.

Thin capitalization rules apply to both inward and outward investments to deny excessive debt deductions. Debt deductions include interest expenses in respect of all debt of the taxpayer. Further, debt/equity rules may recharacterize interest payments as dividends or vice versa.

Foreign investment fund (FIF) rules were repealed with effect from 1 July 2010 and are being replaced by foreign accumulation fund provisions which, when enacted, will target investments in “foreign accumulation funds” made with a sole or dominant purpose of obtaining a tax deferral. The rules attributed the income of a foreign passive investment vehicle to Australian investors. FIF rules did not apply to investments in an active business overseas; the legislation provided a list of businesses that are not “active”. If the investment was not in an active business, there was no control requirement for a proportion of the income of that business to be attributed to the resident investor. Attributed income was calculated based on the market value of the investment, deemed rate of return or by calculation.

From 1 July 2014, thin capitalization measures (the “safe harbour” test) apply a debt-to-equity ratio of 1.5:1 to all debt of an entity (and not just related foreign party debt). For financial entities, the debt-to-equity ratio is 15:1. Generally, no reduction of debt deductions will be made if total debt deductions do not exceed AUD 2 million, all debts are at arm’s length or the total debt does not exceed 60% of the net assets of the taxpayer. Special rules apply to banks and other financial entities. In addition to the 60% safe harbour test, taxpayers are allowed to rely on arm’s length or worldwide gearing tests.

Transferor trust rules assess Australian transferors of assets to a foreign discretionary trust on the value of those assets.

While the accounting values of assets and liabilities (AIFRS) are generally used in the thin capitalization calculations, some accounting standards are disregarded (e.g. recognition of deferred tax balances or surpluses or deficits in defined benefit superannuation plans). The taxpayer may in some cases choose to recognize internally-generated assets for thin capitalization purposes.

8. Value Added Tax 8.1. General The Australian goods and services tax (GST) is a value added tax, with a number of important differences from a European-style VAT.

7.4. Controlled foreign company Controlled foreign company (CFC) rules aim to attribute the income of a foreign company controlled by Australian residents to its Australian controllers.

Briefly, persons who are required to be registered for GST charge the tax at 10% on their supply (unless the supply is not a taxable supply, or it is a GST-free or inputtaxed supply), and claim input tax credits on acquisitions (unless the acquisition is not creditable or is in relation to an input-taxed supply).

CFC rules apply to both companies and individuals if three tests are met in the following order: – a company is a CFC; – there is an Australian attributable taxpayer; and – there is attributable income.

A special regime for claiming reduced input tax credits is applied to supplies of financial services (even though supplies of financial services are input taxed).

If all the tests are met, a part of the attributable income of the CFC is attributed to the attributable taxpayer in proportion to the taxpayer’s attribution percentage.

8.2. Taxable persons

A company is a CFC if five or fewer residents have 50% associate-inclusive control, or a single resident has 40% associate-inclusive control, or a group of five or fewer residents has actual control, of the company. An attributable taxpayer must have at least 10% associate-inclusive control (or 1% if the taxpayer is one of the five or fewer residents controlling the CFC).

The registration threshold is annual taxable supplies (past or projected) of AUD 75,000 (AUD 150,000 for nonprofit organizations). The threshold applies to an enterprise carried on by a person. If a taxpayer carries on one or more enterprises, a separate threshold will be applica-

61

Australia

Corporate Taxation

ble to each enterprise. Certain enterprises, for example operation of taxis, require registration irrespective of turnover.

9.2. Transfer tax 9.2.1. Immovable property

8.3. Taxable events

Transfers of immovable property may be subject to a state stamp duty (see section 9.3.).

GST is levied on the “taxable supply” of goods and services by a taxable person in Australia, and the importation of goods and services by any person into Australia.

9.2.2. Shares, bonds and other securities

Transfers of shares, bonds and other securities may be subject to a state stamp duty (see section 9.3.).

8.4. Taxable amount

9.3. Stamp duty

GST is levied on the price of the taxable supply, which is the market value of the consideration received for the supply.

Stamp duty is a state tax and therefore the scope of dutiable transactions, exceptions, rates, etc. depends on the relevant state stamp duty legislation. Generally, conveyances of property are subject to ad valorem stamp duties. Other transfers, declarations of trust, settlements, leases and hiring arrangements, loan securities, insurance policies, etc. may also be subject to stamp duties. Stamp duty will apply to dutiable transactions having a territorial nexus to the state or territory. Whether territorial nexus exists will depend on the applicable rules of the state or territory.

For importations, GST is levied on the value of the importation, which includes the customs value, transport costs for delivery to Australia, transit insurance costs and customs duties.

8.5. Rates The tax rate is 10%, except where the supply is zero rated or input taxed, in which case no GST is charged. Supplies of food, health services, education, export supplies, etc. (GST-free supplies) are zero rated.

9.4. Customs duty

8.6. Exemptions

Australia imposes a number of customs duties, both on import and export, depending on the type of goods, country of origin, etc. The collection of customs duties is administered by the Australian Customs Service.

The provision of the following supplies is not subject to GST: – non-taxable supplies (e.g. supplies not connected with Australia); and – input-taxed supplies (financial supplies, residential rent and premises, etc.), which are non-creditable supplies.

9.5. Excise duty Excise duty is levied on alcohol, tobacco and petroleum products. The collection of excise duties is administered by the ATC.

An entity making financial supplies may be able to recover a percentage of its input tax credits (i.e. GST paid on acquisitions) if certain criteria are met by the entity.

9.6. Other taxes 9.6.1. Luxury car tax

8.7. Non-residents

Sales or imports of cars with a GST-inclusive value in excess of AUD 63,184 (AUD 75,375 for fuel-efficient cars) are subject to a luxury car tax at 33% of the excess of the GST-inclusive value of the car over the threshold, regardless of the use of the car (private or business). No credit is available for this tax.

Generally, the registration requirements for non-residents are the same as for residents. Reverse charge rules apply for the acquisition of services from non-residents which are not wholly for creditable purposes. A refund scheme is available to individuals for the export of goods purchased in Australia.

9.6.2. Wine equalization tax

9. Miscellaneous Taxes

The sale of wine is subject to a wine equalization tax of 29% in addition to GST. No credit is available to retailers, but wine producers may claim a rebate.

9.1. Capital duty There is no capital duty.

62

Estonia This chapter is based on information available up to 1 March 2016.

Abbreviations

generally in the same manner as are resident corporate taxpayers (see section 6.2.1.2.).

Abbreviation KMS MaaMS MKS RLS SMS TKindlS

This survey is restricted to public and private limited companies, as well as to general and limited partnerships, which are treated as separate taxable entities. All these entities will be referred to as companies.

TMS

Name in original language (English name) Käibemaksuseadus (Value Added Tax Act) Maamaksuseadus (Land Tax Act) Maksukorralduse seadus (Taxation Act) Riigilõivuseadus (State Fees Act) Sotsiaalmaksuseadus (Social Tax Act) Töötuskindlustuse seadus (Unemployment Insurance Act) Tulumaksuseadus (Income Tax Act)

1.2.1. Residence

A company is resident in Estonia if it is founded under Estonian law (section 6 of the TMS).

Introduction

1.3. Taxable income

Distributions of corporate profits are subject to distribution tax. No corporate income tax applies to retained earnings. In addition, companies are subject to social security contributions, land tax, value added tax and various excise taxes. Municipalities are authorized to introduce local taxes, most notably advertising tax. The importance of the local taxes, however, is very small.

1.3.1. General

From 1 January 2011, the currency is the euro (EUR).

1. Corporate Income Tax 1.1. Type of tax system Corporate taxpayers are not subject to corporate income tax. Instead, they are subject to a distribution tax on distributed profits, including transactions that are considered as hidden profit distributions (e.g. fringe benefits, gifts and donations, non-business expenses). No tax is levied on any retained earnings.

1.2. Taxable persons Taxable persons include (section 2 of the TMS): – resident public limited companies (AS) and private limited companies (OÜ); – resident general partnerships (TÜ) and limited partnerships (UÜ); and – resident cooperatives, associations and foundations, as well as public-law legal persons. The above categories are subject to an unlimited tax liability as residents. Similar non-resident entities are subject to tax only insofar as they derive certain types of Estonian-source income (see section 6.2.). Profits derived by a non-resident through a permanent establishment in Estonia are subject to distribution tax,

The income of a resident company is its worldwide income, but it is not taxable as long as it is retained in the company; only distributions are taxable (sections 48-52 of the TMS). Upon distribution, tax is levied on the net amount of the distribution. The taxable base for the distribution tax comprises the following components (sections 48-52 of the TMS): – fringe benefits (see section 1.3.1.1.); – gifts, donations and entertainment expenses (see section 1.3.1.2.); – dividends (see section 1.3.1.3.); – profit adjustments (see section 1.3.1.4.); and – non-business expenses (see section 1.3.1.5.). 1.3.1.1. Fringe benefits Fringe benefits (benefits in kind) granted to employees are subject to distribution tax in the hands of the employer (section 48 of the TMS). Benefits so taxed are exempt from individual income tax in the hands of the recipient. Alternatively, the employer may treat the benefits as the recipient’s employment income, which is subject to a withholding tax and is included in the employee’s taxable income for individual income tax purposes. Fringe benefits include all goods, services, other benefits in kind and benefits or gifts that can be valued in terms of money, which are granted by an employer to an employee in respect of employment, or by a legal person to members of the management and supervisory boards or in connection with a long-term contractual relationship (section 48 of the TMS). Benefits granted by companies (both resident and non-resident) within the same group as the employer are considered as granted directly by the employer and are, therefore, taxable at the level of the employer.

385

Estonia

Corporate Taxation

Examples of fringe benefits include (section 48 of the TMS): – the full or partial covering of housing expenses; – the non-business use of a vehicle or any other employer’s asset free of charge or at a preferential cost; – insurance premiums, other than mandatory premiums, paid by an employer; – per diem allowances for business trips, in excess of the amounts prescribed by the government; – compensation for the use of a private vehicle in excess of the amounts prescribed by the government; – loans bearing an interest rate below the market conditions, unless the interest rate at the moment of the payment thereof is at least double of the last interest rate applicable to the main refinancing operations of the European Central Bank before 1 January or 1 July; – gratuitous transfer, discount sale and exchange at a price lower than market value of an asset, securities, proprietary rights or services; – purchase of an asset, securities, proprietary rights or services at a price higher than market value; and – waiving a monetary claim, except where the estimated reasonable costs of collection would exceed the claimed amount. The granting of stock options is not considered a fringe benefit. Profits from the sale of the option or the value of the shares received by the employee at the exercise of the option are considered as fringe benefit only if the employee exercises the options within 3 years from the granting. 1.3.1.2. Gifts, donations and entertainment expenses In general, all gifts made by companies are subject to distribution tax (section 49 of the TMS). Gifts so taxed are exempt from income tax in the hands of the recipient. Alternatively, gifts can be considered to be taxable income of the recipient, which is generally subject to withholding tax and is included in the taxable income of the recipient. Gifts made by an employer to an employee are treated as fringe benefits. Goods given or services rendered free of charge for advertising purposes are not taxed if their value does not exceed EUR 10 each (excluding VAT). Gifts and donations made to non-profit organizations approved by the government (including non-profit organizations established in EEA countries that comply with the conditions applicable to respective Estonian organizations) are exempt from distribution tax up to 3% of the amount of the personalized social tax due for the current year or up to 10% of the annual profits for the previous financial year, whichever is higher (section 49 of the TMS). In respect of entertainment expenses, there is a general tax-exempt limit of EUR 32 per month (section 49 of the TMS). In addition, companies are entitled to pay monthly tax-exempt entertainment expenses of up to 2% of the amount of the personalized social tax due for the current month. If a taxpayer does not pay entertainment expenses in every month of a calendar year, any unused limits may be carried forward within the same calendar year.

1.3.1.3. Dividends In general, dividends and other profit distributions, whether in monetary or non-monetary form, are subject to distribution tax (see section 1.6.1.). Liquidation proceeds and payments upon the reduction of share capital or redemption of shares are taxed as profit distributions to the extent that these payments exceed the contributions made to the equity capital of the company. 1.3.1.4. Profit adjustments The distribution tax is levied on transfer pricing adjustments, i.e. the amount of the income the taxpayer would have received or the loss the taxpayer would not have sustained had the value of the transaction conducted with a related person been such as used by unrelated persons in similar transactions (see section 7.2.). 1.3.1.5. Non-business expenses The distribution tax is levied on non-business expenses, unless it has already been paid on such expenses under the rules on the above-mentioned forms of distribution (see sections 1.3.1.1. to 1.3.1.4.). Non-business expenses include the following (sections 51 and 52 of the TMS): – statutory penalties and interest for late payment of tax; – cost of property that was subject to special confiscation from the taxpayer; – certain pollution charges; – admission and membership fees paid to non-profit associations, unless participation in the relevant association is directly related to the business of the taxpayer; – expenses that the taxpayer cannot certify by a source document meeting accounting requirements; – expenses incurred for purchasing services not related to the business of the taxpayer; – acquisition cost of property not necessary for business; – acquisition cost of securities issued by a legal person located in a low-tax territory (see section 7.1.); – acquisition cost of a participation in a legal entity located in a low-tax territory; – payment of a fine for delay or penalty, compensation for damage without a court decision to a legal person located in a low-tax territory; – granting a loan or making an advance payment to a legal person located in a low-tax territory or for the acquisition of a claim against a legal person located in a low-tax territory in any other manner; and – bribes. 1.3.2. Exempt income

In general, there are no types of income which would not bear distribution tax upon distribution. 1.3.3. Deductions

As there is no tax on retained earnings, it is generally not possible to make deductions for tax purposes.

386

Corporate Taxation

Estonia

1.3.4. Depreciation and amortization

1.8.2. Tax returns and assessment

As there is no annual net taxation of corporate profits, legal entities are also not subject to tax depreciation and amortization rules.

Companies registered for VAT purposes must file the tax return by the 10th day of the calendar month following the taxable period (section 54 of the TMS). Companies not so registered must file the tax return only if tax is due for the period. There is a joint form (form TSD) for filing the information concerning distribution tax, withholding tax on payments made to individuals and social tax.

1.3.5. Reserves and provisions

As there is no tax on retained earnings, no reserves and provisions are applicable.

1.4. Capital gains Capital gains derived by companies remain exempt from tax until a distribution is made (see section 1.3.1.).

1.8.3. Payment of tax

The taxpayer must remit the distribution tax due to the bank account of the tax board by the due date of the tax return (section 54 of the TMS). 1.8.4. Rulings

1.5. Losses Since there is no tax on retained earnings, losses have no significance for tax purposes. Profit distributions are subject to distribution tax even if the company has an accounting loss (sections 18 and 50 of the TMS). Losses, however, generally reduce the accounting profit from which the taxable distributions are made. 1.5.1. Ordinary losses

A taxpayer can apply for an advance ruling from the tax authorities on his prospective transactions. Such rulings are binding on the tax authorities but not on the taxpayer. No rulings can, however, be issued on transfer pricing arrangements between related persons.

2. Transactions between Resident Companies 2.1. Group treatment

Not applicable.

The Estonian tax legislation does not include a concept of group taxation.

1.5.2. Capital losses

Not applicable.

2.2. Intercompany dividends

1.6. Rates

In general, all companies making dividend distributions are subject to a distribution tax at the rate mentioned in section 1.6.1.

1.6.1. Income and capital gains

The distribution tax is levied at a rate of 20/80 (approximately 25%) of the net amount of the profit distribution, corresponding to 20% on the gross amount (distribution + distribution tax) of the distribution (section 4 of the TMS). The rate was 21/79 before 1 January 2015, corresponding to 21% on the gross amount. 1.6.2. Withholding taxes on domestic payments

There are no withholding taxes on payments to resident companies. For payments to non-residents, see section 6.3.

1.7. Incentives No tax incentives are currently offered.

1.8. Administration 1.8.1. Taxable period

In general, the taxable period for corporate distribution tax purposes is the calendar month (section 3 of the TMS).

However, where a resident parent company redistributes dividends that it has received from its subsidiaries, the further distribution by the resident parent company is exempt from distribution tax if (i) the parent holds at least 10% of the capital or voting power of the subsidiary and (ii) one of the following conditions is met (section 50 of the TMS): – the subsidiary is resident in Estonia or another EEA country or Switzerland and is a taxable person there (it is not required that income tax has actually been paid); or – the subsidiary is resident outside the EEA and Switzerland and either (i) the subsidiary was subject to income tax on its profits (i.e. tax has been paid, or assessed but not yet due), or (ii) the dividends received by the parent were subject to withholding tax. If these conditions are not met, or the subsidiary is resident in a low-tax territory (see section 7.1.), the further distribution will be subject to distribution tax (section 50 of the TMS). Ordinary credit for foreign withholding taxes paid will in that case be allowed for foreign dividends, whereas domestic dividends will suffer double taxation. Liquidation proceeds and capital reductions, which would normally be taxable (see section 1.3.1.3.), paid out

387

Estonia

Corporate Taxation

of exempt dividends mentioned above or out of liquidation proceeds and capital reductions which were taxed, or the underlying income of which was taxed, are exempt from distribution tax if the parent company held at least 10% of the capital or voting power of the subsidiary at the time of payment. In addition, a resident company is exempt from distribution tax upon the distribution of dividends out of profits attributable to its permanent establishment situated in an EEA country or Switzerland (section 50 of the TMS). If the dividends are distributed out of profits attributable to a resident company’s permanent establishment situated in any other foreign country, the distribution is exempt from distribution tax if the permanent establishment’s profits have been subject to income tax (i.e. tax has been paid, or assessed but not yet due).

3. Other Taxes on Income

Unemployment insurance contributions The purpose of the unemployment insurance is to pay compensation to employees and civil servants in the case of unemployment or insolvency of the employer. Unemployment insurance contributions must be paid by employers and employees on any monetary employment income of the employees. Contributions are also due on the payments made to an individual under a service contract, unless the individual is registered with the commercial register or with the tax authorities as a sole proprietor. Contributions are equally due in respect of non-resident employees working in Estonia. Non-monetary employment income and fees paid to the members of management and supervisory boards are not subject included in the contribution base. The employer’s contribution is levied at a rate of 0.8% (section 41 of the TKindlS). For the unemployment insurance contributions payable by employees, see Individual Taxation section 3.

There are no other taxes on corporate income.

5. Taxes on Capital

4. Taxes on Payroll

5.1. Net worth tax

4.1. Payroll tax

There is no net worth tax in Estonia.

There is no payroll tax.

5.2. Real estate tax

4.2. Social security contributions Social security contributions are payable by employers on the payments to their employees (sections 3 and 4 of the SMS). Social security contributions are also due by resident companies making payments to the members of the board of directors or the supervisory board, or to persons who are not employees, but who are also not registered with tax authorities as self-employed individuals. The social security contributions consist of social insurance and health insurance contributions. The contributions are computed on all payments made to individuals, except those specifically exempted by law. The minimum monthly contribution base is EUR 390 in 2016. No ceiling amount exists for the social security contributions due by the employer. Fringe benefits are included in the definition of taxable payments. Reimbursements for travel expenses and expenses for the use of personal cars are exempt in established limits. The rate is 33% (20% for social insurance and 13% for health insurance) (sections 7 and 10 of the SMS). The contributions must be paid by the 10th day of the calendar month following the month the payment was made to the individual. Employers do not make contributions to the mandatory funded pension scheme, but are required to withhold the contributions made by their employees. For the social security contributions payable by individual entrepreneurs, see Individual Taxation section 3.

An annual land tax flows into the budget of the municipalities. Taxable persons are the owners or, in specific circumstances, the users of land. Tax is levied on the market value of all land unless specifically exempt (sections 3 and 5 of the MaaMS). The tax rate is established by the municipal council and may vary between 0.1% and 2.5% of the taxable value of the land. With respect to land on which economic activities are restricted, the fixed tax rate is reduced to 50% of the rate. For real estate taxation of individuals, see Individual Taxation section 4.2.

6. International Aspects 6.1. Resident companies For the concept of residence, see section 1.2.1. 6.1.1. Foreign income and capital gains

A resident company is taxable on its worldwide income and worldwide capital gains. Under domestic law, no differences exist in the tax treatment of domestic and foreign income. Thus, foreign income is fully taxable in Estonia at the time of a later distribution (except for certain dividend income and certain income derived from permanent establishments abroad). Retained profits are not taxable. For the treatment of certain dividend income received from foreign subsidiaries, see section 2.2.

388

Corporate Taxation

Estonia

6.1.2. Foreign losses

As Estonian resident companies are not subject to tax on retained earnings, losses have no significance for tax purposes. Losses, however, generally reduce accounting profit from which the taxable distributions are made. 6.1.3. Foreign capital

No net worth tax is imposed in Estonia. Foreign-situs immovable property is not subject to Estonian land tax. 6.1.4. Double taxation relief

Unilateral relief An ordinary tax credit is granted for withholding and income tax levied abroad on any type of foreign-source income derived by a resident company or a permanent establishment of a non-resident company (unless, for profit distributions, the exemptions described in sections 2.2. and 6.2.1.2. apply) (section 45 of the TMS).The foreign tax credit is set off against the distribution tax liability. The allowable credit is computed separately for each country. If higher tax has been paid in a foreign country than would be due under its domestic law or under the applicable tax treaty, only that part of the foreign tax is credited that was paid in accordance with the respective law or treaty (e.g. the foreign withholding tax of 25% is paid even though domestic law requires or the treaty allows only 10%). Treaty relief Under Estonia’s tax treaties, double taxation relief is generally available in the form of an ordinary tax credit. The treaties initialled from 2007, however, generally provide for the exemption method in respect of income other than interest, royalties and non-qualifying dividends. Under domestic law, redistributions of qualifying dividends are exempt from distribution tax irrespective of the credit provisions of the tax treaties. For a list of tax treaties in force, see section 6.3.5.

6.2. Non-resident companies Non-resident companies are those which are not founded under Estonian law. 6.2.1. Taxes on income and capital gains

6.2.1.1. General Non-resident companies are taxable on business income derived from Estonian sources (section 29 of the TMS). Apart from income derived through a permanent establishment in Estonia (see section 6.2.1.2.), taxable business income of a non-resident company includes income from a trade or business carried on in Estonia without a permanent establishment. A non-resident company that is located in a low-tax territory (see section 7.1.) is subject to income tax (by withholding) on all income derived from the provision of

services to an Estonian resident, irrespective of where the services were provided or used (section 29 of the TMS). Capital gains derived by non-residents on the sale of shares in resident companies are generally not taxable in Estonia. The gains are taxable (by assessment), however, if the sale concerns shares in a company, in a contractual investment fund (open-ended fund) or in another pool of assets (e.g. partnership) whose assets for more than 50% were at the time of the sale, or at any period during the 2 years preceding the sale, directly or indirectly made up of Estonian-situs immovable property or buildings regarded as movable property and in which the non-resident had a holding of at least 10% at the time of the sale (section 29 of the TMS). Gains from the exchange of shares in the course of mergers, divisions or other reorganizations are exempt. Capital gains derived by non-residents on the sale of Estonian-situs immovable property, including rights in such property and buildings regarded as movable property, are subject to income tax by way of assessment (section 29 of the TMS). The same applies in respect of gains on movable property if the property was registered in Estonia prior to the disposal. Income of non-resident companies, other than income subject to withholding tax (see section 6.3.), is taxed by assessment in the same manner and at the same rate as income of sole proprietors (see Individual Taxation section 1.5.), unless the non-resident has a permanent establishment in Estonia. 6.2.1.2. Permanent establishments The term “permanent establishment” is defined as a business unit through which the permanent business activities of a non-resident are carried on in Estonia (section 7 of the TMS). A permanent establishment is created as a result of an economic activity of (i) a geographically localized or mobile nature or (ii) a representative authorized to conclude contracts in the name of the non-resident. For a calculation of the taxable income attributable to permanent establishments, the separate entity approach is applied. The income of a permanent establishment is subject to distribution tax in the same manner as income of a resident company, subject to some differences. Besides fringe benefits, gifts, donations, entertainment expenses and non-business expenses that a non-resident company makes through, or on account of, its permanent establishment in Estonia, a non-resident company has to pay distribution tax on the profits attributed to the permanent establishment and taken out of it in either monetary or non-monetary form. However, a non-resident company is exempt from distribution tax on profits distributed by its permanent establishment in Estonia if these profits consist of dividend income that was received from its subsidiaries through, or on account of, its Estonian permanent establishment and if (i) it holds at least 10% of the capital or voting power of the subsidiary that paid the dividend and (ii) one of the following conditions is met (section 50 of the TMS): – the subsidiary is resident in Estonia or another EEA country or in Switzerland and is a taxable person

389

Estonia

–

Corporate Taxation

there (it is not required that income tax has actually been paid); or the subsidiary is resident outside the EEA and Switzerland, and either (i) the subsidiary was subject to income tax on its profits (i.e. tax has been paid, or assessed but not yet due), or (ii) the dividends received were subject to withholding tax.

If those conditions are not met or the subsidiary is resident in a low-tax territory, the distribution tax on profits taken out of the non-resident’s permanent establishment in Estonia is reduced by any foreign withholding tax paid on the dividend. In addition, a non-resident company is also exempt from distribution tax on profits taken out of the permanent establishment in Estonia if these profits consist of exempt liquidation proceeds or capital reductions (see section 2.2.) that were received through, or on account of, its Estonian permanent establishment if it held at least 10% of the capital or voting power of the subsidiary at the time of the payment. 6.2.2. Taxes on capital

There is no net worth tax in Estonia. A non-resident company may be subject to land tax (see section 5.2.) in respect of immovable property situated in Estonia. 6.2.3. Administration

If the income of a non-resident company is derived through a permanent establishment in Estonia, the same assessment rules apply as for resident companies (see section 1.8.). A non-resident company that has no permanent establishment in Estonia must file a tax return for taxable capital gains from movable property by 31 March after the calendar year in which the transaction took place (section 44 of the TMS). In the case of gains from immovable property, the return is due within 1 month of the date of receipt of the gains. Income tax due on capital gains must be paid to the tax authorities within 3 months of the date of the tax return. If a non-resident company that has no permanent establishment in Estonia earns business income subject to taxation in Estonia (see section 6.2.1.1.), it must file an annual tax return in respect of income from Estonian sources, other than income subject to final withholding tax (section 44 of the TMS). The income tax return must generally be filed within 6 months of the end of the calendar year. In the case of termination of activities in Estonia, it must be filed within 2 months of the termination. Income tax due on business income must be paid to the tax authorities within 3 months of the due date of the tax return.

6.3. Withholding taxes on payments to nonresident companies If a non-resident company has a registered permanent establishment in Estonia, there are no withholding taxes on payments to the permanent establishment.

All withholding taxes are levied on gross payments and no deductions are allowed. The withholding taxes are final taxes, and the non-resident recipient has no obligation to file an income tax return for income so taxed. The withholding agent must file a withholding tax return for each month when a payment subject to withholding tax was made. The return must be filed by the 10th day of the month following the date of payment. The tax withheld must be remitted to the tax office by the same date. The withholding agent must provide the recipient with a withholding certificate by 1 February of the following year if so requested by the recipient. As the distribution tax is considered to be an integral part of the corporate tax system, and not a withholding tax, it is not subject to a lower rate under tax treaties. 6.3.1. Dividends

Dividends paid by resident companies to non-resident shareholders are subject to distribution tax (section 50 of the TMS) (see section 2.2.) at the rate mentioned in section 1.6.1. There is no additional withholding tax. 6.3.2. Interest

Interest paid to non-resident companies is generally exempt from taxation (section 29 of the TMS). 6.3.3. Royalties

Patent royalties, including payments for the use of commercial, scientific or industrial equipment, paid by resident companies to non-residents are subject to income tax by way of withholding. The rate is 10%, unless a treaty provides for a lower rate (section 41 of the TMS). Under domestic law implementing the provisions of the EU Interest and Royalties Directive (2003/49) and the EU-Switzerland Savings Agreement, outbound royalty payments are exempt from withholding tax, provided that the recipient is an associated company of the paying company and is resident in another EU Member State or Switzerland, or such a company’s permanent establishment situated in another Member State or Switzerland (section 31 of the TMS). Two companies are “associated companies” if (i) one of them holds directly at least 25% of the capital of the other or (ii) a third EU or Swiss company holds directly at least 25% of the capital of the two companies. In both cases, a minimum holding period of 2 years is required. The exemption is not granted to the extent that the payment exceeds a similar payment between non-associated persons. 6.3.4. Other

A 10% withholding tax rate applies to the following payments (section 43 of the TMS): – fees paid to a non-resident for services rendered in Estonia (see also section 7.1.); and – payments to a non-resident third person for an artist’s or sportsman’s activities conducted in Estonia. A 20% (21% before 1 January 2015) withholding tax rate applies to the following payments (section 43 of the TMS):

390

Corporate Taxation

– –

Estonia

rental payments to non-residents (other than rental of equipment; see section 6.3.3.); and insurance benefits made to non-residents.

6.3.5. Withholding tax rates chart

Lithuania Luxembourg Macedonia (FYR) Malta Mexico Moldova Netherlands Norway Poland Portugal Romania Serbia Singapore Slovak Republic Slovenia Spain Sweden Switzerland Thailand Turkey Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan

The following chart contains the withholding tax rates that are applicable to dividend, interest and royalty payments by Estonian companies to non-residents under the tax treaties in force as at the date of review. Where, in a particular case, a treaty rate is higher than the domestic rate, the latter is applicable. A reduced treaty rate may be applied at source if the appropriate residence certificate has been presented to the withholding agent making the payment. Dividends Individuals, Qualifying companies3 companies4 (%) (%) Domestic Rates Companies: Individuals: Treaty Rates Treaty With: Albania Armenia Austria Azerbaijan Bahrain Belarus Belgium Bulgaria Canada China (People’s Rep.) Croatia Cyprus Czech Republic Denmark Finland France Georgia Germany Greece Hungary Iceland India Ireland Isle of Man Israel Italy Jersey Kazakhstan Korea (Rep.) Latvia

05 0

0 n/a

10 15 15 10 0 10 15 5 15

56 5 5 5 0 10 5 06 5

10 15 0

5 56 0

15 15 15 15 0 15 15 15 15 10 15 0 5 15 0 15 10 15

5 5 5 56 0 5 5 5 5 10 5 0 06,13 56 0 5 5 5

Interest1

Royalties2

(%)

(%)

0 0

0/10 10

5 10 10 10 0 10 10 0/57 10

5 10 5/10 10 0 10 5/10 5 108

10 10 0

10 10 0

10 10 10 0/109 0 10 10 10 10 10 10 0 5 10 0 10 10 10

10 5/10 5/10 5/1010 0 5/10 5/10 5/1011 5/10 1012 5/10 0 0 5/10 0 15 5/10 5/10

1.

Dividends Individuals, Qualifying companies3 companies4 (%) (%) 15 514 10 06

Interest1

Royalties2

(%) 10 0

(%) 10 0

5 15 0 10 15 15 15 10 10 10 10

0 5 0 10 5 5 5 10 10 5 5

5 10 4.9/1015 10 0/109 10 10 10 10 10 10

5 10 10 10 5/10 5/10 10 10 10 5/1016 7.5

10 15 15 15 10 10 10 10 15

10 5 5 5 019 10 10 10 5

10 10 0/109 10 0 10 10 10 10

10 10 5/1017 5/1018 0 8/1020 5/10 10 10

0

0

15 15 10

5 56 5

0 0/109 10 5

0 5/1021 5/10 10

Many treaties provide for an exemption for certain types of interest, e.g. interest paid to the state, local authorities, the central bank, export credit institutions or in relation to sales on credit. Such exemptions are not considered in this column. 2. In the case of two rates, the lower rate applies to equipment rentals. 3. There is no withholding tax on dividends paid to non-resident individuals under domestic law; no tax is levied even where a treaty would allow it. 4. Unless stated otherwise, the reduced treaty rates given in this column apply generally apply if the recipient company holds directly or indirectly at least 25% of the capital or the voting power, as the case may be, of the company distributing dividends. 5. Distribution tax applies, but in essence it is the equivalent of the corporate income tax (the only tax on corporate income). Dividends paid by resident companies to non-resident shareholders are only subject to distribution tax. There is no additional withholding tax. 6. A 10% holding is required. 7. The lower rate applies to interest paid to a bank. 8. A most favoured nation clause may be applicable with respect to royalties. 9. The exemption applies to interest paid to a bank (by virtue of the protocol of 2005 between Estonia and the Netherlands and the respective most favoured nation clauses of the final protocols to Estonia’s treaties with France, Spain and the United Kingdom). 10. A most favoured nation clause may be applicable with respect to royalties.

391

Estonia

Corporate Taxation

11. The lower rate applies to (a) equipment rentals and (b) royalties for transmission by satellite, cable, optic fibre or similar technology. 12. This rate applies to royalties and fees for technical services. 13. The exemption applies if dividends are paid to the government of the other state, a local authority or the central bank, or to a pension fund or other similar institution providing pension schemes in which individuals may participate, subject to further conditions. 14. A holding of at least 20% is required. 15. The lower rate applies to interest paid to a bank, pension fund or pension scheme. 16. The lower rate applies to royalties for any copyright of literary, artistic or scientific work including cinematographic films, and excluding computer software. 17. A most favoured nation clause may be applicable with respect to royalties. 18. A most favoured nation clause may be applicable with respect to royalties. 19. The lower rate applies to dividends paid to (i) a company, other than a partnership, which holds directly at least 10% of the capital of the company paying the dividends for at least 1 year prior to the payment of the dividends, (ii) a pension scheme and (iii) the central bank of the other state. 20. The lower rate applies to royalties paid for the use of, or the right to use, industrial, commercial or scientific equipment. 21. A most favoured nation clause may be applicable with respect to royalties.

7.2. Transfer pricing If the value of a transaction between a resident company and a related person (broad concept) differs from the value which would be used by unrelated persons in similar transactions, the tax authorities may adjust the value of the transaction to the latter amount (section 50 of the TMS). The methods applied are: comparable uncontrolled price method, cost-plus method, resale price method, profit split method and transactional net margin method. The distribution tax is levied on transfer pricing adjustments, i.e. the amount of the income the taxpayer would have received or the loss the taxpayer would not have sustained had the value of the transaction conducted with the related person been such as used by unrelated persons in similar transactions.

7.3. Thin capitalization There are no thin capitalization provisions.

7.4. Controlled foreign company 7. Anti-Avoidance 7.1. General According to a general anti-avoidance rule, where from the content of a transaction it is evident that the transaction is performed for the purposes of tax evasion, the conditions that correspond to the actual economic content apply for tax purposes (section 84 of the MKS). In addition, measures to combat the erosion of the taxable base through payments to low-tax territories include the following (section 41 of the TMS): – fees paid to companies situated in low-tax territories for services rendered to Estonian residents are subject to a 20% (21% before 1 January 2015) withholding tax irrespective of where the services were provided or used; and – various payments made, or benefits provided, to recipients situated in low-tax territories are regarded as non-business expenses for distribution tax purposes (see section 1.3.1.5.). The term “low-tax territory” is defined as a foreign state, or a territory with an independent tax jurisdiction in a foreign state, which does not impose a tax on the profits earned or distributed by a legal entity or imposes a tax which is less than one third of the income tax that an Estonian resident individual would have to pay on business income of the same amount (i.e. less than 7%), without taking into account the deductions (see Individual Taxation section 1.9.1.). A legal entity is not considered to be situated in a low-tax territory if more than 50% of its financial year’s income is generated from real economic activities or whose home country or territory provides to Estonian tax authorities information on income of the entities controlled by Estonian residents. The government has adopted a “white list” of territories which are not regarded as low-tax territories.

As retained earnings of resident companies are tax exempt, under the domestic law, the income of controlled foreign companies can only be attributed to resident individuals (see Individual Taxation section 6.1.1.). However, according to a Supreme Court decision of 26 September 2011, the general anti-avoidance rule (see section 7.1.) allows the tax authorities, under circumstances, to attribute the income of a foreign company which does not have independent economic activities, to an Estonian company. This will be the case when the transactions by the foreign company are made to conceal the true transactions by the Estonian company. As a consequence, the Estonian resident company may be liable to distribution tax on those payments.

8. Value Added Tax 8.1. General The Estonian value added tax system is in line with the EU VAT system. The principal mechanism for collecting value added tax requires the taxable person to charge VAT on the goods or services supplied, to take a deduction for VAT paid on business expenditure and to pay the net tax to the authorities. VAT must be paid by the 20th day of the month following the tax period and must be remitted, along with the VAT return, to the tax authorities.

8.2. Taxable persons Taxable persons are individuals, legal entities, and public bodies and institutions, who/which are engaged in business and are registered or required to register as a taxable person (section 3 of the KMS). Any importer of goods is also a taxable person.

392

Corporate Taxation

Estonia

The registration obligation arises if the taxable value of goods and services supplied from the beginning of a calendar year exceeds EUR 16,000. The distance-selling threshold for foreign businesses is EUR 35,000.

–

–

8.3. Taxable events Taxable transactions are (section 4 of the KMS): – the supply of goods and services in Estonia; – the intra-Community acquisition of goods; – the import of goods into Estonia; and – the supply of services, the place of supply of which is not in Estonia and which are not considered to be exempt supplies.

8.4. Taxable amount The taxable amount is the total of the sales price of all goods and services supplied by the taxpayer, together with any other consideration received from the customer or any third person (section 12 of the KMS). It does not include any discounts allowed to the customer if such discounts are applied for commercial purposes at the time of supply. It does not include interest and the VAT itself. The taxable amount of imported goods is the customs value of the goods including import taxes (excises and customs duties) but excluding the VAT itself. In order to prevent tax evasion and avoidance, if goods or services are supplied to related persons (including intraCommunity acquisition of goods), the taxable amount shall be the market value, provided that the consideration for the goods or services is: – lower than the market value and the customer has no right for full deduction of input VAT; – lower than the market value and the supplier has no right for full deduction of input VAT and the supply is a VAT-exempt supply; – higher than the market value and the supplier has no right for full deduction of input VAT.

8.5. Rates The standard VAT rate is 20%. A reduced rate of 9% applies to certain books and periodical publications, certain medicines and medical equipment and certain accommodation services (section 15 of the KMS). Zero-rated supplies include the exportation of goods, intra-Community supply of goods, services rendered to passengers on board a ship or aircraft during the international transport of passengers and the supply of vehicles used for international air and sea transport.

8.6. Exemptions The most important supplies of goods and services not subject to VAT are (section 16 of the KMS): – certain goods and services of social character, such as: – universal postal services; – medical services; – certain social services; – certain educational services; and

transport of ill, injured or handicapped persons in special purpose vehicles; and other goods and services, such as: – insurance services; – immovable property and parts thereof (subject to exceptions); – securities (except securities giving their owner ownership rights over, or rights to use and dispose of as owner, immovable property subject to VAT); – leasing of immovable property (the exemption does not apply to accommodation services or leasing of parking houses and areas, fixed machinery and safes); – listed financial services; – lottery and gambling; and – investment gold.

8.7. Non-residents A non-resident person having no permanent establishment in Estonia must apply for VAT registration if it makes taxable supplies in Estonia that are not subject to the reverse charge mechanism; there is no registration threshold in this case. A taxable person of another EU Member State who has purchased goods or services in Estonia is entitled to a refund of VAT if the following conditions are met: – the person is required to pay VAT in his country of residence as an enterprise; – the person has the right to deduct input VAT under the same conditions in his residence country; – taxable persons in Estonia have the right to deduct input VAT under the same conditions; – the amount of VAT to be refunded is at least EUR 50 per calendar year or EUR 400 if the application is submitted for a period which is 3 months or longer but does not exceed a calendar year; and – electronic application is submitted to the Estonian tax authority through the tax authority of the residence country of the person by no later than 30 September of the calendar year following the period of refund. Taxable persons of non-EU countries are entitled to a refund if the following conditions are met: – the person is required to pay VAT in his country of residence as an enterprise; – the amount of VAT to be refunded is at least EUR 320 per calendar year; – taxable persons in Estonia have the right to deduct input VAT under the same conditions; – the country in which the non-resident taxable person is established grants a refund of VAT to taxable persons resident in Estonia (i.e. the reciprocity principle applies); and – a written application is submitted to the Estonian tax authorities. Non-residents registered in Estonia as taxable persons are entitled to deduct their input VAT against their output VAT in the same manner as resident taxable persons.

393

Estonia

Corporate Taxation

9. Miscellaneous Taxes

9.2.2. Shares, bonds and other securities

9.1. Capital duty

There is no transfer tax on the transfer of shares, bonds or other securities.

There is no capital duty or similar duty on the formation and expansion of capital of companies. Legal fees are charged upon the registration of businesses in the commercial register and upon any changes in the records of the commercial register.

9.3. Stamp duty There are no significant stamp duties.

9.4. Customs duty

9.2. Transfer tax 9.2.1. Immovable property

Transactions involving immovable property are subject to a state fee the amount of which depends on the value of the transaction. For transactions of more than EUR 639,120, the fee is fixed at 0.16% of the value, but not more than EUR 2,560 (section 74 of the RLS).

With effect from 1 May 2004, Estonia is fully integrated into the EU Customs system, while customs duties with third countries continue to be governed by the EU common customs tariff.

9.5. Excise duty Estonia levies excise duties on alcoholic drinks, tobacco products, packages and fuel.

394

Notes

Notes

Notes

Contact IBFD Head Office Rietlandpark 301 1019 DW Amsterdam P.O. Box 20237 1000 HE Amsterdam, The Netherlands Tel.: +31-20-554 0100 (GMT+1) Email: [email protected] Web: www.ibfd.org

IBFD, Expertise IBFD, Your YourPortal PortaltotoCross-Border Cross-BorderTax Tax Expertise