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The Impact of Brexit on German Taxes for Private Clients and Nonprofit Organizations

The Impact of Brexit on German Taxes for Private Clients and Nonprofit Organizations

American business executives responsible for regional operations in Europe often see different approaches to problem solving in terms of cultural differences between various European countries.  It can be said that British colleagues often continue to rethink decisions even after solutions are adopted, and German colleagues focus on engineering a unified approach to reach the best solution to the matter at hand.  These cultural characteristics seem to have manifested in the different ways Parliament in the U.K. and the Bundestag in Germany are addressing Brexit.  Parliament continues to debate whether, when, and how to implement Brexit, while the Bundestag has enacted several laws to address how a hard or soft Brexit will affect various aspects of German tax law.  Dr. Andreas Richter of P+P Pöllath + Partners, Berlin and Frankfurt, provides the reader with an overview of the German tax consequences to be anticipated from a U.K. departure from the E.U. – with or without a formal Brexit agreement.

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Strategies for Foreign Investment in Indian Start-Ups

Strategies for Foreign Investment in Indian Start-Ups

Foreign investment in Indian high-tech start-ups can yield significant profit opportunities for savvy investors.  During 2018, over 1,000 deals were struck, reflecting $38.3 billion in new investments.  If these investments turn out to be profitable, the tax exposure for the investor will vary with the form of the investment.  Choices of investment vehicles include (i) L.L.P.’s, (ii) Category I, Subcategory I alternative investment funds (“A.I.F.’s”) registered with the Securities Exchange Board, (iii) Category III A.I.F.’s, and (iv) trusts.  Each has unique tax consequences for investors receiving dividends and realizing gains.  Raghu Marwah and Anjali Kukreja of R.N. Marwah & Co L.L.P., New Delhi, explain the entities choices and the resulting tax costs.

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Trust Regulations and Payment Services: Dutch Law in 2019

Trust Regulations and Payment Services: Dutch Law in 2019

The Dutch government has taken steps in recent months to enhance regulatory oversight.  The new Act on the Supervision of Trust Offices 2018 adopts serious best practices for trust companies designed to prevent Dutch entanglement in the next set of Panama Papers.  KYC due diligence must be real.  At the same time, the Second Payment Services Directive (“P.S.D. II”) was transposed into Dutch law.  With customer permission, companies involved in payment service businesses will have greater access to information on spending habits of customers.  This generates a win-win scenario – a miracle for companies engaged in marketing activities and insights for consumers into their spending patterns, enabling them to make better financial decisions.  Lous Vervuurt of Buren N.V., the Hague, explains how the new rules work, including new standards of account security.  

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Can Tax Authorities Demand Access to Audit Workpapers? Canadian Experience Follows U.S. Rule

Can Tax Authorities Demand Access to Audit Workpapers? Canadian Experience Follows U.S. Rule

Recent victories in litigation have allowed the Canada Revenue Agency to review tax accrual workpapers of Canadian corporations, provided the request for access is not a “fishing expedition” attempting to find issues.In the U.S., the I.R.S. has enjoyed that power for many years. Sunita Doobay of Blaney McMurtry L.L.P., Toronto, examines the scope and limitations of the Canadian decisions. Stanley C. Ruchelman reviews case law in the U.S., the role of FIN 48, and the purpose behind Schedule UTP (reporting uncertain tax positions), which surprisingly is designed to limit examinations of tax accrual workpapers.

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O.E.C.D. on Digital Business – Seriously?!

O.E.C.D. on Digital Business – Seriously?!

On February 13, 2019, the O.E.C.D. issued a discussion draft addressing the tax challenges of the dig- italization of the economy and asked for feedback in a shockingly brief time- frame. Is the discussion draft – which, in many respects, mimics G.I.L.T.I.provisions and highlights the value of a market as a key determiner of profitallocation – a move away from value of functions? In a stealth way, it may be a precursor to a global B.E.A.T. Christian Shoppe of Deloitte Deutschland, Frankfurt, cautions that the ultimate destination of B.E.P.S. may be added complexity in tax laws and expanded opportunity for double taxation. Bad news for taxpayers; more work for tax advisers.

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Tax Authorities Eye GSK-HUL Merger: Could Attract Tax on Long-Term Capital Gains and Brand Transfer

Tax Authorities Eye GSK-HUL Merger: Could Attract Tax on Long-Term Capital Gains and Brand Transfer

GSK Consumer Healthcare India (“GSKIndia”) is in the process of merging with Hindustan Unilever Ltd (“HUL”) inthe biggest deal in India’s consumer packaged goods space, valued at ap- proximately $4.5 billion. Although the transaction is structured to be tax-free for shareholders, plenty of room exists for the Indian tax authorities to assert tax from the companies: The transfer of a brand owned outside India may generate Indian tax to the extent its value stems principally from India. In addition, arm’s length pricing for royalty payments and accompanying with- holding tax issues also come into play. Sanjay Sanghvi and Raghav Kumar Bajaj of Khaitan & Co., Mumbai and New Delhi, discuss the global tax issues surrounding the transaction.

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New Developments on the E.U. V.A.T. Regime of Holding Companies

New Developments on the E.U. V.A.T. Regime of Holding Companies

Like state and local tax in the U.S., where tax exposure can be underestimated by many corporate tax planners, the V.A.T. rules in the E.U. contain many pitfalls. This is especially true when it comes to recovery of V.A.T. input taxes by holding companies. A corporate tax adviser may presume that all V.A.T. input taxes paid by a holding company are recoverable. Yet, despite abundant jurisprudence, debate continues regarding the V.A.T. recovery rights of holding companies. The starting point in the analysis is easy to state: Holding companies that actively manage subsidiaries can recover V.A.T., while holding companies that passively hold shares cannot. The problem is in the application of the theory, where the line between active and passive behavior is blurred by seemingly inconsistent decisions. Bruno Gasparotto and Claire Schmitt of Arendt & Medernach, Luxembourg, explain the rules and how they have been applied by the C.J.E.U.

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2019 Welcomes New Finnish Interest Deduction Limitations

2019 Welcomes New Finnish Interest Deduction Limitations

Changes to the Finnish interest barrier regime have come into effect in 2019. They have been expected since 2016, when the E.U. released its Anti-Tax Avoidance Directive (“A.T.A.D.”), which sets forth the minimum standards for interest deduction restrictions within the E.U. The limitations affect E.B.I.T.D.A.-based rules (i.e., addressing earnings before interest, tax, depreciation, and amortization) adopted in 2014, which include the specific interest barrier rule affecting the deductibility of intra-group interest payments. Antti Lehtimaja and Sanna Lindqvist of Krogerus Ltd., Helsinki, explain the key elements of the new restrictions, including some considerations regarding the impact on Finnish taxpayers and investments in Finland.

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The U.K. Digital Sales Tax – It Could Be You

The U.K. Digital Sales Tax – It Could Be You

On November 7, 2018, the U.K. government confirmed that it will proceed with the introduction of a digital services tax ("D.S.T.") on large businesses. The tax will be charged beginning April 2020. It will apply to three key areas, which the government has concluded derive a huge value from the participation of U.K. users and are largely untaxed. Eloise Walker of Pinsent Masons, London, provides an overview of the D.S.T., cautioning that problems exist in identifying both the revenue to which the D.S.T. will apply and the hallmarks of jurisdiction that must exist in order for the tax to be imposed.

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Revised Swiss Corporate Tax Reform Will Keep Switzerland a Top Corporate Location

Revised Swiss Corporate Tax Reform Will Keep Switzerland a Top Corporate Location

Beginning in 2015, Switzerland has struggled over the adoption of a tax system that is consistent with B.E.P.S. Many different stakeholders are involved, ranging from the Swiss Federal government to the cantons, various political parties, and the E.U. At last, a version of tax reform has been adopted by the Swiss Federal National Assembly. Known as the Federal Act on Tax Reform and A.H.V. Financing ("T.R.A.F."), it contains provisions designed to please all participants while maintaining Switzerland's global reputation as an attractive jurisdiction for multinational enterprises. Danielle Wenger and Manuel Vogler of Prager Dreifuss AG, Zurich, guide the reader through the various iterations of the reform and the provisions of the T.R.A.F.

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Alta Energy Affirms Treaty Benefits: A Canadian Case Study for Applying the M.L.I.

Alta Energy Affirms Treaty Benefits: A Canadian Case Study for Applying the M.L.I.

As part of its attack on B.E.P.S., the O.E.C.D. published its Multilateral Instrument, a device that revised more than 1,200 income tax treaties. One of the provisions of the M.L.I. targets treaty shopping by the adoption of, among other things, a principal purpose test ("P.P.T."). In simple terms, the P.P.T. disallows a treaty benefit when a principal purpose of a transaction is to obtain that benefit. Transactions in accordance with the object and purpose of the provisions of a treaty are not affected by the P.P.T. Many North American tax advisers know that the P.P.T. is based on a provision of Canadian law known as the General Anti-Avoidance Rule or G.A.A.R. A recent decision of the Tax Court of Canada addresses the application of G.A.A.R. to a cross-border tax plan set up by a U.S. financial institution designed specifically to obtain enhanced Canadian tax benefits by rechanneling a U.S. investment in Canada into a U.S. investment into Luxembourg that was then invested into Canada. The Canada Revenue Agency ("C.R.A.") attacked the Luxembourg company's entitlement to treaty benefits relying heavily on G.A.A.R. Kristy J. Balkwill and Benjamin Mann of Miller Thomson L.L.P., Toronto, explain the decision and its potential impact on the P.P.T. The case has been appealed by C.R.A.

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Corporate Matters: Ichabod Crane Visits His Executive Employment Attorney

Corporate Matters: Ichabod Crane Visits His Executive Employment Attorney

Washington Irving’s “The Legend of Sleepy Hollow” tells the story of poor Ichabod Crane, a school teacher attacked by a headless horseman. It is a tale fitting for Halloween by a 19th Century American author famous for his stories about rural New York State, somewhere near the Tappan Zee Bridge. In this latest retelling, George Birnbaum, a New York State attorney whose practice focuses on labor law, brings a new twist to the story. Here, it comes to light that Ichabod made poor decisions regarding his employment contract, and those decisions exacerbated work-related problems flowing from the attack.

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Extension of German Taxation on Foreign Companies Holding German Real Estate

Extension of German Taxation on Foreign Companies Holding German Real Estate

In August, the German Federal government proposed draft legislation that will expand the scope of German taxation to cover the sale of shares in “real estate rich companies” by nonresident taxpayers. The draft legislation proposes that capital gains from shares in non-German companies will be subject to German taxation if more than 50% of the share value is attributable to German real estate. The legislative proposal has wide application, reaching a shareholding that exceeds a 1% threshold at any time in the five years preceding the sale. Dr. Petra Eckl, a partner at GSK Stockmann + Kollegen in Frankfurt, explains the proposal and the practical exposure that arises from its overly broad language.

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Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

Dutch Corporate Tax Reform: Dividend Tax Remains, A.T.A.D. Arrives, and Tax Rates Drop

Across the globe, the landscape for international tax is in a constant state of change. Nowhere is this more evident than in the Netherlands. On the third Tuesday of September, a repeal of the dividend withholding tax was announced. Within a month, it was withdrawn. Paul Kraan, a partner of Van Campen Liem in Amsterdam, discusses the remaining tax proposals presented by the Dutch government on the eve of the third Tuesday of September. These include provisions related to A.T.A.D. 1, such as G.A.A.R., an exit tax for corporations, a C.F.C. anti-abuse rule, and a cap on the deductibility of net interest expense.  Also discussed is an existing unilateral exemption from withholding tax on cross-border dividend payments in (i) the context of an income tax treaty and (ii) the presence of economic substance for the direct or indirect shareholder. This exemption is likely to remain in the law.

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O.E.C.D. Discussion Draft on Financial Transactions – A Listing of Sins, Little Practical Guidance

O.E.C.D. Discussion Draft on Financial Transactions – A Listing of Sins, Little Practical Guidance

In July, the O.E.C.D. Centre for Tax Policy and Administration released Public Discussion Draft on B.E.P.S. Actions 8-10: Financial transactions (the “Discussion Draft”) addressing financial transactions (e.g., loans, guarantees, cash pools, captive insurance, and hedging). Michael Peggs and Scott R. Robson review the draft guidance and express disappointment. The Discussion Draft is not a thought leader, as tax authorities have successfully litigated the issues inherent in intercompany loans. Decided cases generally reflect a “not in my back yard” approach to deductions for interest expense. The Discussion Draft makes statements regarding allocation of risks in financial transactions that are inconsistent with arm’s length evidence. It also promotes decisions based on 20-20 hindsight. All these lead to several unanswered questions: What is the ultimate meaning of the term “arm’s length” when used in a cross-border financial transaction? Is it the terms and conditions that exist in actuality among lenders and borrowers, or is it the terms and conditions that should exist in the mindset of the tax authorities?

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German Anti-Treaty Shopping Rule Infringes on E.U. Law

German Anti-Treaty Shopping Rule Infringes on E.U. Law

When do attacks on cross-border tax planning move from enough to too much? The European Court of Justice (“E.C.J.”) provided an answer in connection with German tax rules limiting access to the E.U. Parent Subsidiary Directive for dividends leaving Germany. For many years, German law provided an irrebuttable presumption of fraudulent or abusive tax planning when a multinational structure failed to meet a “one size fits all” set of factual parameters. The provision was struck down by the E.C.J. last year, modified slightly in response, and struck down again in July of this year. Pia Dorfmueller of P+P Pollath explains why the German tax law was found to violate European law – it provided a response that was not proportional to the alleged wrong-doing.

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Joint Audits: A New Tool for Cross-Border Tax Evasion

Joint Audits: A New Tool for Cross-Border Tax Evasion

When a large corporate taxpayer receives an audit notification letter from the tax authority in its country of residence, the taxpayer typically knows what to expect: a lengthy process of documenting and defending its tax position. It also knows the process under domestic law for appealing adverse tax adjustments, and if cross-border issues are raised, it knows how to take advantage of Mutual Agreement Procedures between competent authorities under an income tax treaty. The full process can take years to resolve. Now, however, a pilot program between German and Italian tax authorities empowers a joint cross-border audit team to conduct a single joint audit of cross-border operations between the two countries. The joint audit is intended to be more effective for resolving issues of double taxation in cases involving complex facts related to (i) transfer pricing issues, (ii) residency or permanent establishment issues, and (iii) aggressive tax planning schemes. Marco Orlandi of Ludovici Piccone & Partners, Milan, examines the actual process followed in the pilot program and comments on whether the goals of the joint audit have been achieved.

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Coming to the U.S. After Tax Reform

Coming to the U.S. After Tax Reform

Now, more than six months after enactment of the Tax Cuts & Jobs Act, many tax advisers have achieved a level of comfort with the brave new world of Transition Tax, F.D.I.I., G.I.L.T.I., B.E.A.T., and incredibly low corporate tax rates. However, sleeper provisions in the new law can have drastic adverse tax consequences in the realm of cross-border transactions and investments: (i) the threshold for becoming a C.F.C. has been reduced significantly by several changes in U.S. tax law and (ii) the 10.5% tax rate for G.I.L.T.I. is limited to corporations so that individuals face ordinary income treatment for G.I.L.T.I. inclusions from foreign corporations that were not C.F.C’s. prior to the new law. Jeanne Goulet of Byrum River Consulting L.L.C., New York, addresses these problems and suggests several planning opportunities.

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Israeli Court Case First to Interpret Ten-Year Exemption

Israeli Court Case First to Interpret Ten-Year Exemption

Effective in 2007, Israel’s New Immigrant Benefits rules are intended to promote immigration through the grant of substantial tax benefits: (i) a ten-year tax exemption for foreign-source income produced or accrued outside Israel or income stemming from assets located outside Israel and (ii) an exemption for all tax reporting requirements related to exempt income. Over the years, the Israeli tax authorities applied strict rules in determining (i) whether a specific item of income should be considered to be foreign source income and (ii) the portion that is properly treated as foreign in circumstances of mixed income – part foreign and part domestic. Now, eleven years after the New Immigrant Benefits rules became effective, the first case addressing these open questions has been decided, Talmi v. Kfar Saba Tax Assessor. Daniel Paserman and Inbar Barak-Bilu of Gorntizky & Co., Tel Aviv, report on the holding. In brief, the taxpayer won on principles but lost on the basis of his facts.

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U.K. Requirement to Correct

U.K. Requirement to Correct

The “Requirement to Correct” (“R.T.C.”) rules for offshore tax affairs in the U.K. threaten steep penalties if noncompliant taxpayers at April 5, 2017, do not take action to correct the relevant noncompliance by September 30, 2018. In a detailed look at the R.T.C. rules, Gary Ashford of Harbottle & Lewis L.L.P., London, explains the ins and outs of the provisions, including (i) the definition of offshore noncompliance, (ii) covered taxes, (iii) penalties, (iv) the reasonable cause defense, (v) disqualified advice that cannot be reasonable cause, (v) the method that must be followed to implement a valid correction, (vi) the statute of limitations, and (vi) recent guidance from H.M.R.C. regarding last minute notifications by noncompliant taxpayers. The final date for completing a correction is December 29, 2018.

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