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CHANGES TO COR POR ATE INCOME TAX RULES IN THE CONTEXT OF EU INTEGRATION. Sylwia Sobowiec Sławomir Boruc ( presentation prepared with the help of Baker & McKenzie Amsterdam office ). EU LAW ON DIRECT TAXATION. Merger Directive Parent Subsidiary Directive

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slide1

CHANGES TO CORPORATE INCOME TAX RULES IN THE CONTEXT OF EU INTEGRATION

Sylwia Sobowiec

Sławomir Boruc

(presentation prepared with the help of

Baker &McKenzie Amsterdam office)

eu law on direct taxation
EU LAW ON DIRECT TAXATION
  • Merger Directive
  • Parent Subsidiary Directive
  • Interest and Royalty Directive
  • Savings Directive
  • Arbitration Convention
eu law on direct taxation cont d
EU LAW ON DIRECT TAXATION cont’d
  • Importance of the case law of European Court of Justice
slide4

MERGER DIRECTIVE

Aims:

  • Enable tax free business reorganization
  • Safeguard fiscal interest of member states (defer taxation)
  • Deny benefits of the Directive in the case of tax evasion or avoidance
merger directive cont d
MERGER DIRECTIVE cont’d.
  • Merger
  • Division
  • Transfer of assets
  • Exchange of shares
merger directive cont d1
MERGER DIRECTIVE cont’d.

Merger (3 possibilities)

Company A

  • Being dissolved without going into liquidation
  • Transferring all assets and liabilities to another existing company B
  • In exchange for shares (and cash) issued

to the shareholders of company A

merger directive cont d2
MERGER DIRECTIVE cont’d.

Merger (first option)

shareholders

German GmbH

B

UK Ltd

A

(receivingcompany)

(dissolved)

Companies from two or more states

merger directive cont d3
MERGER DIRECTIVE cont’d.

Merger (other options)

  • same as above, only German GmbH and UK Ltd. both transfer assets / liabilities to NewCo
  • subsidiary merged into parent company
merger directive cont d4
MERGER DIRECTIVE cont’d.

Division

  • Company A being dissolved (without going into liquidation)
  • Transfer of all assets and liabilities to two or more companies
  • In exchange for shares (and cash) issued

to the shareholders of company A

merger directive cont d5
MERGER DIRECTIVE cont’d.

Division

shareholders

shareholders

transfer

transfer

NewCoA

UK Ltd

NewCoB

merger directive cont d6
MERGER DIRECTIVE cont’d.

Transfer of Assets

shares

UK Ltd

Italian S.p.A

Branch

Branch

transfer

merger directive cont d7
MERGER DIRECTIVE cont’d.

Exchange of shares

shareholders

Italian S.p.A

transfer

UK Ltd

merger directive cont d8
MERGER DIRECTIVE cont’d.
  • Mergers and divisions are not possible in many member states according to domestic commercial law
  • Companies from two or more member states
  • Companies listed in the annex to the Directive
  • Possibility of implementing min. 25% holding (10% is proposed) in the capital of the transferring

company in order to benefit from the Directive

parent subsidiary directive
PARENT SUBSIDIARY DIRECTIVE
  • Companies from different member states listed in the Annex
  • Parent holds at least 25% in the capital of subsidiary (10% holding is proposed)
  • Option to introduce twoyear holding period

(Denkavit case)

parent subsidiary directive cont d
PARENT SUBSIDIARY DIRECTIVE cont’d.
  • No withholding tax on dividends
  • Dividends received exempt from tax or credit is given for corporate income tax paid by subsidiary on those profits
interest and royalty directive cont d
INTEREST AND ROYALTY DIRECTIVE cont’d.
  • Exemption of interest and royalties from withholding tax
  • Interest and royalties paid by a company/PE of one member state to a company/PE of another member state
  • The recipient must be the beneficial owner of interest and royalties
  • Both the payer and the recipient must be associated

(with each other)

savings directive
SAVINGS DIRECTIVE

AIM

  • Taxation of savings income in the Member State in which the beneficial owner being an individual is a resident
savings directive cont d
SAVINGS DIRECTIVE cont’d.

SCOPE

  • Exchange of information (almost all EU countries)
  • Withholding tax (Austria, Belgium, Luxembourg and non-EU countries: Switzerland, Liechtenstein, Monaco, Andorra, San Marino)
harmoni z ation of polish tax regulations with the merger directive
HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE
  • Harmonization of provisions regarding:
    • Mergers
    • Divisions
    • Transfer of assets
  • Lack of harmonization in the case of exchange of shares
harmoni z ation of polish tax regul a tions with the merger directive cont d
HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE cont’d
  • Exchange of shares – a company acquires shares in another company as a result of which the first will hold a majority of voting rights in that other company in exchange for shares of the acquiring company issued to shareholders of the other company
harmoni z ation of polish tax regul a tions with the merger directive cont d1
HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE cont’d

shares

P

A

100%

transfer

S

100%

P –holds shares in S with a nominal value of 100 m.u.

P – contributes the shares it holds in S to A at the

market price of 1000 m.u. and takes up shares

in A for 1000 m.u.

adaptation of polish regulations to the parent subsidiary directive
ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE
  • Exemption from withholding tax on dividends (and other revenue from sharing in profits of legal persons)
    • paid by Polish company
    • received by EU company (subject to corporate income tax)
    • EU company holds for at least 2 years a minimum of 25% shares in capital of Polish company
adaptation of polish regul a tions to the parent subsidiary directive con t d
ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d
  • Exemption does not apply to:
    • profits from the redemption of shares
    • profits from the sale of shares for the purpose of their redemption
    • liquidation profits
  • Obligation to keep the shares for 2 years –

how it will work in practice (Denkavit case)

adaptation of polish regulations to the parent subsidiary directive cont d
ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

INCOME 100

CIT (19%) 19

INCOME AFTER CIT 81

DIVIDEND 81

WHT 0% 0

PAID DIVIDEND 81

S

P

RECEIVED DIVIDEND 81

adaptation of polish regulations to the parent subsidiary directive cont d1
ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

Tax Credit

  • Polish parent authorised to deduct from its tax any corporate income tax paid by EU subsidiary on profits out of which dividend was paid
  • Polish parent holds at least 25% of shares in EU subsidiary for at least 2 years
  • Tax credit is limited to the amount of Polish

tax that relates to foreign income

adaptation of polish regulations to the parent subsidiary directive cont d2
ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

INCOME 100

CIT (10%) 10

INCOME AFTER CIT 90

DIVIDEND 90

WHT 0% 0

PAID DIVIDEND 90

S

P

INCOME 200

DIVIDEND 90

TOTAL INCOME 290

CIT (19%)

19% X 290 55,1

CIT TO PAY

(55,1 – 10) 45,1

harmoni z ation of polish regulations with the interest and royalty directive
HARMONIZATION OF POLISH REGULATIONS WITH THE INTEREST AND ROYALTY DIRECTIVE
  • No changes to the regulations were proposed
  • Poland has asked for transitional periods
    • 5% withholding tax on interest for 8 years
    • 10% withholding tax on royalties during the first 4 years and 5% tax during the next 4 years
  • No response from EU was reported to date
  • What will happen after May 1, 2004?
harmoni z ation of polish regulations wit h eu directives
HARMONIZATION OF POLISH REGULATIONS WITH EU DIRECTIVES
  • Are Polish thin capitalisation rules in line with EU regulations?
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