World Tax Advisor - Deloitte Tax...profits of a subsidiary that is tax resident in an EU member state or country that has concluded a tax treaty with Ireland are taxed at a rate of

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International Tax

World Tax Advisor 23 November 2012

In this issue: Singapore: 2012 year in review ............................................................................................................................................ 1 Ireland: 2012 year in review ................................................................................................................................................. 3 Austria: More changes made to land registry fee .................................................................................................................. 5 Cyprus: New treaty signed with Ukraine ............................................................................................................................... 5 Denmark: Authorities rule on tax treatment of dividends paid to U.S. S Corp ........................................................................ 6 Denmark: Potential for dividend withholding tax reclaim by distributing investment funds .................................................... 7 Hong Kong: Income tax agreement signed with Canada ...................................................................................................... 7 Russia: Cyprus to be removed from Russia’s offshore zone blacklist .................................................................................... 10 United States: Update on FATCA ........................................................................................................................................ 11 In brief ............................................................................................................................................................................... 13 Tax treaty round up ............................................................................................................................................................ 14 Are You Getting Your Global Tax Alerts? ............................................................................................................................ 15 Singapore: 2012 year in review In 2012, Singapore became a more attractive gateway for investing in Asia because of a new safe harbor for capital gains and an extension of the mergers and acquisitions (M&A) scheme to foreign multinational groups. The government sweetened tax incentives to encourage R&D, international expansion, financial services, shipping, aviation and other activities. It also announced new tax incentives to develop Singapore as a refining and trading hub for precious metals. Singapore signed its first stand-alone tax information exchange agreement (TIEA) and continued to expand and update its network of comprehensive income tax treaties. Domestic tax changes Singapore is a leading location for holding companies for investments into China, India and other parts of Asia. One key reason is that Singapore does not tax capital gains from sales or other dispositions of shares in a company, whereas gains or losses that are income in nature may be taxed or deductible for tax purposes. However, the correct characterization of a gain may be uncertain because there is no bright-line test, but is instead based on a consideration of the facts and circumstances of each case. Therefore, the government introduced a new safe harbor to facilitate corporate restructuring, enhance Singapore’s attractiveness as a business location and minimize compliance costs for taxpayers. Under the new rule, a gain derived by a divesting company from a disposition of ordinary shares in an investee company generally is not taxable if, immediately before the date of the share disposition, the divesting company held at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months. Improvements to the M&A scheme could make it very attractive for foreign multinationals to use Singapore companies as acquisition vehicles. The scheme is now available as an added feature of the headquarters tax incentive program. The


administering government agency has the power to waive the requirement that the ultimate holding company of the acquiring company must be incorporated and tax resident in Singapore, on a case-by-case basis and subject to conditions, for companies under the program. The government also introduced a double tax deduction scheme for qualifying transaction costs incurred for qualifying share acquisitions during the period 17 February 2012 through 31 March 2015, subject to an expenditure cap of SGD 100,000 per year of assessment, in addition to the existing M&A allowance of 5% of up to SGD 100 million of the acquisition value for all qualifying M&A per year of assessment and stamp duty relief. The government made Singapore a more attractive IP holding location by allowing expenditure incurred under R&D cost-sharing agreements to be deductible under the productivity and innovation credit (PIC) scheme, subject to conditions. It also increased the cash payout rate for years of assessment 2013 through 2015 and enhanced the PIC scheme to facilitate training, R&D in software not intended for resale and investment in automation equipment. The government introduced a goods and services tax exemption and an approved refiner and consolidator scheme to develop a new refining and trading cluster for investment-grade gold, silver and platinum in Singapore. It also improved tax incentives for international expansion, the financial sector, real estate investment trusts, shipping, aviation and other activities. International tax changes On 30 October 2012, Singapore signed a stand-alone TIEA with Bermuda, the first in Singapore’s history. It also signed comprehensive income tax treaties with the Isle of Man and Jersey and continued to update its tax treaty network by signing an enhanced treaty with Poland and new treaty protocols with Portugal, Turkey, the U.K. and Vietnam. The pending Singapore-U.K. treaty protocol, upon entry into force, will eliminate the limitation of relief provision in article 24 of the treaty in line with Singapore’s recent general treaty trend (another example is Singapore’s second treaty with China, signed in 2007). However, other treaties, such as Singapore’s treaties with India and Japan, still include limitation of relief provisions. The pending protocol to the Singapore-Vietnam treaty includes an interesting most-favored-nation provision. Paragraph 2 of article V of the protocol provides that if Vietnam, in any tax treaty with any other state, provides for a tax rate of less than 10% for interest, the same lower rate will apply for purposes of the Singapore-Vietnam treaty. Although most-favored-nation provisions are rare, this is not the first in Singapore’s treaty network. Another notable example is article 6 of the Singapore-India treaty protocol signed on 29 June 2005, which provides that the capital gains tax exemption in article 1 of the protocol will remain in force so long as any tax treaty between India and Mauritius provides that any gains from the alienation of shares in any company that is a resident of a contracting state will be taxable only in the contracting state in which the alienator is a resident. Singapore’s revised income tax treaty with Switzerland and its treaty protocols with Bahrain, Canada, Estonia and Italy entered into force. Outlook The government is considering adopting a rights-based approach to characterize software payments and payments for the use of, or the right to use, information and digitized goods, based on feedback received during the public consultation conducted by the Inland Revenue Authority of Singapore (IRAS). The Ministry of Finance announced on 14 October 2012 that it has agreed to enhance tax cooperation with Germany to prevent tax evasion, which will alleviate Germany’s concern about its citizens moving funds to Asia after its conclusion of a treaty with Switzerland targeting citizens who hide taxable income in Swiss banks. Singapore currently has one of the broadest treaty networks in Asia, with 69 comprehensive income tax treaties in force. The government is looking to expand the network as widely as possible and, in particular, would like to conclude more treaties with Latin American and African countries if opportunities arise, according to Sing Yuan Yong, senior tax specialist for the tax policy and international tax division at the IRAS. The Singapore government is in talks with the U.S. Department of the Treasury to conclude an intergovernmental agreement on the U.S. Foreign Account Tax Compliance Act. A private-sector advisory panel will be formed to provide


industry input for the talks, according to a joint press release issued on 9 November by Singapore’s Ministry of Finance and the Monetary Authority of Singapore. — Linda Ng (New York)

Director Deloitte Tax LLP [email protected]

Steve Towers (Singapore)Partner Deloitte Singapore [email protected]

Li Mei Liew (New York) Senior Manager Deloitte Tax LLP [email protected]

Ireland: 2012 year in review The main corporation tax rate of 12.5% has become a key part of Ireland’s brand. While there has been commentary from some international quarters on the sustainability of the rate, Ireland’s steadfast commitment to the rate has been reiterated on numerous occasions by the government. No amendments have been made in relation to the 12.5% corporation tax rate during 2012, and the government strongly supports the retention of this rate for the foreseeable future. The year 2012 has seen significant growth in foreign direct investment levels in Ireland, and combined U.S. investment over the past two years has resulted in the strongest ever two-year period of investment from U.S. firms into Ireland. This represents a significant vote of confidence in the Irish economy. Corporation tax developments General In a bid to encourage job creation and boost the economy, the three-year corporate and capital tax exemption for new start-up companies that was introduced in 2010 has been extended for another three years for companies starting up in 2012, 2013 and 2014. In addition, a number of welcome changes were brought into place, including an improved R&D credit regime and an opportunity to reward key staff through certain provisions of the R&D credit. Incentives were introduced to help stimulate growth in the real estate sector in the form of reduced stamp duty for commercial property, a capital gains tax exemption for certain property and mortgage interest relief measures for individuals. Combined, these initiatives were anticipated to act as a catalyst in rejuvenating an ailing Irish real estate market, but their success remains to be seen. Improvements to R&D tax credits Ireland has had a very generous R&D tax credit regime since 2004 and a number of improvements have been introduced in recent years, such as the ability to offset the R&D credits against payroll taxes to generate cash tax refunds. Despite recent improvements, one of the remaining criticisms of the R&D tax credit regime is that tax credits are available only on incremental spending in excess of the company’s 2003 base year R&D expenditure. While this will not create an issue for companies that had no R&D activities in 2003, this year saw a relaxation of the incremental nature of the regime. Now all companies can claim the first EUR 100,000 per annum of qualifying R&D spend, regardless of their R&D spend in 2003. This is a positive step and has been welcomed. An additional development in the R&D tax credit regime is that employers now have the opportunity to reward key employees. Companies that are in receipt of the R&D credit can surrender a portion of the credit to reduce an employee’s effective tax rate. Both of these new features are clearly focused on assisting smaller technology companies improve their financial position and to invest in future technology. Pooling of foreign royalties Ireland’s legal and tax regimes have resulted in many groups managing their intellectual property assets from Ireland, and a change enacted during 2012 should help improve Ireland’s attractiveness in this area. Previously, Ireland allowed credit relief for foreign withholding taxes against the Irish tax on a particular royalty stream paid


to the Irish company. From 2012, when relevant royalties are received as part of trading income from persons not resident in Ireland, any unrelieved foreign tax on those royalty streams can be used to reduce the income arising from other foreign royalties streams in the same accounting period. Taxation of foreign dividends and holding companies Foreign dividends received by an Irish company out of trading profits of a subsidiary that is tax resident in an EU member state or country that has concluded a tax treaty with Ireland are taxed at a rate of 12.5%, subject to relief for foreign withholding taxes and underlying foreign tax on the profits. This low rate of tax is extended to include dividends from territories whose governments have ratified the Convention on Mutual Assistance in Tax Matters (32 countries currently have committed to the Convention). A practical change has been made to the tax treatment of foreign exchange gains and losses arising on bank deposits held by holding companies in a currency other than the euro. In accordance with the amendments, the tax treatment now follows the accounting treatment for such transactions. Group relief The definition of a “group” has been expanded so that an Irish resident company can surrender losses to another Irish resident group company when the companies are members of the same group and the Irish companies’ parent is a company resident in a treaty country or listed on a recognized stock exchange. This is a welcome change for foreign-headquartered groups that do not have an EU holding company; previously, the Irish companies had to be part of an EU group of companies to avail themselves of the relief. VAT and capital taxes As expected, the standard rate of VAT was increased from 21% to 23%, while the rates of capital acquisitions tax and capital gains tax both increased from 25% to 30%. One welcome new provision was the introduction of a capital gains tax holiday, under which any land or buildings acquired in Ireland (or a member of the EEA) between 7 December 2011 and 31 December 2013 that is owned by the same person for at least seven years will be exempt from capital gains tax on any gain arising in the seven-year period following the date of acquisition. The stamp duty rate on commercial property has been significantly reduced to a flat rate of 2%. Special assignee relief program A new special assignee relief program was introduced during the year and is targeted at attracting highly paid talent to Ireland. This scheme was welcomed by the many multinationals based in Ireland that frequently assign individuals to work at their Irish operations, as the relief should reduce the cost of the relocation package for those employees, who are often tax equalized. Expectations for 2013 – Further measures to attract foreign investment With pressure on the Exchequer’s finances, it is likely that a residential property tax will be introduced in 2013; however, a significant change to the taxation of companies is not expected. In light of the government’s aim of developing and improving policies to attract foreign investment and improve Ireland’s international competitiveness, it would be surprising if we do not see further measures over the coming months to enhance Ireland’s Inc.’s offering. With Budget Day set for 5 December 2012 and the Finance Bill expected in early 2013, it is likely that the positive measures that were introduced in recent years to enhance Ireland’s attractiveness to multinationals will be broadened further. — David Shanahan (Dublin)

Director Deloitte Ireland [email protected]


Austria: More changes made to land registry fee As reported in the 12 October 2012 issue of the World Tax Advisor, the Austrian Ministry of Justice has proposed an increase in the base for purposes of the land registry fee for transactions not involving consideration. The fee is due when a change in ownership of real property is entered into the Austrian land registry. The bill was the government’s response to a ruling of the Austria’s Constitutional Court of Justice that the existing rules are unconstitutional. Following comments and criticism by lobbying groups and tax experts, the government has presented a revised bill that would broaden the applicability of a beneficial tax base rule. URL: http://newsletters.usdbriefs.com/2012/Tax/WTA/121012_2.html The exemption for transfers without consideration between close family members would be enhanced to cover any real estate (previously only certain dwellings) and a broader group of family members would be able to enjoy the beneficial treatment. Even more important for corporate taxpayers, reorganizations such as mergers, spin-offs, contributions in kind, conversions or transfers between a company and its shareholder that do not involve consideration would be covered by the beneficial rule. Under this beneficial rule, the land registry fee would not be based on the fair market value of the property, but rather on the lower of three times the fictitious tax value and 30% of the fair market value. If approved by parliament, the new rules would apply to all transactions filed with the land registry after 31 December 2012. — Michael Weismann (Vienna)

Partner Deloitte Austria [email protected]

Petra Apfelthaler (Vienna)Director Deloitte Austria [email protected]

Cyprus: New treaty signed with Ukraine Cyprus and Ukraine signed a new tax treaty on 8 November 2012 to replace the existing treaty between Cyprus and the USSR. The most significant provisions of the new treaty are as follows:

The treaty incorporates the OECD model treaty definition of a permanent establishment. In particular, a building site or construction or installation project or any supervisory activities in connection with such a site or project will constitute a permanent establishment only if it lasts more than 12 months.

The withholding tax rate on dividends will be 5% if the beneficial owner holds at least 20% of the capital of the dividend-paying company or has invested at least EUR 100,000 in the acquisition of shares or other rights of the dividend-paying company. The rate in all other cases will be 15%.

The withholding tax rate on interest will be 2%. The withholding tax rate on royalties in respect of a copyright of scientific work, patent, trademark, secret formula,

process or information concerning industrial, commercial or scientific experience will be 5%; otherwise, the rate will be 10%.

Taxing rights with respect to capital gains arising from a disposal of shares (irrespective of the underlying assets of the company in which the shares are being disposed of) or any other movable property will be granted to the state in which the person making the disposal is tax resident.

The new treaty will bring certainty to investors in the two countries, because the treaty with the USSR, which both states have continued to honor, has been under renegotiation for a number of years. The new treaty closely follows the OECD model, which – unlike the Cyprus-USSR treaty – provides guidance to both countries on the interpretation of the treaty. Although the withholding tax rates will increase slightly, this is not believed to create a deterrent to business between the two states, particularly given the overall certainty achieved under the new treaty. The treaty will enter into effect on 1 January following the year in which the parties exchange notifications of ratification.


— Pieris Markou (Nicosia) Partner Deloitte Cyprus [email protected]

Denmark: Authorities rule on tax treatment of dividends paid to U.S. S Corp The Danish tax authorities published a binding ruling on 8 November 2012, dealing with the issue of whether dividends paid by a Danish company to its U.S. parent company, an S Corporation (S Corp), are subject to Danish withholding tax. The tax authorities concluded that the Danish company was required to deduct a withholding tax of 15% from the dividends paid to the S Corp. The S Corp in the case was wholly owned by a U.S. resident individual. Under domestic Danish law, dividends are not subject to Danish taxation if all of the following conditions are satisfied:

1. The shareholder is a nonresident corporation; 2. The shareholder owns at least 10% of the share capital of the Danish company; and 3. The 27% domestic Danish withholding tax on dividends is reduced or eliminated under a tax treaty between

Denmark and the country in which the shareholder is tax resident or under the EU parent-subsidiary directive. In other words, the domestic Danish tax treatment must depend on the treatment under an applicable tax treaty or the EU directive.

The first issue addressed in the ruling was whether the S Corp should be treated as a corporation for Danish tax purposes. This issue must be resolved under domestic Danish tax law with no regard to the tax status of the entity in its country of residence. After examining the articles of association and the purpose of the S Corp, the tax authorities determined that the S Corp should be treated as a separate entity for Danish tax purposes, despite its status as a transparent entity under U.S. federal income tax law. The second condition was satisfied because S Corp owns 100% of the Danish company. The pivotal question then was whether Danish taxation should be reduced or eliminated under the Denmark-U.S. tax treaty. Article 10 of the treaty provides that the source state may tax dividends derived by a tax resident of the other state at 0%, 5% or 15%, depending on the status of the shareholder. The Danish tax authorities noted that the S Corp did not qualify as a tax resident of the U.S. under article 4(1) of the treaty because of its status as a transparent entity. However, according to article (4)(1)(d), Denmark was required to recognize that the dividends were derived by a tax resident of the U.S., i.e. the U.S. individual owning 100% of the S Corp. On this basis, the treaty required Denmark to reduce its domestic tax from 27% to 15%, the tax rate applicable to individuals. The tax authorities concluded that the Danish company was required to deduct a 15% withholding tax from the dividends paid to the S Corp. The tax authorities’ conclusion is undoubtedly a correct interpretation of the Denmark-U.S. tax treaty, but it is questionable whether the ruling correctly interprets domestic Danish tax law. The third condition for an exemption arguably was satisfied because Danish taxation should be reduced under a tax treaty, and on this basis, the S Corp would satisfy all three conditions to qualify for an exemption from Danish withholding tax on the dividends. The effect of the ruling is that Danish companies must deduct a 27% withholding tax on dividends paid to a U.S. S Corp. If the shareholders of the S Corp are tax resident in another EU member state or a country that has concluded a tax treaty with Denmark, the withholding tax may be reduced under the treaty. However, this usually will require that each shareholder request an upfront reduction of the withholding tax or subsequently request a refund of tax withheld. — Jens Wittendorff (Copenhagen)

Partner Deloitte Denmark [email protected]


Denmark: Potential for dividend withholding tax reclaim by distributing investment funds As a result of recent developments, certain foreign investment funds investing in Danish companies should consider filing claims for refunds of Danish withholding tax levied on distributions made to them. The European Commission initiated an infringement investigation against Denmark on 30 April 2012 because of Denmark’s differential tax treatment of domestic and foreign investment funds. Specifically, Danish companies can distribute dividends to “distributing Danish investment funds” free from withholding tax, but the exemption is not available to foreign distributing investment funds. According to the Commission, this treatment violates the free movement of capital and the free movement of services principles in the Treaty on the Functioning of the European Union because the rules make it more attractive to invest in Danish companies through Danish investment funds rather than investing through foreign investment funds, and the beneficial treatment of Danish investment funds can restrict foreign investment funds from providing their services to Danish investors, due to higher taxation. Strict requirements must be met to qualify as a “distributing investment fund” for Danish tax purposes and thereby qualify for the 0% withholding tax. These requirements include that the fund can issue only a single class of shares, it must make complex calculations of the income to be distributed and it must make annual distributions of certain income. Even though these requirements could be met by foreign investment funds, the requirements have effectively restricted the marketing of foreign funds to private investors in Denmark. (It should be noted that the requirements to qualify as a distributing fund will be eased as from 1 January 2013. Under the new rules, distributing funds will be permitted to issue multiple classes of shares and they will not be subject to the detailed and complex distribution rules.) In a July 2012 memorandum regarding the infringement investigation, the Danish Ministry of Taxation acknowledged the discrimination and the fact that it could result in a restriction of the free movement of capital, but took the position that the discrimination can be justified on the grounds of maintaining the coherence of the tax system. The Commission’s infringement procedure and the acknowledgement by the Ministry of Taxation create the potential for foreign investment funds to reclaim withholding tax levied during the past three years on distributions made to them by Danish companies. Foreign investment funds should carry out a comparability analysis to determine whether they meet the Danish requirements to qualify as distributing funds and, if so, should consider filing a protective claim with the Danish tax authorities. Even if a fund determines that it does not meet all the requirements, there may be a possibility that the Danish withholding taxes borne by the fund ultimately may be reclaimed depending on how Denmark responds to the infringement proceedings initiated by the European Commission, though such a claim likely would have to be taken through the court system. — Erik Banner Voigt (Copenhagen)

Partner Deloitte Denmark [email protected]

Sven Hagens Ottosen (Copenhagen) Senior Manager Deloitte Denmark [email protected]

Hong Kong: Income tax agreement signed with Canada The Hong Kong Special Administrative Region of the People’s Republic of China and Canada signed an income tax agreement on 11 November 2012. This is Hong Kong’s 26th agreement; Canada currently has 90 treaties in force and has signed a number of others. The agreement will enter into force upon the exchange of instruments of ratification. Negotiation of the agreement was initiated in June 2011 and has been highly anticipated by communities in both Canada and Hong Kong. Its swift conclusion and the visit by Canada’s Prime Minister to witness the signing ceremony signify the importance being placed on further strengthening the relationship between the two jurisdictions. Closer economic cooperation and the promotion of greater synergies are anticipated. The agreement, in conjunction with domestic laws, offers tax benefits that are generally more attractive than benefits in Canada’s treaties with its other major Asian trading partners such as China, India, Japan, Korea and Singapore. This should further Hong Kong’s objective of being the gateway


abuse of the agreement by broadly allowing either jurisdiction to apply its domestic laws in counteracting potential abusive transactions involving the agreement. In addition, article 26(4) contains a provision that is not commonly seen in Hong Kong’s or Canada’s agreements/treaties. It states:

“Where under any provision of this Agreement any income is relieved from tax in a Party and, under the law in force in the other Party a person, in respect of that income, is subject to tax by reference to the amount thereof that is remitted to or received in that other Party and not by reference to the full amount thereof, then the relief to be allowed under this Agreement in the first-mentioned Party shall apply only to so much of the income as is taxed in the other Party.”

Broadly speaking, the provision seeks to limit benefits under the agreement to amounts that are remitted to or received by a partner jurisdiction where that jurisdiction only taxes such income on a remittance or receipt basis under its domestic tax law. Neither Canada nor Hong Kong taxes income on a remittance or receipt basis and, therefore, this provision should have no current application. Exchange of information Critical to the conclusion of the agreement were the exchange of information article and the related protocol. The agreement specifically provides that information communicated will be treated as secret and that it can be used only for the purposes provided for in the agreement. In addition, a protocol to the agreement states that it is understood that:

The article does not require the exchange of information on an automatic or spontaneous basis; Information exchanged shall not be disclosed to any third jurisdiction for any purpose; and A party may only request information relating to taxable periods for which the agreement has effect for the party.

While the adoption of the 2004 version of the OECD model standard exchange of information article has enabled Hong Kong to negotiate and sign many agreements since 2010, the Hong Kong Inland Revenue Department had also issued Departmental Interpretation and Practice Notes No. 47 (DIPN 47) to assuage taxpayers’ concerns about their privacy rights. DIPN 47 sets out the safeguards put in place to protect confidentiality and privacy rights and its administrative practice in relation to the exchange of information with Hong Kong’s agreement partners. Effective date The Canadian withholding tax benefits under the agreement will come into effect as from 1 January following the year in which both countries exchange completed instruments of ratification. If both jurisdictions can complete these procedures in 2012, the agreement would be effective as early as 1 January 2013. Otherwise, for Canadian withholding tax purposes, it will be effective on 1 January of a later year. All other Canadian benefits under the agreement will be effective for taxation years beginning on or after 1 January of the calendar year following that in which the agreement comes into force, wth the exception of certain provisions concerning shipping and air transport. As regards Hong Kong, the agreement will be effective as early as the year of assessment 2012/13 if it is ratified during 2012. Otherwise, it will take effect only for the year of assessment 2013/14 or even later. Where to go from here? For Canadian taxpayers expanding into Asia, the agreement is a welcome development. As noted above, with the agreement in place, dividends from active business earnings from a Hong Kong subsidiary generally should become fully deductible and, hence, not subject to Canadian tax. This is a key benefit to many Canadian multinationals with or contemplating setting up operations in Hong Kong that may wish to repatriate the earnings to Canada. Many Canadian companies that are considering the Asia Pacific marketplace now have a more robust and efficient basis from which to build. For many, Hong Kong is a natural regional holding company location, and this agreement provides significant tax efficiency in that regard. For Asian investors, particularly Chinese investors investing into Canada, the agreement also provides a tax efficient platform from which to make Canadian investments. While Hong Kong is already a natural business platform for many Chinese


companies, the agreement may enhance opportunities. For example, given that the agreement offers a more favorable dividend withholding tax rate of 5% than the 10% available under the Canada-China treaty, Chinese companies may consider holding their Canadian investments through a Hong Kong holding company rather than directly in order to achieve more tax efficient profit repatriation. Nevertheless, the anti-avoidance rules under the agreement and Chinese domestic general anti-avoidance and beneficial ownership rules should be carefully considered. — Chris Roberge (Hong Kong)

Managing Director Deloitte Hong Kong [email protected]

Anthony Lau (Hong Kong)Partner Deloitte Hong Kong [email protected]

Vanessa Poon (Hong Kong) Senior Manager Deloitte Hong Kong [email protected]

Samantha Tan (Hong Kong) Manager Deloitte Hong Kong [email protected]

Russia: Cyprus to be removed from Russia’s offshore zone blacklist Russia’s Ministry of Finance has officially announced the removal of Cyprus from its offshore zone blacklist with effect from 1 January 2013, which will have positive implications for outbound investment from Russia. An order dated 21 August 2012 and published in Russia’s official gazette amends the list of countries and territories that offer preferential tax treatment and/or that do not provide for the disclosure and provision of information on financial transactions. From the Russian side, the order will have the following effect:

The participation exemption for dividends will be applied to dividends received by qualifying Russian entities from Cyprus subsidiaries. Thus, dividends received from Cyprus may be subject to a 0% profit tax in Russia, provided the other conditions for the participation exemption are satisfied (i.e., the Russian entity must hold not less than 50% of the equity of the Cyprus subsidiary for at least 365 days). Dividends from “blacklisted” jurisdictions do not qualify for this participation exemption and are subject to the 9% tax rate.

Transactions between Russian individuals/companies and Cyprus residents will not be considered “controlled transactions” for Russian transfer pricing purposes, provided the parties are unrelated and the transactions are not concluded with respect to goods traded on international commodity markets.

Any other tax restrictions that may be introduced in Russia in respect of payments to residents in blacklist jurisdictions will not apply to transactions with Cyprus residents.

The removal of Cyprus from the blacklist is the result of the ratification of the 2010 protocol to the Russia-Cyprus tax treaty that applies generally from 1 January 2013 (except for certain provisions that will apply from 1 January 2017). The measure will undoubtedly strengthen the position of Cyprus as one of the most favorable jurisdictions for Russian investment. However, multinational groups that include companies located in Russia and Cyprus should consider the following:

Information exchange and transparency in tax relationships between the two countries is expected to improve, and there will be more efficient control of tax violations.

A draft law in Cyprus (based on the EU anti-money laundering directive) would regulate the activities of professional trustee companies and company service providers (i.e. it would introduce licensing procedures). If adopted, the law would improve the image of Cyprus, as well as the quality of services relating to the registration and administration of Cyprus companies.

— Elena Solovyova (Moscow)

Partner Deloitte Russia [email protected]

Pieris Markou (Nicosia)Partner Deloitte Cyprus [email protected]


United States: Update on FATCA The U.S. government recently made several announcements on various aspects of the Foreign Account Tax Compliance Act (FATCA):

The Internal Revenue Service (IRS) released Announcement 2012-42 on 24 October 2012 that extends the deadlines for certain FATCA requirements related to due diligence, withholding and reporting requirements. The announcement also provides additional guidance on grandfathered obligations.

A memo issued on 8 August 2012 provides that under particular circumstances, certain forms may be submitted electronically in some cases.

The U.S. Treasury announced on 8 November 2012 that it is actively engaged in negotiations with over 50 countries and jurisdictions to enter into Intergovernmental Agreements (IGAs) for compliance with the FATCA provisions.

On 14 November 2012, the Treasury released a second model IGA. Under FATCA, certain U.S. and foreign financial institutions and non-financial foreign entities are required to report information about offshore accounts and investments held by U.S. taxpayers to the IRS annually. These institutions include banks, insurance and real estate companies, hedge funds, mutual funds and private equity firms. Foreign financial institutions (FFIs) must enter into agreements with the IRS; otherwise, they will face a 30% withholding charge. Announcement 2012-42 The IRS announcement that certain FATCA compliance dates have been extended was welcome news for many financial and non-financial institutions. Although the IRS is providing additional time to meet key compliance milestones (the account onboarding start dates were extended one year for U.S. withholding agents (USWAs) and six months for FFIs), the extension of time to implement FATCA’s complex regulations may not be as significant as one might expect. The new FATCA deadlines under Announcement 2012-42 are as follows:

FFI application o The deadline for entering into the FFI agreement has moved to 31 December 2013 (pushed back from 30

June 2013). New accounts

o The requirement to implement new account onboarding procedures has moved to 1 January 2014 for USWAs, Participating FFIs and Registered Deemed-Compliant FFIs (pushed back from 1 January 2013 for USWAs and 1 July 2013 for Participating FFIs and Registered Deemed-Compliant FFIs).

Pre-existing accounts o The deadline for pre-existing entity account documentation for clients identified as Prima Facie FFIs has

moved to 30 June 2014 (if the FFI signs an agreement after 1 January 2014, the deadline is six months from the effective date of the FFI agreement) for USWAs, Participating FFIs and Registered Deemed-Compliant FFIs (pushed back from 31 December 2013 for USWAs).

o The deadline for pre-existing entity account documentation for clients not identified as Prima Facie FFIs has moved to 31 December 2015 (if the FFI signs an agreement after 1 January 2014, the deadline is two years from the effective date of the FFI agreement) for USWAs, Participating FFIs and Registered Deemed-Compliant FFIs (pushed back from 31 December 2014 for USWAs and 30 June 2015 for Participating FFIs and Registered Deemed-Compliant FFIs).

o The deadline for pre-existing individual account documentation for high value clients generally has been pushed back to 31 December 2014 (if the FFI signs an agreement after 1 January 2014, the deadline is one year from the effective date of the agreement) for Participating FFIs (pushed back from 30 June 2014).

o The deadline for pre-existing individual account documentation for non-high value clients generally has been pushed back to 31 December 2015 (if the FFI signs an agreement after 1 January 2014, the deadline is two years from the effective date of the FFI agreement) (pushed back from 30 June 2015).

Withholding o There is no change to income withholding that begins on 1 January 2014. o Gross proceeds withholding now begins on 1 January 2017 (pushed back from 1 January 2015).


o There is no change to foreign pass-through withholding that begins no later than 1 January 2017. Reporting

o Participating FFIs will be required to file the information reports with respect to the 2013 and 2014 calendar years no later than 31 March 2015 (pushed back from 30 September 2014).

Electronic submission of Form W-8 A memo released by the IRS Office of Chief Counsel states that, under certain circumstances, a PDF or fax of a Form W-8, which is used to certify the status of individuals and entities who are beneficial owners of U.S. tax withholding, is acceptable under the existing regulations governing withholding of tax on nonresident alien and non-U.S. corporations. This conclusion also may be extended to apply to FATCA, which explicitly allows a withholding agent to accept a facsimile of Form W-8, subject to certain requirements. The general requirements for electronic submission include the following:

The electronic system must ensure that the information received is the information sent and that the system documents user access resulting in the submission, renewal and modification of the electronic form.

The electronic system must ensure that the person sending the form is the person named on the form. The electronic version of the Form W-8 must include the same information as the official IRS paper Form W-8. The electronic transmission must contain an electronic signature by the person named on the Form W-8 (or

authorized person) and must be subject to the same penalties of perjury appearing on the official IRS paper Form W-8.

Upon an IRS examination, “the withholding agent must supply a hard copy of the electronic Form W-8 and a statement that, to the best of the withholding agent’s knowledge, the Form W-8 was filed by the person” named on the form.

Satisfaction of the above requirements is feasible, but withholding agents should further analyze whether a policy of accepting electronic forms should be adopted. Given the requirements, as well as the controls needed to determine compliance, withholding agents may not find the electronic alternative viable. Moreover, there is still risk associated with accepting electronic forms. The IRS memo cannot be used as precedent and the regulatory rules could be interpreted to require an actual system (e.g. an electronic W-8 application designed to complete and submit an electronic Form W-8), rather than an ad hoc procedure for electronic submission. Until the IRS releases guidance that can be relied upon, withholding agents should carefully consider whether and how they should adopt an official policy to accept electronic Form W-8. IGA negotiations The U.S. government is actively engaged in negotiations with over 50 countries and jurisdictions to enter into IGAs for compliance with FATCA. Treasury published a model IGA during the summer and a second model on 14 November, which will be used as the basis for bilateral agreements with other countries and jurisdictions, paving the way for the U.S.’s effort to enhance cooperation in countering offshore tax evasion and improving global tax compliance. The first model was signed by the U.K. in September 2012. Treasury is in the process of finalizing additional IGAs and is aiming to conclude negotiations with the following jurisdictions by the end of 2012:

Canada Denmark Finland France Germany Guernsey Ireland Isle of Man

Italy Japan Jersey Mexico Netherlands Norway Spain Switzerland


Treasury also is actively engaged in IGA discussions with the following jurisdictions and expects to conclude negotiations with several by the end of 2012 (however, no indication was given that IGAs are expected to be completed by year end):

Argentina Australia Belgium Cayman Islands Cyprus Estonia Hungary Israel

Korea Liechtenstein Malaysia Malta New Zealand Singapore Slovak Republic Sweden

Treasury is exploring options for IGAs with the following countries:

Bermuda Brazil British Virgin Islands, Chile Czech Republic Gibraltar India Lebanon

Luxembourg Romania Russia Saint Maarten Seychelles Slovenia South Africa

The announcement indicates that Treasury and the IRS are looking to implement final FATCA regulations in the “near term” and will continue reaching out to interested jurisdictions wishing to implement an IGA with the U.S. Although this announcement represents another significant step forward in the global exchange of information to combat tax evasion, certain large multinational organizations may face complications in complying with differing FATCA requirements across their global footprint and should continue to monitor FATCA and IGA developments. — Denise Hintzke (New York)

Director Deloitte Tax LLP [email protected]

William Fernandez (Boston)Manager Deloitte Tax LLP [email protected]

Robert McRae (New York) Tax Consultant Deloitte Tax LLP [email protected]

Ari Cohen (New York)Tax Consultant Deloitte Tax LLP [email protected]

In brief European Union The European Commission has decided to refer the U.K. to the Court of Justice of the European Union for its tax regime concerning the attribution of gains to members of nonresident companies and the transfer of assets abroad. The referral is the last step in the infringement procedure. In February 2011, the Commission sent a reasoned opinion formally demanding that the U.K. authorities amend the tax regime in these areas. It may initially appear surprising that the Commission has taken this step, given that the U.K. government has been consulting on proposals aimed at addressing the issues raised. However, it seems that, in the Commission’s view, the draft legislation does not satisfy the requirements of EU law. The hearing before the ECJ may be dropped if the U.K. adopts satisfactory legislation in the meantime. European Union The European Council adopted a regulation on 4 October 2012 that amends the EU’s Generalized System of Preferences (GSP) for developing countries. The GSP is an arrangement that allows exporters from qualifying developing countries to pay lower duties on certain goods they sell to EU countries and thus grants such exporters access to EU markets. The new regulation generally updates the criteria for countries to qualify for the GSP and allows the EU more discretion in applying the preferential rates and will apply from 1 January 2014.


Greece The Code of Books and Records is abolished and replaced with a “Code for the Tax Recording of Transactions” as from 1 January 2013. The new code is the first step of a major tax reform and is designed to simplify administrative obligations for taxpayers, facilitate examinations by the tax authorities and increase transparency. Hong Kong The government has announced that it would amend the Stamp Duty Ordinance to impose measures to address the overheated Hong Kong property market by amending the Special Stamp Duty (SSD) rules and introducing a new Buyer’s Stamp Duty (BSD). The rates of the existing SSD will increase in general by 5% and the holding period will be extended. Under the adjusted regime, any residential property acquired on or after 27 October 2012 by an individual or a company (regardless of where incorporated) and resold within 36 months will be subject to the new rates of SSD (10%/15%/20%). BSD will be levied on residential property acquired by any person (including a limited company), except a Hong Kong permanent resident, with effect from 27 October 2012. BSD will be charged at a flat rate of 15% on all residential property, in addition to the existing ad valorem stamp duty and SSD, if applicable. OECD The OECD held a Public Consultation in Paris on 12-14 November 2012 on the three discussion drafts issued in June on safe harbors, timing issues and, importantly, special considerations for intangibles. The meeting reconfirmed commitment to the arm’s length principle for transactions involving intangibles. The OECD’s Working Party 6 now continues its work on these projects, and a new discussion draft on intangibles will be released “as soon as possible.” Tax treaty round up At the end of each month, the World Tax Advisor provides an update on recent tax treaty developments, with a focus on items that directly affect the withholding tax rates of the key jurisdictions covered by the Deloitte International Tax Source (DITS). Additional coverage may include stated negotiating priorities and other important tax treaty trends. URL: http://www.dits.deloitte.com Unless otherwise noted, the developments discussed below are not yet in force. Argentina-Russia The 2001 treaty entered into force on 16 October 2012 and will apply from 1 January 2013. When in effect, the treaty will provide a 10% rate on dividends paid to a company that holds directly at least 25% of the capital of the payer company; otherwise, the rate will be 15%. The rate on interest and royalties will be 15%. Cyprus-Finland When in effect, the treaty signed on 15 November 2012 will provide that a 5% withholding tax may be levied on dividends paid to a company (other than a partnership) that holds directly at least 10% of the voting power of the payer company; otherwise, the rate will be 15%. Interest and royalties will be taxable only in the state of residence of the recipient. Cyprus-Ukraine See article in this issue. URL: http://newsletters.usdbriefs.com/2012/Tax/WTA/121123_4.html Estonia-Mexico When in effect, the treaty signed on 21 October 2012 will provide that dividends will be taxed only in the state of residence of the recipient. The rate on interest will be 4.9% when paid to banks and pension funds or schemes and 10% in all other cases. Royalties will be subject to a maximum withholding tax of 10%. Germany-Taiwan The 2011 treaty entered into force on 7 November 2012 and applies as from 1 January 2013. When in effect, the rate on dividends and interest will be 10%, except in the case of certain real estate investment companies, which will be subject to a 15% rate in both instances. The rate on royalties will be 10%. Hong Kong-Canada See article in this issue. URL: http://newsletters.usdbriefs.com/2012/Tax/WTA/121123_7.html Hungary The tax authorities have issued guidance adopting the OECD approach to the concept of “economic employer” in the context of the dependent personal services article (or its equivalent) in its tax treaties. India-Switzerland The Indian Authority for Advance Rulings (AAR) has ruled that a nonresident fiscally transparent partnership that received fees for legal services from an Indian party is not eligible for tax treaty benefits and, therefore, fees


received by the partnership from India are taxable under the Indian Income Tax Act, 1961. Specifically, the AAR held that a Swiss-based partnership was not a resident of Switzerland under article 4 (fiscal domicile), as read in conjunction with article 3(d) (general definitions, including the definition of “person”), of the India-Switzerland treaty, and that the partners were not eligible for treaty benefits because they were not “recipients” of the income. The AAR also stated that the partners were not eligible for treaty benefits because India (which is not an OECD member) submitted reservations to the commentary on the OECD model tax treaty (the commentary states that treaty benefits should be granted to partners if the partnership is considered a fiscally transparent entity). India-United Kingdom When in effect, the protocol signed on 30 October 2012 will provide that dividends paid out of income derived directly or indirectly from immovable property by an investment vehicle (i.e., a REIT) will be subject to a 15% withholding tax; otherwise, the rate will be 10%. No changes are made to the withholding tax on interest or royalties. Israel-Panama When in effect, the treaty signed on 8 November 2012 will provide that a 5% withholding tax may be levied on dividends paid to a pension fund, and a 20% rate on dividends distributed by a REIT and the recipient holds directly no more than 10% of the capital of the REIT payer; otherwise, the rate will be 15%. A 0% rate will apply to interest paid to a pension fund; otherwise, the rate will be 15%. Royalties will subject to a 15% rate. Latvia-Russia The 2010 treaty entered into force on 6 November 2012 and will apply from 1 January 2013. When in effect, dividends will be subject to a withholding tax rate of 5% if paid to a company (other than a partnership) that holds directly at least 25% of the capital of the payer company, provided the capital invested exceeds USD 75,000 or its equivalent in Russia or Latvia’s national currency; otherwise, the rate will be 10%. The rate on interest will be 5% if paid on loans between banks or other financial institutions; otherwise, the rate will be 10%. The rate on royalties will be 5%. New Zealand-Papua New Guinea When in effect, the treaty signed on 29 October 2012 provides that dividends will be subject to a maximum withholding tax rate of 15%. The rate on interest and royalties will be 10%. Poland-Singapore – When in effect, the treaty signed on 4 November 2012 to replace the existing treaty dating from 1993 will provide that a maximum 5% withholding tax will apply to dividends paid to a company (other than a partnership) that controls directly at least 10% of the capital of the payer company on the date the dividends are paid and has held or will have held the participation for an uninterrupted 24-month period in which that date falls; otherwise, the rate will be 10%. The rate on interest will be 5%. A 2% withholding tax will apply to royalties paid for industrial, commercial or scientific equipment; otherwise, the rate will be 5%. Russia -The government approved a model tax treaty in February 2010 that was to be used as the basis for negotiating new treaties, although in practice, Russia already has a broad tax treaty network and the model actually only reflects certain trends in the Russian tax environment. The model treaty was amended on 25 October 2012, mainly to make changes to the nondiscrimination clause and the definition of associated enterprises. For example, the model treaty will effectively enable the contracting states to apply their domestic thin capitalization rules, and in certain cases, to allow for a limitation of benefits provision. Russia-Cyprus See article in this issue. URL: http://newsletters.usdbriefs.com/2012/Tax/WTA/121123_8.html Slovakia-Kuwait When in effect, the treaty signed on 13 November 2012 will provide that dividends may be taxed only in the state of residence of the recipient. A 10% withholding tax will apply to interest and royalties. Vietnam-Morocco The 2008 treaty entered into force on 12 September 2012 and will apply generally as from 1 January 2013. When in effect, the treaty provides for a 10% withholding tax on dividends, interest and royalties. Are You Getting Your Global Tax Alerts? Throughout the week, Deloitte provides commentary and analysis on developments affecting cross-border transactions on a free subscription basis delivered straight to your email. Read the recent alerts below or visit the archive. Subscribe: http://www.deloitte.com/view/en_GX/global/insights/email-alerts/index.htm Archives: http://www.deloitte.com/view/en_GX/global/services/tax/cross-border-tax/international-tax/69d28aca44ed2210VgnVCM200000bb42f00aRCRD.htm


European Union Finnish taxation of dividends paid to nonresident pension funds violates EU law The Court of Justice of the European Union ruled on 8 November 2012 that Finland’s legislation on the taxation of dividends paid to non-Finnish pension funds is incompatible with the free movement of capital principle. [Issued: 13 November 2012] URL: http://www.deloitte.com/view/en_GX/global/services/tax/cross-border-tax/international-tax/d7a01c3048bfa310VgnVCM2000003356f70aRCRD.htm URL: http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Alerts/dttl_tax_alert_EU_131112.pdf Finland Changes proposed to Transfer Tax Act The government has submitted a proposal to parliament that would expand the tax base and scope of the transfer tax and increase the rate from 1.6% to 2% on the transfers of shares in real estate companies. [Issued: 20 November 2012] URL: http://www.deloitte.com/view/en_GX/global/services/tax/cross-border-tax/international-tax/3c8c822617e1b310VgnVCM2000003356f70aRCRD.htm URL: http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Alerts/dttl_tax_alert_Finland_201112.pdf Portugal New austerity measures affect nonresidents Recently published Law 55-A/2012 includes various tax hikes and other measures that will affect nonresident investors. In particular, the tax rate on certain investment income is increased. The law applies generally as from 30 October 2012, although some changes apply retroactively as from 1 January 2012. [Issued: 16 November 2012] URL: http://www.deloitte.com/view/en_GX/global/services/tax/cross-border-tax/international-tax/f9b740dffca0b310VgnVCM2000003356f70aRCRD.htm URL: http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Alerts/dttl_tax_alert_Portugal_161112.pdf Have a question? If you have needs specifically related to this newsletter’s content, send us an email at [email protected] to have a Deloitte Tax professional contact you. About Deloitte Deloitte refers to one or more of Deloitte Global Services Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Global Services Limited and its member firms. “Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own acts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities. Disclaimer This publication contains general information only, and none of Deloitte Global Services Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Global Services Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication.