Taxation of Intercompany Dividends under Tax Treaties and EU Law edited by Prof. Guglielmo Maisto

Vol.8 EC and International Tax Law Series

Table of Contents Acknowledgements

v

Foreword

vii One Dividends and EU Law

Chapter 1: The Court of Justice and Koen Lenaerts 1.1. 1.2. 1.3. 1.5.

Law

Introduction law The relation of the legislation and the Treaty Concluding remarks Annex — Supplementary remarks

3

3 4 5 8 16

Chapter 2: Dividends and Withholding Taxes Philippe Martin

25

2.1. 2.2.

25 25

2.3.

Introduction Double taxation and neutralization Non-discriminatory withholding taxes within domestic law 2.2.1.1. Freedom of the source state to apply withholding taxes to outbound dividends Symmetrically, there is no obligation under TFEU for the shareholder state to grant credit for foreign withholding tax on EU-sourced dividends 2.2.2. Discriminatory withholding tax within domestic Domestic discrimination against outbound dividends violates TFEU freedoms of movement 2.2.2.2. Potential neutralization in the shareholder state Gross or net withholding tax on dividends The issue arises from discrimination in the source state

26 26

26 26

26 27 29 29

Table of Contents

2.3.2.

2.4.

General ECJ case law on gross or net calculation of withholding taxes 2.3.3. A recent case has addressed the issue of gross or net withholding taxation of interests 2.3.4. The problem of attribution of costs Withholding tax on dividends distributed to foreign collective investment vehicles 2.4.1. Terms of comparison This issue is not settled yet 2.4.1.2. Reasons for comparison and consequences 2.4.2. Neutralization of withholding tax Neutralization must be guaranteed by a tax treaty 2.4.2.2. Neutralization must be total 2.4.3. Third countries 2.4.3.1. Standstill provision 2.4.3.2. Other issues specific to third countries

Chapter 3: Taxation of Intercompany Dividends and EU Law: Three Surprising Aspects of the Recent Case Law of the European Court Peter 3.1. 3.2.

3.3.

Three surprising developments Economic and juridical double taxation of cross-border intercompany dividends 3.2.2. Asymmetric choice for domestic and cross-border dividends 3.2.3. The discriminatory burden of proof and the Mutua Assistance Directive Conclusion

29 30 30 31 32 33 35 36 36 36 37 37 37

39

39 39

47 49 51

Chapter 4: The Internal Market and Double Taxation of Cross-Border Dividends Frans Vanistendael

53

4.1. 4.2. 4.3.

53 54 55

Introduction Double taxation in international taxation Double taxation in the internal market The taxpayer is subject to the consequences of his move

56

Table of Contents

4.3.2.

4.4.

4.5. 4.6.

Abolition of double taxation is one of the objectives of the treaties The position of the ECJ There are no general criteria for abolishing double taxation 4.4.2. The equivalence of exemption and tax credit for the elimination of double taxation The issue of equivalence of exemption or credit Exemption and credit are not the same Conclusion

57 58 58 60

64

Two Dividends and the OECD Definition and Provisions Panel Discussion chaired by John F. Avery Jones Chapter

5.1. 5.2. 5.3. 5.4. 5.5. 5.6.

The Definition of "Dividends" in the OECD Model Tax Convention Jacques Sasseville

Introduction Historical evolution of the definition The guidance included in the Commentary Application of the definition in thin capitalization situations Application of the definition in the case of secondary adjustments Application of the definition to the profit from the redemption of shares or liquidation of a company

Chapter 6: The Meaning of to Dividends under Convention Philip Baker 6.1. 6.2. 6.3. 6.4. 6.5. 6.6.

69

69 70 76 78 81 85

as Applied OECD Model Tax

Introduction History of the beneficial ownership limitation The proposed changes to the Commentary Existing case law Administrative guidance and specific treaty provisions Concluding comments and a problem

87

87 88 89 95 98 100

Table of Contents

Part Three Domestic and Treaty Rules and Principles as Applied to Dividends Panel Discussion chaired by Michael Lang Chapter 7: Domestic and Treaty Anti-Abuse Rules as Applied to Dividends Peter H. Blessing 7.1.

7.2.

General considerations 7.1.1. Background 7.1.1.1. Scope Some words on the concept of abuse Effect of globalization of trade on notions of abuse 7.1.2. Nature of 7.1.3. Tax treatment of dividends as relevant to tax planning Survey of taxpayer planning objectives and tools in respect of dividend income Change dividend to a capital transaction Change classification and source of investment Reduce tax rate imposed on dividend Change timing of dividend inclusion Transfer of dividend rights to tax-favoured taxpayer Special purpose entities designed to generate foreign tax credits Capture dividend and foreign tax credit in traded capital loss 7.1.5. Survey of tax administrator's arsenal for combating tax planning for dividends 7.1.5.1. General Objective rules 7.1.5.3. Subjective rules Analysis of specific types of transactions Avoiding dividend income classification via capital transaction Share buy-back 7.2.1.2. Reduction in capital

107

107 107 107

108 109

114 117

119 120

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7.3.

Dividend wash transactions Recapitalization of shares into shares and notes into or distribution of preferred shares and sale of such shares Multiple classes of stock Sale of shares of one affiliate to another by controlling shareholder 7.2.1.8. Liquidation of holding company Cash-rich demerger/spin-off 7.2.2. Avoiding dividend income classification via substitute payments received under securities loan 7.2.3. Avoiding dividend income classification via total return swap 7.2.4. Avoiding dividend income (and achieving deduction) via hybrid security Use of tax-favoured owner of portfolio dividend income as intermediary 7.2.5.1. General 7.2.5.2. US approach to conduit financing 7.2.5.3. The UK approach 7.2.6. Holding company to achieve reduced dividend withholding tax rate 7.2.6.1. General 7.2.6.2. Prevost Car, 7.2.6.3. VCA 7.2.6.4. German approach to holding company issues 7.2.6.5. General comments on the holding company issue 7.2.6.6. Planning for 0% rate and restrictions 7.2.6.7. Planning for 5% withholding tax rate 7.2.7. Purchase of usufruct to obtain dividend withholding tax relief or tax credit 7.2.8. Purchase of shares to obtain tax credit or exemption in structured financing transaction 7.2.9. Dividend stripping in public market transactions: Purchase of shares in market to capture credit from dividend and tax loss on immediate resale Creation of artificial foreign tax credits Conclusion

121 122

124 124

134

135 137 139

140 141 143 143 145 148 149

157 157

Table of Contents

Part Four Dividends and the OECD MC Non-Discrimination and Procedural Issues Panel Discussion chaired by Michael Lang Chapter 8: Intercompany Dividends and Non-Discrimination under the OECD Model Kees van 8.1. 8.2. 8.3. 8.4. 8.5.

Multiple taxation of cross-border intercompany dividends Non-discrimination under the OECD Model In general Non-discrimination under the OECD Model - PE situation with PE in residence country of subsidiary under the OECD Model PE situation with PE in third country Conclusion

161

161

167

Chapter 9: Intercompany Dividends and Non-Discrimination under the OECD MC: Economic Double Taxation, Branch Taxes and Customary Discrimination Angelo Nikolakakis 9.1. 9.2. 9.3. 9.4. 9.5.

Introduction Economic double taxation Branch taxes Customary discrimination Conclusions

Chapter

Compliance Enhancement (TRACE) Project Philip Kerfs

10.1. Introduction 10.2. Background Building blocks of the Authorised Intermediary system 103.1. Relief at source 10.3.2. Investor 10.3.3. Authorised Intermediaries

169 170 181 188

189

189 189 193 193 193

Table of Contents

Possibility to claim withholding tax relief on a pooled basis 10.33.2. Eligibility criteria status 103.3.3. Reporting obligations of an Authorised Intermediary 10.33.4. Independent review 10.3.4. Increased exchange of information between source countries and residence countries 10.3.5. Standardization The potential benefits of the AI system Potential benefits to governments 10.4.2. Potential benefits for governments 10.4.3. Potential benefits for residence countries Potential benefits for investors 10.4.5. Potential benefits for intermediaries 10.5. Status on the TRACE project

194 194

195

196 197 198 198

Five Country Reports Chapter 11: Australia C. John Taylor The meaning of "dividend" under domestic legislation The traditional concept of dividend in Australian corporate law 11.1.2. Dividends of profits the doctrine of maintenance of capital 11.1.3. Preference shares and the blurring of the debt and equity distinction Buy-backs and other developments further blurring the distinction Current rules on paying dividends and reassessment of the meaning of "dividend" The meaning of "dividend" under domestic tax law The definition of "dividend" and interrelation with other categories or subcategories of income Historical development of the definition of "dividend" under Australian tax law

203

203 203 204 205 207 208

Table of Contents

The current definition of "dividend" and related provisions Tax treatment of dividends outside a consolidated group Constructive dividends, tax recharacterization of non-profit reserves, anti-abuse rules relating to dividend arbitrage schemes Share buy-backs Liquidator's distributions Certain distributions from share capital account 11.2.2.4. benefit streaming rules 11.2.2.5. streaming rules Share value shifting rules Loans and debt forgiveness to shareholders Excessive remuneration to directors and associates Tax treatment of dividend distributions under special tax regimes in domestic law Tax treatment of dividends paid within a consolidated group Tax treatment of dividends paid to shareholders after subsidiary member leaves consolidated group Tax treatment of dividend distributions by a company that has converted from being a partnership Tax treatment of distributions by a partnership or trust that has converted from being a company Tax treatment of dividends flowing from a company through a partnership or trust to investors Dividend taxation for indirect tax purposes and procedural issues relating to intercompany dividend taxation Dividends and indirect taxes Treatment of dividends GST purposes Treatment of constructive dividends for GST purposes Procedural issues relating to dividend taxation Whether presumptions provided under the law can be used for assessment purposes only or relied on directly by taxpayers

225 225 226 228 229 230 232 232 232 233 233 236 237 243 244 245 245 245 246 246

246

Table of Contents

Formalities for obtaining tax credit on domestic dividends Withholding obligations on constructive dividends and domestic anti-abuse rules Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entidement to an exemption or a foreign tax credit for inbound dividends Entidement to exemption for non-portfolio foreign-source dividends Entidement to foreign tax credit for withholding tax on foreign-source dividends outside CFC rules Dividend taxation under CFC regimes Basic outline of Australian CFC rules Treatment of dividends received by CFC from a foreign non-CFC company Treatment of dividends received by resident company from foreign non-CFC company Treatment of dividends distributed from income attributed and taxed under the CFC regime Domestic anti-abuse rules with respect to dividends sourced in tax havens Interaction of CFC regime as it applies to unlisted countries and exemption and foreign tax credit system and dividend imputation system Deemed dividend provisions relating to distributions from CFCs in unlisted countries Issues relating to the application of domestic withholding tax on outbound dividends Taxation on an assessment basis of dividends attributable to an Australian permanent establishment of a foreign resident Withholding tax on dividends in the absence of a tax treaty

246

246 247 247 247

249 251 254

255

256 257

257

258 260

260 261

Table of Contents

Exemption from withholding tax on the franked portion of a dividend Exemption from withholding tax on distributions of conduit foreign-source dividends Deduction forresidentcompany for flow-on dividends paid to non-resident company Australian position on withholding obligations in the event of conflicts between the meaning of "dividend" for Australian tax purposes and under foreign law Selected issues of dividend taxation under tax treaties Relationship between the definition of "dividend" under OECD Art. 10 and definition of "dividend" under domestic tax law Whether reclassification of interests under debt and equity rules affects classification of returns on those interests under tax treaties Significant departures in definition of "dividend" in Australian tax treaties from OECD definition Whether tax treaty benefits apply to dividend distributions by tax-preferred companies Meaning of "beneficial under case law and administrative practice Anti-abuse rules in Australian tax treaties and their relationship with domestic anti-abuse rules Whether domestic anti-abuse rules can deny tax treaty benefits Non-discrimination issuesrelatingtodividends in Australian tax Formalities for tax treatyreliefon outbound dividends Chapter 12: Austria and Elisabeth

262 263

264 265 265 266 268

273 275 276 277 278 279

The meaning of under domestic law 279 12.2. The meaning of "dividend" under domestic tax law 284 Definition of "dividend" and interrelation with other categories or subcategories of income 284

Table of Contents

12.2.2. Constructive dividends, tax recharacterization of non-profit reserves and anti-abuse rules relating to dividend arbitrage schemes 12.2.2.1. Stock loans 12.2.2.2. Dividend washing arrangements 12.2.2.3. Equity swaps 123. Tax treatment of dividend distributions under special tax regimes in domestic law 12.4. Dividend taxation for indirect tax purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation Dividend and VAT and other indirect taxes Procedural issues relating to intercompany dividend taxation 12.5. Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entitlement to a foreign tax credit for inbound dividends Dividend taxation under CFC regimes 12.5.3. Domestic anti-abuse rules with respect to dividends sourced in tax havens 12.53.1. Sec. 10(4), respectively Sec. 10(5) together with Sec. 10(6) CTA 12.53.2. The general anti-avoidance rule of Austrian tax law: Sec. 22 FC Issues relating to the application of domestic withholding tax on outbound dividends Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive 12.6.1.1. Subject-to-tax condition 12.6.1.2. Anti-abuse provisions 12.6.13. Definition of "distributed profit" 12.6.1.4. Procedural issues 12.6.2. Issues of compatibility of domestic tax law with EU law Selected issues of dividend taxation under tax treaties

295 306 307 308 309

320 320

332 332 337 338 339 347 349 355 355 355 356 361 364 365 370

Table of Contents

Chapter 13: Belgium Kim

383

The meaning of "dividend" under domestic non-tax law 13.2. The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income Tax definition of dividends Interrelation with other categories of income 13.2.2. Constructive dividends, tax recharacterization of non-profit reserves and anti-abuse rules relating to dividend arbitrage schemes 13.2.2.1. Constructive dividends Tax-recharacterization of non-profit reserves Anti-abuse rules relating to dividend arbitrage schemes 13.3. Tax treatment of dividend distributions under special tax regimes in domestic law 13.3.1. Change of legal form Special and optional tax regimes 13.4. Dividend taxation for indirect tax purposes and procedural issues relating to intercompany dividend taxation 13.4.1. Dividend and other indirect taxes Procedural issues relating to intercompany dividend

383 388 388 388 393

398 398 400 404 407 407 409 417 417 421

13.5. Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to the entitlement to a foreign tax credit for inbound dividends 13.5.2. Dividend taxation under CFC regimes Domestic anti-abuse rules with respect to dividends sourced in tax havens First test General subject-to-tax requirement and foreign favourable tax regime Second test: Financing, treasury and investment companies Third test Companies with offshore income Fourth test: Low-faxed foreign branches

xx

426 426 429 431

431 434 435 436

Table of Contents

13.53.5. Fifth test: Conduit companies (look-through) Issues relating to the application of domestic withholding tax on outbound dividends Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive 13.6.1.1. condition 13.6.1.2. Anti-abuse provisions 13.6.13. Definition of "distributed profit" 13.6.1.4. Procedural issues Issues of compatibility of domestic tax law with EU law 13.7. Selected issues of dividend taxation under tax treaties Chapter 14: Canada Geoffrey The meaning of "dividend" under domestic law Corporate law 14.1.2. Accounting treatment The meaning of under domestic tax law Definition of "dividend" and interrelation with other categories of income General comments 14.2.1.2. Classification and taxation of dividends 14.2.13. Other categories of income 14.2.2. Constructive dividends and related anti-abuse rules Deemed dividends and surplus stripping 14.2.2.2. Shareholder benefits and transfer pricing adjustments 14.2.23. Dividend anti-abuse rales Tax treatment of dividend distributions under special tax regimes domestic law 143.1. Absence formal grouping regime 14.3.2. Distributions from publicly traded trusts and partnerships 14.3.3. Dividend taxation under other specialized regimes Dividend taxation for indirect tax purposes and procedural issues relating to intercompany dividend taxation 14.4.1. VAT taxes

437 439 442 442 442 444 446 447 448 454 467

467 467 470

471 472 475 477 477 481 483 487 487 488 489

491

Table of Contents

Procedural issues relating to intercompany dividend taxation Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entitlement to foreign tax credits for inbound dividends Dividend taxation under CFC regimes 14.5.3. Domestic anti-abuse rules with respect to dividends sourced in tax havens Issues relating to application of domestic withholding tax on outbound dividends Selected issues of dividend taxation under EU law 14.7. Selected issues of dividend taxation under tax treaties 14.7.1. Definitions of dividends 14.7.2. Limitation of treaty benefits 14.7.2.1. Beneficial ownership 14.7.2.2. Anti-avoidance rules and principles

491 494 494 498 500 501 503 503 503 504 505 507

Chapter 15: France Alexandre Maitrot de la Motte The meaning of under French domestic non-tax law The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income 15.2.1.1. Historical review 15.2.1.2. Actual definition 15.2.2. Constructive dividends, tax recharacterization of reserves, anti-abuse rules relating to dividend arbitrage schemes 15.3. Tax treatment of dividend under special tax regimes in domestic law Tax treatment of dividend distributions under tax grouping regimes 153.2. Tax treatment of dividend distributions in case of change of legal form Tax treatment of dividend distributions under forfaitaire regimes Dividend taxation for indirect tax purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation

511

517 520

525 529 529 533 534

536

Table of Contents

Dividends and VAT and other indirect taxes 15.4.1.1. Dividends and VAT 15.4.1.2. Other indirect taxes Procedural issues relating to intercompany dividend taxation 15.5. Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entidement to a foreign tax credit for inbound dividends 15.5.1.1. Conflicts of qualification of dividends 15.5.1.2. Conditions under which taxes paid abroad are regarded as "final" and thus satisfy the requirements for a foreign tax credit to be granted 15.5.13. Possible impact of exemption or partial exemption of dividends on the amount of tax credit granted Relationship between tax credit relief granted under domestic tax law and tax credit relief granted under tax treaties 15.5.2. Dividend taxation under CFC regimes Domestic anti-abuse rules with respect to dividends sourced in tax havens Issues relating to the application of domestic withholding tax on outbound dividends Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive 15.6.1.1. Subject to tax condition 15.6.1.2. Anti-abuse provisions 15.6.13. Definition profits" Meaning of "participation to capital" 15.6.1.5. Procedural issues 15.6.2. Issues of compatibility of domestic with EU law Selected issues of dividend taxation under tax treaties Chapter 16: Germany Maximilian Bowitz and Sebastian Heinrichs The meaning of 16.1.1.

under domestic

536 536 538 539 540 541 541

542

543

543 544 548 549

551 553 553 554 555 556 559 565

law

565 565

Table of Contents

Non-voting preference shares (Stimmrechtslose Vorzugsaktien) 16.1.3. Quasi-equity instruments 16.13.1. Corporate profit participation rights (Genussrechte) 16.13.2. Profit-participating loans (partiarisches Darlehen) and profit-participating bonds 16.1.33. Silent partnership (Stille 16.13.4. Subordinated loans 16.2. The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income 16.2.1.1. Historical review 16.2.1.2. Influence of double taxation issues Distinctive features of dividends compared to other income from capital investments Income from rent and leasing (§ 21 EStG) 16.2.13.2. Atypical silent partnership 16.2.133. Dividends distributed to private assets 16.2.13.4. Dividends distributed to business assets 16.2.13.5. Dividends distributed to other corporations Distinction of dividends from other income distributed by a company Treatment of dividends under trade tax 16.2.2. Constructive dividends, tax recharacterization of non-profit reserves, rules relating to dividend arbitrage schemes 16.2.2.1. General 16.2.2.2. Examples for constructive dividends Transfer pricing as constructive dividends? 16.2.2.4. Distributions of non-profit reserves 16.2.2.5. Reductions of the net equity for events other than distribution Applicability in case of dividend distributions 16.2.2.7. Anti-abuse rules for arbitrage schemes

567 567 567

568 568 569 569 569 570

571 572 572 572 573 574 574

575 575 576 577 577 578 579 579

Table of Contents

Tax treatment of dividend distributions under special tax regimes in domestic law 16.3.1. Tax consolidation (Organschaft) 16.3.1.1. Four prerequisites for tax consolidation 163.1.2. Dividend treatment 16.3.2. REIT tax regime 163.2.1. Prerequisites REIT regime 163.2.2. Dividend treatment 16.33. Tonnage tax regime and tax regime for income from agriculture and forestry 16.33.1. Tonnage tax regime 163.3.2. Tax regime for income from agriculture and forestry 16.3.4. Change of legal forms and taxation of dividends 163.4.1. Change from corporation to partnership 163.4.2. Change from partnership to corporation 16.4. Dividend taxation for indirect tax purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation Dividend and VAT and other indirect taxes 16.4.1.1. Influence of ECJ case law on the VAT treatment of dividends in Germany ECJ decisions in and Berginvest and Cibo Participations Implementation of ECJ case law Relevance of dividends for the pro-rata deduction of input VAT 16.4.13. Organschaft 16.4.1.4. Selected issues relating to VAT taxation of dividends VAT treatment of dividends in kind VAT treatment of constructive dividends deriving from transfer pricing adjustments Dividend treatment in other indirect taxes (e.g. transfer taxes)

580 580 581 582 583 584 584 585 585 586 586 586 587

587 587 587

587 589 590 591 593 593

594 594

Table of Contents

16.4.2. Procedural issues relating to intercompany dividend taxation Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entitlement to a foreign tax credit for inbound dividends Issues regarding economic double taxation 16.5.1.1.1. Relation between tax treaty and domestic provision Classification conflict between German domestic law and foreign domestic law Issues regarding juridical double taxation 16.5.2. Dividend taxation under CFC regimes 16.5.2.1. Dividends received by a CFC subsidiary 16.5.2.2. Dividends distributed by a CFC subsidiary Domestic anti-abuse rules with respect to dividends sourced in tax havens Issues relating to the application of domestic withholding tax on outbound dividends Taxation of dividends paid to non-residents 16.5.4.2. Scope of dividend definition 16.5.43. Reclassification of dividends with regard to the corporate status of the foreign shareholder Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive 16.6.1.1. Subject to tax condition 16.6.1.2. Anti-abuse provisions 16.6.13. Definition of "distributed profit" 16.6.13.1. Inbound dividends 16.6.13.2. Outbound dividends 16.6.1.4. Procedural issues 16.6.2. Issues of of domestic tax law with EU law 16.6.2.1. Consistency of German tax rules with ECJ jurisprudence with regard to inbound dividends 16.6.2.2. Consistency of German tax rules with ECJ jurisprudence with regard to outbound dividends

594 595 595 595 596

597 598 598 598 599 600

601

602 603 603 603 604 605 605 605 606 607

607

608

Table of Contents

16.6.2.2.1. Distributions to a corporation 16.6.2.2.2. Distributions to an individual Selected issues of dividend taxation under tax treaties The definition of "dividends" under Art. 10 of the OECD Model Convention General remarks and scope Comparison of the domestic dividend definition with the definition in Art. 10 16.7.13. Definition of "company" 16.7.1.4. Other rights, not being debt claim, participating in profits The term "dividend" in Germany's tax treaty practice 16.7.2.1. Usage of the term "other rights, not being participating in profits" Usage of the term "income from other corporate rights" 16.7.23. Relevance of domestic tax treatment Other extensions of the dividend definition 16.7.2.5. Treaty anti-abuse rules included in tax treaties concluded by Germany 16.7.3. Analysis on the beneficial ownership concept 16.7.4. Procedure in claiming treaty reliefs Chapter 17: Italy Paolo de'Capitani di Vimervate The meaning of "dividend" under non-tax law 17.2. The meaning of "dividend" under domestic law The Italian tax treatment of inbound dividends The Italian tax treatment of dividends and comparable items of income The treatment of dividends and similar income in case of IAS adopters 17.3. Tax treatment of dividend distributions under special tax regimes in domestic law Dividend taxation for indirect tax purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation Dividends and VAT and other indirect taxes

608 609 609 609 609

610 611

614 615 615 615 617 619

625 630 632 641 643

650 650

Table of Contents

The principle of the open market value in the VAT regime 17.5. Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entidement to a foreign tax credit for inbound dividends 17.5.2. Dividend taxation under CFC regimes 17.5.3. Domestic anti-abuse rules with respect to dividends sourced in tax havens 17.5.4. Issues relating to the application of domestic withholding tax on outbound dividends 17.6. Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive 17.6.2. Issues of compatibility of domestic law with the EU law 17.7. Selected issues of dividend taxation under tax treaties

657 659 659 662 663 665 669 669 677 681

Chapter 18: Luxembourg Katarina Kbszeghy

699

18.1.

699 699

The meaning of "dividend" under domestic non-tax law The definition of dividend under Luxembourg corporate law General principles of Luxembourg company law Dividend definition in Luxembourg non-tax law Trends with regard to the term "dividend" Developments in Luxembourg law with regard to instruments Atypical financial instruments that may be created by virtue of the LSC Preferred non-voting shares and founder shares

699 699 701

703 704

704 704 18.2.2.13. Convertible bonds (obligations convertibles) and bonds with a subscription right (obligations avec bon de souscription) 705

Table of Contents

Atypical financial instruments the creation of which is not precluded by LSC Joint (stapled) shares (actions jumelees) Subscription rights de souscription (warrants 18.2.2.2.3. Bonds with warrants (obligations a warrants) Exchangeable or refundable bonds (obligations ou en actions) Reverse convertible (exchangeable) notes 18.2.2.2.6. Preferred Equity Certificates (PECs) and Convertible Preferred Equity Certificates (CPECs) The meaning of "dividend" under domestic tax law The definition of "dividend" and interrelation with other categories or subcategories of income "Dividend", a category of income from capital Dividend as income distributed by companies 183.1.1.3. Influence of double taxation on the dividend definition 183.2. Constructive dividends, tax reclassification of non-profit reserves, anti-abuse rules relating to dividend arbitrage schemes 183.2.1. Taxation of constructive dividends 183.2.1.1. Elements "hidden distributions" in Luxembourg law 183.2.1.2. hidden distributions 183.2.2. Alternative ways to distribute constructive dividends 183.2.2.1. Free allocation of shares 183.2.2.2. Capital reductions 18.3.2.23. Partial liquidation

705 705 706 706

706 706

706 707 707 707 710

718 720 722 722 722 723

Table of Contents

183.2.2.4. Share buy-backs de ses propres actions) 18.3.23. Share premium (prime Tax treatment of dividend distributions under special tax regimes in domestic law "Special" tax regime in Luxembourg tax law: The "participation exemption" Participation exemption within tax consolidation Tax consolidation in Luxembourg tax law 18.4.1.1.2. Taxation of dividends distributed within a tax consolidation regime Automatic preservation of the participation exemption Special tax regimes in situations of changes of legal form Transformation within the same type of company Transformation of a transparent company into a non-transparent company Transformation of a non-transparent company into a transparent company Taxation of dividends with respect of companies subject to a special or optional tax regime Taxation of investment funds in Luxembourg Investment funds - Venture capital company SPF Same treatment of the dividends paid by companies entitled to special regime and by companies entitled to ordinary regime? Dividend taxation for indirect purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation taxation and other indirect taxes 18.5.1.1. The influence of ECJ case law on domestic VAT treatment 183.1.1.1. law

XXX

723 724 724 724 727 727

729 729 730 730

732 732 732 732

733

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Table of Contents

18.5.1.1.2. The influence of ECJ case law on Luxembourg law The relevance of dividends pro-rata deduction of input VAT Selected issues relating to VAT taxation of dividends in kind or constructive dividends deriving from transfer pricing adjustments Dividend in cash and dividend in kind treatment for the purposes of indirect taxes Procedural issues relating to intercompany dividend taxation 18.5.2.1. Procedural and tax litigation issues arising in connection to intercompany dividend taxation Applicability of presumptions provided by tax law or case law 18.5.2.1.2. Formalities to be complied with in order to benefit from dividend tax credit laid down by domestic law Withholding obligation issues in case of assessment on constructive dividend distributions Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to the entitlement to a foreign tax credit for inbound dividends 18.6.1.1. Credit for withholding tax at source Juridical double taxation 18.6.1.1.1. method 18.6.1.1.2. LITL -Deduction method for unrelieved foreign tax Credit for underlying tax on distributed profits - Economic double taxation Impact of full and partial exemption on the amount of tax credit granted

736 737

737 738 738

738

738

738

740 740 740

741

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18.6.13.1. Classical system of taxation of dividends 18.6.13.2. The partial exemption on No. 15a LITL 18.6.133. The full exemption on dividends - Art. 166 LITL Conflicts of qualification of dividends Conditions under which taxes paid abroad satisfy the requirements for a foreign tax to be granted Dividend taxation under CFC regimes 18.6.3. Domestic anti-abuse rules with respect to dividend sourced in tax havens Issues relating to the application of domestic withholding tax on outbound dividends 18.6.4.1. Taxation of dividends to non-residents - Final withholding tax 18.6.4.1.1. No exemption from withholding tax 18.6.4.1.2. Exemption from withholding tax Non-application of withholding tax The presence of a permanent establishment 18.6.4.2.1. Distributions received by domestic permanent establishment Definition of "dividends" for outbound dividends the same as for dividends distributed domestically 18.7. Selected issues of dividend taxation law Open in the implementation of the Parent-Subsidiary Directive 18.7.1.1. Subject-to-tax condition The "comparable tax" requirement 18.7.1.1.2. The "full subject-to-tax" requirement 18.7.1.2. Definition of "distributed profits"

xxxn

742

743 744 744

745 745 746 747 747 747 748

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18.7.13.1. Does "distributed profits" on non-tax law or on tax law? Issues of compatibility of domestic tax law with EU law 18.7.2.1. Principles established by the ECJ with regard to tax neutrality for inbound dividends and outbound dividends Outbound dividends 18.7.2.1.2. Inbound dividends 18.7.2.13. Outbound and inbound dividends from a third-state perspective with respect to freedom of movement of capital 18.7.2.1.4. Compatibility of Luxembourg tax consolidation provisions law Selected issues of dividend taxation under tax treaties Relationship between the definition of "dividends" under OECD MC and domestic Inconsistencies of both terms The restriction by the definition of "company" of the scope of the definition of "dividends" under Art 10 compared to domestic law definition of "dividends" 18.8.1.1.2. Meaning attributed to "other rights, not being participating in profits" 18.8.1.13. Possible departures in the definition of dividends found in Luxembourg tax treaties when compared to the OECD MC Granting of treaty benefits irrespective of the income tax treatment of the distributing company - Treaty benefits granted to entities subject to a special tax regime

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18.8.1.1.5. The "beneficial ownership" concept 18.8.1.1.6. Treaty anti-abuse rules included in DTT concluded by Luxembourg and interrelations with domestic rules and case law

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Chapter 19: Netherlands Reinout de Boer and Frederik Boulogne

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19.1. Introduction The meaning of "dividend" under domestic non-tax law General rules on distributions 19.2.2. Recharacterization of financing instruments 19.3. The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income 19.3.1.1. Definition of "dividend" Dutch tax purposes of dividends in Dutch corporate income tax 193.1.1.2. Taxability of dividends in Dutch corporate income tax 193.1.13. Dutch dividend withholding tax Interrelation with other categories or subcategories of income 193.1.2.1. Recharacterization debt instruments as equity "Bad debt" (intra-group) 193.1.23. Recharacterization of equity instruments 193.2. Constructive tax recharacterization of reserves, anti-abuse rules relating to dividend arbitrage schemes 193.2.1. Constructive dividends Repayment of capital and repurchase of shares 193.2.1.2. Constructive dividends through non-arm's length terms in related-party transactions

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193.2.2. Recharacterization of non-profit reserves Domestic anti-abuse measures relating to dividend arbitrage schemes 19.4. Tax treatment of dividend distributions under special tax regimes in domestic law 19.4.1. Fiscal unity (corporate income tax) Fiscal unity and participation exemption Fiscal unity and tax treaties Art. )(b) DWTA 1965: Exemption from dividend withholding tax in case of a fiscal unity Allocation of shares in a Dutch resident company to a Dutch permanent establishment 19.4.2. Change of corporation form 19.4.3. Tonnage tax regime 19.4.4. 19.5. Dividend taxation for indirect tax purposes (VAT, transfer tax etc.) and procedural issues relating to intercompany dividend taxation 19.5.1. Dividend VAT 19.5.1.1. Introduction Dividend as consideration for shareholder activities? 19.5.13. Dividends and deduction of input VAT Dividend and real estate transfer tax 19.5.3. Selected procedural issues relating to intercompany dividend taxation 19.53.1. Refund terms and the EU general principle of 19.53.2. Dividend withholding tax returns and residency permits 1933.3. The 1-month payment term of Art. 19(3) GLNT Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to entitlement to a foreign tax credit for inbound dividends

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808 808 808 808

815

816 Unilateral avoidance of juridical double taxation Unilateral exemption

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19.6.1.2.2. Cost deduction Avoidance of juridical double taxation under tax treaties Avoidance of economic double taxation 19.6.2. Domestic anti-abuse rules with respect to dividends sourced in tax havens Criteria for application of the participation exemption 19.6.2.2. Participation credit regime for participations 19.6.23. Mark-to-market rules (annual revaluation) Issues relating to the application of domestic withholding tax on outbound dividends 19.7. Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive The "subject to tax condition" under Art. 2(l)(c) of the Directive 19.7.1.2. Anti-abuse provisions 19.7.13. Definition of "distribution of profit" 19.7.1.4. Procedural issues 19.7.2. Issues of compatibility of domestic law with EU law 19.7.2.1. Introduction 19.7.2.2. Inbound dividends 19.7.2.2.1. Participation exemption 19.7.2.2.2. Participation credit 19.7.2.23. Triangular case 19.7.23. Outbound dividends 19.7.2.4. Third countries 19.8. Selected issues of dividend taxation under tax treaties 19.8.1. term "dividend" 19.8.1.1. 19.8.1.2. Constructive on "sham loans" Purchase by a company of shares in its distribution "Dividends" under a domestic abuse of law concept 19.8.1.5. Dividends paid by a "company" 19.8.1.6. Debt claims participating in profits Income tax treatment of the distributing or the receiving company

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19.83. Triangular cases Beneficial ownership 19.8.5. Anti-abuse rules 19.8.5.1. Anti-abuse rules included in tax treaties 19.8.5.2. LOB provisions 19.8.53. Application of domestic anti-abuse rules in treaty situations Chapter 20: Spain

856 857 862 862 864 867 873

Cencerrado The meaning of "dividend" under domestic non-tax law 20.2. The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income Historical review of the concept of "dividend" Dividends under the Personal Income Tax Act currently in force 20.2.13. Dividends under the Corporate Tax Act currently in force Dividends under the Non-Resident Income Tax Act currently in force Characterization of income generated by hybrid financial instruments 20.2.2. Constructive dividends, tax recharacterization of non-profit reserves, anti-abuse rules relating to dividend arbitrage schemes Hidden dividend distributions arising from transfer pricing 20.2.2.2. Thin capitalization 20.2.23. Formal distributions of reserves not considered dividends for tax purposes 20.2.2.4. Dividend washing arrangements 20.2.23. Stock loans 203. Tax treatment of dividend distributions under special tax regimes in domestic law 203.1. Dividends under the tax consolidation regime 20.3.2. Dividends under the tonnage tax regime 20.3.3. Dividends under the rental of real property regime 20.3.4. Dividends under the listed real estate investment companies regime

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20.3.5. Dividends under the foreign holding companies (FHC) regime 20.3.6. Dividends in collective investment institutions 20.3.7. Dividends in venture capital companies and funds 20.3.8. Dividends in economic interest groupings 20.3.9. Transitory look-through company regime 20.3.10. Dividends from other income entitled to a tax allowance Retained profits in the transformation of entities 20.4. Dividend taxation for indirect tax purposes and procedural issues relating to intercompany dividend taxation 20.4.1. Dividends and other indirect taxes Impact of ECJ case law on dividend taxation 20.4.1.2. and dividends kind 20.4.13. VAT and related-party transactions Dividends and other indirect taxes 20.4.2. Procedural issues relating to intercompany dividend taxation 20.5. Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law Issues relating to the entitlement to a foreign tax credit for inbound dividends 20.5.1.1. Definition of dividend and the deductions for international double taxation 20.5.1.2. Effective taxation of dividends abroad Relation between measures to avoid double taxation and those envisaged in tax treaties 20.5.2. Dividend taxation under CFC regimes Dividend imputation under the CFC regime 20.5.2.2. Elimination of double taxation of attributed CFC income from a foreign company 20.5.23. Distribution of dividends from income under the CFC regime 20.53. Domestic anti-abuse rules with respect to dividends sourced in tax havens 20.5.4. Issues relating to application of domestic withholding tax on outbound dividends

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20.6. Selected issues of dividend taxation under EU law 20.6.1. Open issues in the of the Parent-Subsidiary Directive 20.6.1.1. The subject-to-tax condition 20.6.1.2. Anti-abuse provisions 20.6.13. Definition of "distributed profit" 20.6.1.4. Procedural issues 20.6.2. Issues of compatibility of domestic tax law with EU law 20.6.2.1. regarding dividends received by Spanish parent companies 20.6.2.2. Issues regarding dividends distributed by Spanish subsidiaries 20.7. Selected issues of dividend taxation under tax treaties Definition of dividends in Spanish law and OECD Model Convention 20.7.2. Definition of dividend in the tax treaties concluded by Spain 20.73. Tax treaty benefits and privileged tax regime for companies 20.7.4. Beneficial owner of dividends 20.7.4. Anti-abuse clauses relating to dividends in tax treaties concluded by Spain 20.7.5. issues in the treatment of dividends Chapter 21: United Kingdom Philippe

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The meaning of under domestic non-tax law The meaning of "dividend" under domestic tax law Definition of "dividend" and interrelation with other categories or subcategories of income Constructive dividends, tax recharacterization of reserves, anti-abuse rules relating to dividend arbitrage schemes Tax treatment of dividend distributions under special tax regimes in domestic law Dividend taxation for indirect tax purposes (VAT, transfer tax, etc.) and procedural issues relating to intercompany dividend taxation Dividend and VAT and other indirect taxes

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Procedural issuesrelatingto intercompany dividend taxation 21.4.2.1. The statutory route 21.4.2.2. The common law route 21.4.23. limits Issues in claiming tax credit inrespectof dividends Selected issues in the tax treatment of cross-border inbound and outbound dividends under domestic law 21.5.1. Issuesrelatingto the entitlement to a foreign tax credit for inbound dividends 21.5.2. Dividend taxation under CFC regimes 21.53. Domestic anti-abuse rules withrespectto dividends sourced in tax havens Issuesrelatingto the application of domestic withholding tax on outbound dividends Selected issues of dividend taxation under EU law Open issues in the implementation of the Parent-Subsidiary Directive Issues of compatibility of domestic tax law with EU law Selected issues of dividend taxation under tax treaties Chapter 22: United States Mark S. Hoose The meaning of theterm"dividend" under domestic non-tax law Definition of "dividend" under relevant corporate law Definition of "dividend" underrelevantaccounting standards 22.2. The meaning of the term "dividend" under domestic tax law The definition of "dividend" and interrelation with other categories or subcategories of income Special issues related to distributions of property 22.2.1.2. Stock dividends and stock rights Dividends as compared to other forms of property income 22.2.2. Constructive dividends and anti-abuse rules

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Redemption transactions (buy-backs) can potentially be dividends 22.2.2.2. Constructive dividends in the context of a closely held corporation 22.2.2.3. Constructive dividends arising from intercompany transactions 22.2.2.4. Constructive dividends and other issues under domestic anti-abuse rules 223. Tax treatment of dividend distributions under special tax regimes in domestic law 22.3.1. The dividends received deduction (DRD) 22.3.2. Tax consolidation 22.33. Conversion of a partnership to a corporation 22.3.4. Special entities - Subchapter S corporations, regulated investment companies and real estate investment trusts 22.4. Dividend taxation for indirect tax purposes and procedural issues relating to intercompany dividend taxation Dividends and indirect taxes 22.4.2. Procedural issues relating to intercompany dividend taxation Taxpayer proactive use of constructive rules under common or case law 22.4.2.2. Taxpayer proactive use of constructive dividend rules provided by statute 22.4.23. General dividend reporting and withholding 22.4.2.4. Other procedural rules related to dividends 22.5. Selected issues in the tax treatment of cross-border inbound and outbound under domestic law Issues relating to the entitlement to a foreign tax credit for inbound The US foreign tax credit generally - IRC 901 through 904 IRC and 903 - Foreign tax credit for foreign withholding tax imposed on dividend 22.5.13. The "deemed paid" foreign tax credit Limitations on the use of foreign tax credits - Creditability, finality and source 22.5.1.5. Foreign tax credits under US treaties

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22.5.2. Dividend taxation under CFC regimes 22.5.2.1. CFC dividend taxation generally 22.5.2.2. CFC investments in US property result in deemed dividend treatment 22.5.23. Distributions of "previously taxed income" by CFCs 22.5.3. Domestic anti-abuse rules with respect to dividends sourced in tax havens 22.5.4. Issues relating to the application of domestic withholding tax on outbound dividends 22.6. Selected issues of dividend taxation under EU law 22.7. Selected issues of dividend taxation under tax treaties Dividend taxation under US income tax treaties generally 22.7.2. Tax treaty treatment of distributions by special entities 22.7.3. Beneficial ownership under US tax treaties 22.7.4. Limitations on benefits provisions in US tax treaties 22.7.5. Limitations on treaty benefits under US domestic law 22.7.6. and procedure

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Contributors

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