The Cyprus holding companies are widely used in the context of international business structuring for the optimization of the channels of incoming and outgoing investment in/from the countries that have signed an agreement with Cyprus on avoidance of double taxation. Recently, the Tax Department has published a guide to VAT accounting for holding companies, which is designed to provide clarity with respect to the circumstances under which the Cyprus holding companies can receive taxable income.

Definition of taxable activities

The common position and practice regarding the regime for levying VAT on dividends remain unchanged. The simple acquisition and ownership of shares in other companies by a Cypriot company does not constitute a taxable business activity in the sense of exploiting assets for income generation. The reason for this approach is that the dividends received from such ownership of shares are considered to arise solely at the expense of ownership of shares, rather than from the form of business activity carried out for the purpose of income generation. Consequently, an enterprise that simply owns shares or a similar form of a stake in another organization is not considered to be taxable. However, if a holding company goes beyond the simple exercise of its rights as a shareholder and takes an active part in the management of its subsidiaries, directly or indirectly, this may constitute a taxable activity.

The test for determining whether such participation in management exists is objective. There are no decisions in the European Court that set out specific rules or precedents on this issue. Each case must be considered individually on specific facts and circumstances. The instruction states that the term “management” can cover a wide range of activities, from organization and administration to the adoption of strategic decisions. These actions can be taken directly, that is, by a legal entity owning shares or indirectly - by a person hired or connected with a legal entity that owns the shares.

Any evaluation should be based on the essence, not on the form. For example, do the directors of affiliated companies exercise autonomous powers to manage their business, or do they simply mechanically approve decisions made at the level of the holding company? These issues should be resolved on the basis of specific facts, such as the degree of duplication or general powers of the director and decisions of the board of directors.

A holding company that has a controlling interest in a subsidiary company clearly has the right to influence the decision-making process in the subsidiary. If the facts show that the holding company exercises this right, any dividends received can be considered a reward for the provided management services and, therefore, income from business activities.
An additional important factor is that the holding company has the necessary human and other resources to provide such services. The instruction states that in some cases the holding company can not use its authority to influence its subsidiary, therefore it is a passive investor with the sole purpose of obtaining dividends without participation in management.

The current jurisprudence is that the company’s participation in the management of the invested company is recognized as economic activity in accordance with Article 3 of the VAT Law and Article 9 (1) of the EU VAT Directive (2006/112 / EU) and therefore it is subject to VAT in accordance with Article 5 of Cyprus Law and Article 2 of the EU Directive.
A holding company, like other companies, must be registered by a VAT payer if its taxable supplies exceed the registration threshold or it receives services from foreign suppliers that must be taken into account within the framework of the reverse charge mechanism.

Otherwise, the holding company can be registered voluntarily. The amount of input VAT that the holding company can reimburse will be based on the distribution between its taxable and non-taxable activities.

The existing European mechanisms for arbitration resolution of tax disputes on double taxation, prescribed in tax agreements and in accordance with the EU Arbitration Convention, do not always result in effective resolution of tax disputes. The recent monitoring carried out by the Council of the European Union revealed certain shortcomings, especially in relation to accessibility of dispute resolution mechanisms, as well as the length and effective conclusion of the procedure. According to the European Commission, the estimated figure of tax disputes on double taxation in the EU is about 900, with approximately 10.5 billion euros at stake.

In this regard, on October 10 this year, the EU Council approved the Directive to resolve tax disputes (hereinafter - the Directive). The directive is aimed at changing the current situation, when the scope for mandatory arbitration in dispute resolution is limited to the issues of transfer pricing adjustments and the profit distribution of related persons. Thus, legal persons and natural persons will be able to resolve all disputes related to the interpretation and application of agreements that provide for the elimination of double taxation of income and capital.

Among the key objectives of the new rules under the Directive are the following:

  • Creating an obligation on Member states to take decisions on all disputes originating in tax treaties and affect the tax position of businesses and citizens;
  • Providing an opportunity for taxpayers to unblock procedures at national courts;
  • Clearly defined timelines and standard period for each arbitration phase;
  • Extending the scope to all tax disputes between Member States that derive from tax treaties and other international agreements;
  • Mandatory notification of the taxpayers and publication of reviews of arbitration decisions.

To achieve these objectives, the Directive provides for the following:

  • Member States will now have a legal obligation to take conclusive and enforceable decisions under the improved dispute resolution mechanism; and if they do not meet such obligations, the national courts will take such decisions;
  • Taxpayers having tax treaty disputes can initiate a procedure whereby the Member States which have concluded the current agreement must attempt to resolve the dispute amicably within two years;
  • If no decision has been found at the end of the two-year period, the competent authority of each Member State must set up an Advisory Commission to arbitrate;
  • If the competent authorities fail to set up the Advisory Commission to arbitrate, the taxpayer can bring an action before the national court to appoint such Advisory Commission.

The Advisory Commission (as agreed by the relevant competent authorities or appointed by national court of the Member States concerned) consists of one chair, maximum of two representatives from each competent authority, and a maximum of two independent persons of standing. The Commission will have six months to deliver a final, binding decision that is immediately enforceable and resolves the dispute.

The Directive will be applicable to matters submitted after 1 July 2019, on issues related to the tax year starting on or after 1 January 2018.
Multinationals should welcome the Directive as a step towards improving access to tax dispute resolution mechanisms within the European Union. The new Directive establishes a European mechanism in which multinationals can access to resolve all tax treaty related disputes. It expands on the scope of existing mechanisms in the EU Arbitration Convention to cover not just disputes concerning profit adjustments of associated enterprises but also other tax treaty related disputes. In particular, disputes between Member States that are not related to transfer pricing that cannot be resolved bilaterally will be resolved by default through mandatory arbitration under the new Directive.

These changes in Europe work alongside the minimum standards agreed under Action 14 of the OECD BEPS Action Plan to improve the effectiveness and timeliness of mutual agreement procedures under tax treaties. The adoption of the new Directive means that European countries have gone further than the minimum standards, which did not include mandatory arbitration in dispute resolution. It is expected that the adoption of this Directive will put further pressures on the countries to agree their positions in mutual agreement procedures. Thus, the Directive will increase legal certainty, while creating a more friendly environment for business and investment in the European Union.

The adoption of the Directive is a timely improvement of dispute resolution mechanisms available to taxpayers, both for double taxation cases and cases involving difficulties in interpreting tax agreements. The Directive will cover a wider range of disputes, and Member States will have clear deadlines to agree on a binding solution going forward. This is likely to be important in the post BEPS environment, where tax certainty is difficult to obtain on a unilateral basis and where taxation disputes are likely to increase as tax administrations begin regular and focused audit practices on cross-border transactions.

The United Kingdom and Colombia

UK and Colombia signed an agreement on avoidance of double taxation November 2, which is designed to support trade and investment by setting the upper limit of income tax on cross-border income.

The agreement was signed by the Financial Secretary of the Treasury, Jane Ellison, and Colombian finance minister Mauricio Cárdenas.

Income which was received through the international border, potentially exposed to tax in two countries, giving birth to the problem of double taxation. Agreement on avoidance of double taxation ensures that it is fixed, and the income earned in one country is taxed only once, not twice. Eliminating the risk of double taxation will give greater confidence for employees and companies between Britain and Colombia about which taxes they pay and where. The agreement will reduce barriers for international trade and investment, and promote growth and jobs. Also, an agreement of avoidance of double taxation includes provisions to help both countries work together to solve evasion and tax avoidance.

The agreement provides that dividends accruing to the pension fund under certain circumstances, dividends will be subject to income tax at a rate of zero percent. If the recipient owns at least 20 percent of the company paying the dividends, the tax rate will be limited to five percent. Otherwise, the tax rate on dividend income will be limited at fifteen percent.

For interest income withholding tax will generally be limited to 10 percent. Licensing also will be tend to rate 10 percent, providing the necessary conditions.

Financial Secretary of the UK Treasury, who signed an agreement with Finance Minister said, that agreement between Britain and Colombia underscores their overall commitment to expand trade and investment between their two countries. As well as encouraging growth and job creation, this transaction will allow both governments work together to fight against overseas tax evasion and avoidance.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

Germany and Costa Rica

German Ministry of Finance of 24 October confirmed that the double tax avoidance, the contract between Germany and Costa Rica, will be applied from January 1, 2017.

The agreement, which was signed on 13 February 2014, is the first such agreement between Germany and Costa Rica, and contains the OECD standard for the exchange of information between the tax authorities of the two countries.

The tax on dividends will generally be limited to 15 percent. However, the rate of five percent would apply if the dividend recipient is a company (other than partners), which directly owns at least 20 percent of the shares of the paying company.

Income tax on the interest payments, as a rule, is limited to five per cent. At the same time, the withholding tax on royalties will be capped at 10 percent.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

Japan and Austria

The Government of Japan and Austria have agreed in principle to amend its dual agreement on the avoidance of taxation, in order to further develop trade and investment between the two countries.

The new agreement will allow, in accordance with the procedure of mutual agreement, to ensure the settlement of the double tax disputes.

Also, the new agreement will reduce the rate of withholding tax at the source of investment income (dividends, interest and royalties), as well as to expand cooperation between the tax authorities of the two countries by providing assistance in collection of taxes.

The Organization for Economic Cooperation and Development, in its final report, recommended that countries adopt a binding international agreement on avoidance of double taxation, to the dispute resolution mechanisms have become more efficient. Japan and Austria are among the 20 countries which have declared their commitment to the project.

Changes to the Agreement shall enter into force after the completion of the approval process in both countries.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

People of Japan

Protocol double tax agreement tax between Japan and India came into force on 29 September.

The Protocol updates the provisions on the exchange of tax information existing contract. It also amends the list of state financial institutions or central banks eligible for exemption from income tax at source of interest payments presentation in Article 11.

The revised pact is active in Japan since 1 January 2017, and in India from April 1, 2017.

The new double tax agreement with Germany Japan also entered into force on 28 September. The new contract provides for more favorable conditions for companies engaged in trade or investment between the two territories. Agreement again provides tax exemption at source for interest and royalties.

Income from dividends will be removed if the company which receives income has a 25 percent share in dividends at least 18 months. Dividend income might otherwise qualify for a reduced rate of five per cent if the company which receives the dividends are held at least five percent of the company paying the dividends for at least six months. Otherwise, it will apply the rate of 15 percent.

For updated provisions on the exchange of tax information, which will operate from 28 October 2016, all other provisions will come into force on 1 January 2017.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

Park in Cyprus

The Ukrainian parliament is currently being finalized for submission to the discussion of the draft law on ratification of the Protocol amending the Convention between the Government of Ukraine and the Government of the Republic of Cyprus for the avoidance of double taxation and prevention of tax evasion on income tax. This Protocol provides for changes in the taxation of dividends, interest on loans, as well as the alienation of the property income.

With regard to dividends, the top rate will be reduced from 15 to 10%. But lower tax rate - 5% survive only if ownership of at least 20% of the capital of a legal entity. But how exactly a person - remains a mystery, as in the original text of the Protocol stated "Partnership About", ie the "Partnership", while the bill "Partnership About" translated as "Society". As such, this provision leaves room for corruption because it allows you to abuse the tax authority in determining the rate that must be applied by the payer.

The rate of taxation of interest on loans increased from 2% to 5%.

Changes are also proposed concerning the taxation of income from the alienation of shares and corporate rights. Unfortunately, due to the incorrect translation of the original text of the Protocol difficult to understand the content of the article, but it is apparent attempt to tax such income on the territory of Ukraine, in some cases. For example, the alienation of shares of a closed joint-stock company, or, if in another contracting country, such income is not taxed (in Cyprus the tax rate on such transactions - 0%).

Regarding royalties, payment of which is carried out by residents of Cyprus - the rules have not yet changed, accordingly it is an opportunity for tax optimization.

If you are interested in this information or if you would like advice on the company's discovery, our staff are ready to advise you at your convenience.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

US double taxation

Department of Finance of Ireland began meeting on the changes in the tax agreement with the United States.

The Department explained that the update is seen as necessary in accordance with the decision of the United States to upgrade its model tax treaty.

The United States took into account the recommendations on the update within reduce their tax base and shift profits. For example, in 2016, the model does not reduce withholding taxes on payments to highly mobile income - income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest rates - which are made by persons who enjoy low or no tax in respect of income in accordance with the preferential tax regime.

In addition, a new article obliges the partners to the extent necessary to make changes to the contract, if the changes cause a doubt one of the partners in the domestic law. Model 2016 also includes measures to reduce the tax benefits of corporate inversions.

The update also included the US regulations, which provide that disputes between countries in the application of a double taxation agreement should be resolved through binding arbitration through the "last best offer".

In announcing the meeting, the Department of Finance of Ireland said: "The reduction of the tax base, and reports on the removal of funds, published in October 2015, led to a series of recommendations to update tax treaties at the global level, countries around the world, including Ireland."

"The Department of Finance and Taxes calls upon to give written comments from interested parties under the contract renewed US tax model with an Irish point of view," he added.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

DTA entered into force between Russia and Hong Kong

Comprehensive agreement for the avoidance of double taxation (CDTA) was signed in January of this year between Hong Kong and Russia, which came into force on 29 July 2016. According to the sources, this agreement shall remain in force for Hong Kong each year since its signing to double taxation, which took place on or after April 1, 2017.

The CDTA is informed about what is required to support efforts to expand the tax obligations undertaken by the two countries in the framework of the «Belt and Road», which is a project of the Chinese government for the economic development aiming at the integration of trade and investment between the approximately 60 countries in Eurasia.

In the absence of the CDTA program, of Hong Kong companies income, which conduct their entrepreneurial activities with the help of permanent missions in Russia and taxed in both places if their earnings was received in Hong Kong. On this basis, in the new agreement, double taxation is eliminated, and now any Russian tax paid by the companies on their earnings, will be allowed to tax payable in Hong Kong.

Besides, in accordance with this agreement, the rate in Russia on income tax on royalties, up to the present time is 20% (for companies) or 30% (for individuals) will be limited to only 3%. A tax rate on dividends, which are in Russia for Hong Kong citizen will be reduced from the current rate of 15% to 5% or 10% depending on the shares of the recipient.

According with further provisions, all Hong Kong airlines which fly to Russia, will be subject to taxation in accordance with the corporate tax rate in Hong Kong, and will not be subject to taxation in Russia. Profits from international shipping transport earned by citizens who have been in Hong Kong, now is also not planning to impose taxes in Russia.

This agreement contains in itself provide a basis for the exchange of tax information between jurisdictions in accordance with international standards.

Author: Olena Kutova

senior lawyer of the Finance Business Service company

Ukraine - Malaysia

Ukraine need to sign agreement about double tax avoidance with Malaysia what will limit tax rate for dividends, interest, and royalties.

According to the deal, the tax rate for dividends will be limited to 15 percent. Special rate for 5 percent will be used for dividends taking from company if it has more than 20 percent of whole company capital paying dividends.

Interest and income will depend on maximal tax rate in 10 percent and 8 percent agreeably.

The agreement project also include contributions about tax information based on standard developed by the Organisation for Economic Cooperation and Development.

The agreement will be signed during official visit of Ukrainian President, Petro Poroshenko, to Malasia 3-5 of August, 2016 year. Ukraine hope to make the same deal with Qatar and other countries and to look through acting agreements with Belgium, Great Britain to the end of 2016 year.

Author: Sergey Panov

managing partner Finance Business Service