Participation Exemption Research Articles

Compartmentalization in the Netherlands Participation Exemption: A Model for Europe?

This article discusses the concept of compartmentalization in the context of the Netherlands participation exemption. The author outlines a decision of the Netherlands Supreme Court wherein it was held that a statutory base is needed for such compartmentalization to apply in the event of a change in legislation and then analyses remedial legislation enacted in response to the decision and its compatibility with EU law.

The Portuguese corporate tax reform and international trends: an assessment

Purpose – The purpose of this paper is, first, to discuss if the Portuguese corporate tax reform, implemented in 2014, moved the system towards international trends. Second is to analyse in what areas the similarities and disparities are more pronounced when assessing the Portuguese reform against the Common Consolidated Corporate Tax Base, the Mirrlees Review or other relevant international guidelines. Finally, it assesses how a European country under a bailout could significantly reform the corporate tax. Design/methodology/approach – The methodology employed is based on a mix of the legal research method and case study analysis. The legal method will be applied under comparative income taxation, and the case study will draw on the Portuguese reform to broaden the discussion about critical issues like the participation exemption regime and its place in the taxation of international income flows. The paper will analyse core issues in international income taxation, the present state of corporate tax harmonization in the European Union, discuss the main issues that were dealt by the Portuguese tax reform and offer a critical assessment of tax policy choices that underpinned the reform. Findings – During the past decades, Portugal was increasingly out of line with international trends in corporate taxation. The bailout asked for the Portuguese Government in 2011 placed a heavy burden in public finances, with an apparent lack of room to follow international trends of corporate tax reform. However, it can be concluded that, after convincing the troika that investment and growth were paramount to overcome the severe economic and social crisis that fell upon the country, the corporate tax was seen as an important policy tool to promote these goals. The reform was thus possible even in the context of a restrictive public finance situation, and followed most guidelines put forward in highly regarded international reports. Practical implications – A broad corporate tax reform, including rate reduction, a participation exemption regime, a more flexible rule on cost acceptance, an extension of loss carry over period, to name a few, was possible in a very constrained public finance situation. By placing the emphasis on moving the system towards international trends and promoting measures to enhance investment and growth, international creditors could accept such a reform. Also, a consensus with the main opposition party was a very important factor in securing much needed political support. Originality/value – The findings from what can be considered as an experiment in corporate tax reform in tough economic and social times can be useful to policymakers, tax authorities and international bodies dealing with tax reform processes. The impact on managerial decisions such as investment and financing is also relevant.

The Tax Treatment of Shareholder Loans in Germany

This article describes the tax treatment of shareholder loan impairments under German tax law within the context of the German national participation exemption regime. In particular, the changes introduced by a recent amendment to the German Income Tax Act are highlighted. The article traces the historical development leading up to the legislative change and analyses the key features of the new provision.

Aggressive International Tax Planning by Multinational Corporations: The Canadian Context and Possible Responses

Aggressive international tax planning by multinational corporations has lately fallen under intense political scrutiny. U.S. politicians have called out some American multinationals, including Apple, Amazon, Starbucks and Google, for relocating profits abroad to avoid American taxes. More recently, politicians accused Burger King of being unpatriotic for its own purported “tax inversion” maneuver, in which it would acquire Canada’s Tim Hortons and shift the head office from Florida to Ontario, benefitting from the lower northern tax rates. The Chicago-based Walgreens pharmacy chain recently backed off a “tax inversion” plan to relocate to Switzerland (the former headquarters of Alliance Boots, a company acquired by Walgreens), apparently having assessed the political risk as too high. This sort of aggressive international tax planning by multinational corporations was what G20 members had committed to fighting against when they endorsed the OECD’s “action plan” against base erosion and profit shifting (BEPS). Canada has been vigilant about improving its tax framework to prevent non-resident corporations from eroding the Canadian tax base, having enacted thin-capitalization rules and, more recently, foreign-affiliate-dumping rules, as well as proposing anti-treaty-shopping measures. But despite Canada’s commitment to the OECD’s BEPS Action Plan, the Canadian government has been reluctant to follow through on implementing rules that might affect its own resident corporations and their international competitiveness. This is most notably visible in the generous participation exemption for dividends from foreign affiliates, the absence of rules restricting the deductibility of interest expenses incurred to earn exempt dividends from foreign affiliates. Canada may be reluctant to fully follow through on all aspects of the OECD’s BEPS Action Plan. As the examples of Apple, Amazon, Google and Starbucks demonstrate, the American government has so far been unable to bring itself to take any meaningful action against aggressive international planning by U.S.resident corporations. Were Canada to enact and enforce rules that clamped down on aggressive international tax planning by its own resident corporations, it would only put Canadian firms at a competitive disadvantage relative to American (or other international) rivals. Until the United States is willing and able to take the lead on aggressive international tax planning by multi-national corporations, the reality is that smaller countries, including Canada, should be cautious about making changes to its international tax rules that are dependent on other countries making similar changes.

The Devil in the Details: Reflections on the Tax Reform Act of 2014

The Discussion Draft of the “Tax Reform Act of 2014” (TRA14) released by US House Committee on Ways and Means Chairman Dave Camp (R-MI) on February 26, 2014 represents a major effort for fundamental and far reaching reform of US tax law. Unfortunately, while many parts of the proposal seem quite sensible as an effort to bring back the “spirit of 1986”, the international tax reform proposals are deeply flawed and based on obsolete assumptions on the world facing US multinationals in 2014.Overall, TRA14 represents a welcome effort to propose a revenue neutral combination of base broadening and rate cutting. TRA14 envisages three individual rates of 10%, 25% and 35% and a corporate rate of 25%. This rate structure is quite sensible, and if it can be achieved in a revenue neutral fashion that is an added advantage. However, the international tax proposals are based on the assumption that because most other OECD countries have adopted a limited version of territoriality, i.e., a “participation exemption” for dividends out of the active income of Controlled Foreign Corporations (CFCs), the US must follow suit to preserve the competitiveness of US based MNEs. But this assumption is wrong, for three reasons. First, the empirical data indicate that under current law US based MNEs do not face a competitive disadvantage despite the fact that they are nominally taxed on a worldwide basis without a participation exemption. Second, the OECD BEPS project suggests that the effective tax rates of foreign MNEs are headed up, not down. Third and most importantly, reducing the US corporate tax can be done without putting US-based MNEs at a competitive disadvantage even if deferral were completely eliminated, and this has the added advantage of eliminating both lock out (the main problem the participation exemption is designed to solve) and the incentive to shift profits out of the US (which this version of TRA 14 does little to address).This paper will discuss these points and conclude that as far as the international proposals are concerned it would be better to go back to the drawing board and start from scratch with a simple proposal of full inclusion at whatever corporate rate is judged to be similar to the effective rates paid by foreign-based MNEs.

International Aspects of the New Portuguese Corporate Income Tax Regime Enhancing Tax Competition in the European Market

This note addresses the international aspects of the overhaul of the Portuguese corporate income tax regime undertaken by the Tax Reform Commission, which was re-published by Law 2/2014 of 16 January 2014. In particular, the note focuses on Portuguese international tax policy, namely the newly introduced participation exemption regime and the new regime applicable to income earned by foreign PEs of Portuguese companies.

Vive La Petite Difference: Camp, Obama, and Territoriality Reconsidered

The recent tax reform proposals by Chairman Camp (R-MI) of the House Ways and Means Committee and by President Obama seem to offer starkly contrasting visions of how to reform the taxation of foreign source income earned by US-based multinationals (MNEs). Both acknowledge the problem, which is that US-based MNEs currently have over a trillion dollars of “permanently reinvested” income offshore, which they cannot bring back to the US without incurring a 35% tax penalty. However, they seem to offer radically different solutions: Under the Camp Proposal, a participation exemption will enable US-based MNEs to bring back the income without paying significant tax. Under the Obama Proposal, deferral will be abolished and US-based MNEs will have to pay a minimum tax on foreign source income earned by their controlled foreign corporations (CFCs) as it is earned. The result would be that the tax penalty on repatriating such income would be reduced because dividends would only be subject to tax at the difference between the statutory rate (reduced to 28% under the Obama Proposal) and the minimum rate. However, a closer look reveals that these proposals have more in common than meets the eye. Specifically, the Obama Proposal’s minimum tax on foreign source income of CFCs is perfectly compatible with exempting such income from further tax when it is repatriated, as the Camp Proposal envisages. Conversely, the provisions to prevent income shifting in the Camp Proposal can in practice result in precisely the minimum tax on the foreign source income of CFCs that is the centerpiece of the Obama Proposal. This level of agreement suggests that a compromise embodying elements of both proposals should not be impossible to reach when tax legislation is enacted after the fall election.

Notas sobre o regime de participation exemption previsto no CIRC

Notas sobre o regime de participation exemption previsto no CIRC

Extension of Malta’s Participation Exemption

In this note, the author explains the participation exemption regime in Malta, including recent amendments that extend the exemption method to income or gains derived by a company that are attributable to a permanent establishment situated outside Malta, or to the transfer of a PE.

BACK TO THE DRAWING BOARD: THE STRUCTURAL AND ACCOUNTING CONSEQUENCES OF A SWITCH TO A TERRITORIAL TAX SYSTEM

We review the basics of international tax planning by U.S. multinational corporations (MNCs) and the organizational structures that facilitate such planning. We then discuss the potential impacts that adopting a participation exemption regime (i.e., a territorial tax system) along the lines proposed by Representative Camp could have on a U.S. MNC's worldwide supply chain structure and financing arrangements. We compare the change in a corporation's global accounting effective tax rate under the current U.S. worldwide tax system and four participation exemption options proposed by Representative Camp. Using a hypothetical set of facts representative of a U.S. multinational with highly mobile intellectual property income, we show that the options produce very different accounting effective tax rates and tax revenues received by the U.S. Treasury. We also point out potential tax planning strategies that could be employed pre- and post-effective date of the implementation of a participation exemption system that would change the expected revenue to be received during the transition to such a system.

Taxation of EU Cross-Border Corporate Dividends: Convergence and Tax Competition

This paper addresses the tax treatment of EU inbound dividends in the EU Member States where the corporate (rather that individual) shareholders are resident, that is dividends paid by a company that is resident in a EU Member State to a corporate recipient shareholder that is resident in a EU Member State, including those dividends not covered by the Parent-Subsidiary Directive (corporate dividends). The paper adopts a comparative approach aimed at providing an explanation of the convergence of policies relating corporate dividends of the EU countries of residence of recipient corporate shareholders in the EU in the last decade, a convergence not fully explained by the top-down harmonization introduced by the Parent-Sub Directive. The paper describes the process of convergence towards exemption for corporate dividends (section 2), and then provides an evolutionary explanation of that process by adopting an evolutionary approach (section 3), together with a discussion of the circulation of the participation exemption model through tax transplants in combination with the ECJ case law (section 4). The paper concludes with comments on the intra-model competition among sub-models of participation exemption (section 5).

New Guidance on Italian Participation Exemption

This note summarizes the main aspects of the Guidance recently issued by the Italian Revenue on the participation exemption regime applicable to capital gains.

Australia as an international capital centre and headquarters for oil and gas investments

Oil and gas projects inherently require significant sums of capital investments. Uncertainty in the global financial climate, coupled with volatile commodity prices and unrelenting cost escalations, is contributing to the risk of a world-wide credit crunch. In an ever-tightening capital market, investors are forced to compete globally for equity amidst rising costs of capital and an unprecedented demand for accountability by capital providers. Despite tough economic times, Australia has remained one of the world’s leading centres for raising capital for global oil and gas exploration and development exploits. Many players increasingly access Australia’s liquid capital markets to fund emerging oil and gas ventures in locations including Africa, Asia and the Americas. Australia has conducive regulatory and fiscal rules, which make it an attractive holding company jurisdiction to locate either global or regional oil and gas headquarters. There are, however, many aspects of Australia’s fiscal rules that are often overlooked and can prove costly for the global tax effectiveness of investing through Australia and the flow-on impact on global after-tax funding costs in a capital-constrained environment. This peer-reviewed paper seeks to canvass the following: overview of Australia’s holding company tax regime, including Australia’s participation exemption, branch profits exemption and controlled foreign company rules; accidental permanent establishment risks for Australian entities operating abroad; treatment of equity-raising costs; cost allocations for management, technical services and head office support; funding of foreign operations and subsidiaries; holding intellectual property rights and conducting research and development in Australia versus abroad; and Australia’s arm’s length rules.

Recent Developments Regarding the Participation Exemption Regime and the Capital-Holding Requirement

Recent Developments Regarding the Participation Exemption Regime and the Capital-Holding Requirement

Opportunities Arising from Entitlement to Participation Exemption Benefits for the Gain Realized upon Disposal of Preferential Subscription Rights

Luxembourg administrative courts recently rendered three decisions which confirm the application of the participation exemption regime to a gain deriving from the sale of assets which are not per se shares, and clarify the tax treatment of preferential subscription rights. Bearing in mind the significant role of Luxembourg in the financial sector, the authors explain the content of the recent court decisions and consider related opportunities.

The New Participation Exemption Regime

The author, in this note, reviews the provisions in the Budget Law for 2011 in regard to dividend taxation, which became effective 1 January 2011.

Participation exemption and tax arbitrage: Italy’s case

This paper studies how participation exemption (PEX) tax rules for stocks owned by companies, which are frequent in EU countries, introduce tax arbitrage opportunities. The focus is on Italy’s PEX rules. PEX enables companies to make manufactured loans that generate tax exempt interest income by combining stocks with forwards or options. Borrowing through similar manufactured loans allows companies to bypass restrictions to deducting the cost of borrowing. PEX induced arbitrage exploitable through stock and options portfolios is available even when put-call parity holds for European options. Derivatives that hedge a stock can “inherit” the PEX regime of the stock they hedge. PEX gives companies that own a stock a tax timing option, which can be exploited through stock straddle strategies, i.e. long-short positions in the same stock, and which can generate valuable tax savings.

After-tax Valuation of Convertible Bonds and Participation Exemption

This paper studies the after-tax valuation of convertible bonds in the light of Europe's participation exemption (PEX) rules and International Financial Reporting Standards (IFRS). The focus is on Italy's representative case. PEX rules exempt from company taxation capital gains realized by companies selling stocks. PEX rules raise the value of convertibles as investor companies can strategically convert the bond into stock to enjoy PEX. Historical cost-based national accounting standards imply taxation upon realization and valuable tax timing options (TTOs). ‘Fair value’ based IFRS entail mark-to-market taxation, which ‘kills’ TTOs, but investor companies can convert the bond early in order to enjoy PEX. Early conversion can be valuable.

South Africa’s Exit Charges (And Something on Immigration Too)

In this article, the author considers the implications of the various exit (and immigration) tax issues (for both individuals and corporations) in South Africa, with special reference to residence, capital gains tax, controlled foreign companies, the participation exemption, permanent establishments, certain other disposals and dividends.

New Rules on Qualifying Subsidiaries under the Dutch Participation Exemption Regime

This note outlines the revised rules regarding subsidiaries that qualify for the application of the participation exemption, which are applicable from 1 January 2010. The author concludes that although the rules may look complex, in practice, they are straightforward to implement and the outcome should be the same in most instances as under the old rules.