PwC

Blickpunkt Osteuropa

Blickpunkt Osteuropa

Latvia: Risk analysis in transfer pricing documentation


The latest version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which came into force in autumn 2015, substantially widens the range of requirements for analysing risk as part of the functional analysis in a company’s transfer pricing documentation. This article takes a look at details.

Risk analysis

Section D1.2.1 of the OECD guidelines states that the process for analysing risk in a controlled transaction should comprise the following six steps:

  1. Identify economically significant risks with specificity;
  2. Determine how specific, economically significant risks are contractually assumed by the associated enterprises under the terms of the transaction;
  3. Determine through a functional analysis how the associated enterprises that are parties to the transaction operate in relation to assumption and management of the specific, economically significant risks, and in particular which enterprise or enterprises perform control functions and risk mitigation functions, which enterprise or enterprises encounter upside or downside consequences of risk outcomes, and which enterprise or enterprises have the financial capacity to assume the risk;
  4. Determine whether the contractual assumption of risk is consistent with the conduct of the associated enterprises and other facts of the case by analysing (i) whether the associated enterprises follow the contractual terms under the relevant principles; and (ii) whether the party assuming risk, as analysed under (i), exercises control over the risk and has the financial capacity to assume the risk;
  5. Where the party assuming risk under steps 1–4(i) does not control the risk or does not have the financial capacity to assume the risk, apply the guidance on allocating risk;
  6. The actual transaction, as accurately delineated by considering the evidence of all the economically relevant characteristics of the transaction as set out in the guidance, should then be priced, taking into account the financial and other consequences of risk assumption, as appropriately allocated, and appropriately compensating risk management functions.

Practice

We have noticed that certain SRS officers who specialise in transfer pricing reviews are already adopting this OECD approach during tax audits and issuing information requests focused on managing various risks.

This means that Latvian taxpayers should control all expenses they incur in their dealings with related companies to ensure that those expenses are deductible for corporate income tax purposes.

For example, corporate groups often have a dedicated purchase company or a purchase department within a group company that selects suppliers, negotiates terms that are favourable to the group, and takes care of ordering, buying and transporting goods for a Latvian taxpayer. Corporate groups typically organise centralised purchases to reduce the group’s total expenses and negotiate favourable terms of purchase, including a bulk discount on goods ordered for the whole group.

However, if the Latvian taxpayer is not involved in the process of selecting suppliers, has no right to reject or change a supplier, and is unable to independently analyse or control purchase prices, there is a high risk that the SRS will find that the expenses the Latvian taxpayer incurs in making purchases beyond his control are not deductible for Latvian tax purposes and should be borne by the group entities that exercise control over those expenses. To mitigate this risk, the Latvian taxpayer’s functional analysis should accurately describe all activities that are associated with control over the Latvian company’s business operations in general and costs in particular.

Amendment to the Polish CIT and PIT Laws – accepted by Sejm


In brief

On 22nd July Sejm accepted a bill amending income tax laws. The amendment introduces new lower CIT rate at 15 % for so-called small taxpayers, as well as a number of important changes relating to catalogue of categories of non-resident income subject to taxation in Poland, exclusion of deferral of taxation of share exchange , where one of primary aims of this transaction is tax avoidance, rules of taxation of in-kind contribution of assets (other than going concern)and application of withholding tax exemption for interest and royalties depending on whether the recipient is beneficial owner thereof.

In detail

Lower CIT rate for small taxpayers and taxpayers commencing activities

Under the amendment, a new 15 % CIT rate (as opposed to standard 19%) will be introduced for ‘small taxpayers’ (reporting gross sales for the preceding tax year of no more than EUR 1 .2m). Lower CIT rate will also be applicable to the taxpayers commencing business activities in the first year of these activities. However, the preferential rate will not be applicable in the year in which activities are commenced and in the subsequent year where the taxpayer (i) was formed as a result of merger, demerger or transformation (except transformation between limited liability company, joint-stock company and joint- stock partnership), (ii) was formed by entities that contributed in-kind a going concern or assets exceeding the value of EUR 10ths, (iv) was formed by entities that contributed in-kind assets received as a result of liquidation of other taxpayers.

Catalogue of non-resident income subject to taxation in Poland

Amendment introduces to the CIT Law and expands in the PIT Law a catalogue of income categories of non-resident taxpayers which are deemed earned in the territory of Poland, hence subject to taxation in Poland.

Besides income related to business activities carried out in Poland and Polish real property, such categories will include income from receivables settled by entities resident in Poland, regardless of the place where the agreement is concluded or performance is executed. Income earned in Poland will also include income from securities and derivatives quoted on Polish stock exchange, as well as direct or indirect transfer of shares in a company, partnership or investment fund whose assets are composed in at least 50% of real state or rights to real estate located in Poland. Also, dividends, interest and other payments subject to withholding tax will be deemed earned in Poland.

The proposed catalogue is exemplary, i.e. it does not exclude classification of other income categories as earned in Poland. It should be noted that Double Taxation Treaties concluded by Poland may in practice result in specific income being not taxable in Poland.

No deferral of taxation for share exchange lacking business justification

Deferral of taxation with respect to share exchange will not be applicable where one of the primary aims of the transaction is tax avoidance. This will be deemed to be the case where share exchange does not have business justification.

Taxation of in-kind contributions

The amendment changes rules on recognition of taxable revenues related to in-kind contribution of assets other than a going concern.

Taxable revenues will no longer be equivalent to the face value of the shares issued in exchange for the contribution. Instead, in practice, taxable revenue will correspond to the market value of the contributed assets. This change eliminates existing controversies regarding taxation of in-kind contributions. At the same time, it could negatively affect execution of intra-group restructurings.

New requirements regarding withholding tax exemption for interest and royalties

The condition for application of exemption from withholding tax of interest and royalties – paid to associated companies from the European Union – will be that the interest recipient is beneficial owner thereof.

In order to apply the withholding tax exemption, the Polish payer will have to obtain a written statement which– besides other items – will confirm that the recipient company or permanent establishment is the beneficial owner of the payment.

Annihilation of shares in case of demerger

Amendment addresses also certain ambiguities relating to demerger of companies where the number of shares in a company being demerged remains unchanged while the face value thereof is decreased.

Status of amendment and entry into force

After Sejm acceptance the bill will be passed through the Senate and subsequently referred to the President for signature.

The changes to the legislation will generally become binding as of 1 January 2017, while CIT taxpayers whose tax year will begin before that date would still be subject to ‘old’ regulations until the end of such tax year.

Hungary: Amending act LXVI of 2016


On 15 June 2016 the Act LXVI of 2016 amending certain tax laws and related legislation and Act CXXII of 2010 on the National Tax and Customs Authority was published in issue no. 87 of Magyar Közlöny (the Official Gazette of Hungary). The most important provisions of the amending act are summarized below. In addition to next year’s tax changes, the amending act contains several provisions that will come into effect later this year. We point out these provisions in this newsletter.

Changes related to tax proceedings

Special taxpayer classifications

According to the amending act, from 1 July 2016, the total tax difference charged to taxpayers classified as “reliable” will have to be reduced by the total tax difference credited to these taxpayers during the current year and the preceding five years. Public limited liability companies can also be classified as reliable if they have been in operation for less than three years. The amendment provides that companies undergoing involuntary deregistration and taxpayers who have amassed unpaid default fines exceeding 70% of their tax payments also be slotted into the “risky” category.

From 1 January 2017, the tax authority will transfer VAT refunds to public limited liability companies within 30 days.

Tax audit of binding rulings

From 1 July 2016, a new type of tax audit will be introduced: binding rulings will be fact-checked to find out whether the events underlying a binding ruling actually occurred, and if so, whether the ruling in question is binding on the tax authority. During the audit, the tax authority may only request documents specifically mentioned in the binding ruling as records that, if issued, kept or retained, prove that the underlying events actually occurred. Regarding binding rulings becoming final and binding before 31 December 2015, the taxpayer may also initiate the proceedings.

Another change during the year is that the expert opinion of the Hungarian Chamber of Auditors must be attached to requests for a binding ruling pertaining to IFRS accounting.

Publication obligation under the block exemption regulation

From 1 July 2016, in accordance with Article 9 of Commission Regulation (EU) No 651/2014 (“block exemption regulation”), the Member States concerned must ensure the publication of relevant information on each individual aid award exceeding the HUF equivalent of EUR 500,000. According to the amendment, for aid in the form of a tax advantage, the required information on individual aid amounts in the specified ranges must be published within one year from the date the tax declaration is due, and must be available for at least 10 years from the date on which the aid was granted.

Self-revisions after the limitation period

According to the amending act, from 1 July 2016, taxpayers will be able to submit self-revisions even after the right of tax assessment has lapsed, in accordance with a court decision, in order to meet their tax obligations. Based on the self-revision, the tax authority may conduct an audit within one year. For periods already closed by an Audit, the related tax obligation may be corrected by means of a re-audit at the taxpayer’s request.

 

Czech Republic and Monaco will exchange tax information


The agreement between the Czech Republic and the Principality of Monaco for the exchange of tax Information specifies the type of information that both countries are obliged to provide in the event of a request. The agreement also sets out the procedural requirements under which the exchange will take place.

At the issuing of the request, the information that is deemed relevant for determining, assessing and collecting taxes on corporate and personal income, property taxes, secure payment of these taxes or information for an investigation and prosecution of tax offenses may be provided.

Information will be provided on the basis of a formal request addressed to the other country, regardless of whether the conduct for which the information is requested is considered criminal or not in the country receiving the request.

However, the party receiving the request can also refuse to provide the information in the case that it would reveal confidential communications relating to the provision of legal advice between a client, an attorney, solicitor or other recognised legal representative.

The agreement, which is valid from the beginning of March, may also be applied to facts arising prior to the agreement taking effect.

Bulgaria: The new Union Customs Code


In brief

On 1 May 2016 the Union Customs Code (UCC) will become applicable. The UCC (Regulation 952/2013) introduces simplification and alignment of customs procedures, new rules regarding customs valuation, changes to the rules regarding Authorised Economic Operator concept, compulsory application of BTIs in import declarations, amendments to non-preferential origin rules as well as other amendments that may have an impact on your business.

Customs procedures

Under the UCC, the customs procedures are simplified and aligned. The following customs procedures will be applicable:

Release for free circulation

(Re) export

Special procedure that will include the following:

  • Transit: external transit and internal transit
  • Storage: customs warehousing and free warehousing
  • Specific use: temporary admission and end-use
  • Processing: inward processing and outward processing.
  • Alignment of customs debt

 

Under the UCC, a standard approach is introduced and the customs debt will be established at the moment of release for free circulation (instead of rules per procedure that are applicable now).

New Inward Processing regime (IPR)

The new inward processing relief will replace the current inward processing regimes (suspension and drawback) and Processing under Customs Control (PCC). Тhe inward processing with application of the refund system will no longer be available. Instead, the inward processing procedure is transferred into a real/full suspensive regime. Under the new inward processing regime, duties levied for products that are released for free circulation in the EU, will be calculated based upon the processed products (comparable to the current PCC regime). However, upon (prior) request it can also be allowed to calculate the duties on the basis of the raw materials and components used for processing (the current IPR). Compensatory interest currently applicable under IPR suspension will no longer be levied.

First draft of amendment to the Polish CIT and PIT Laws published


In brief

On 25 February 2016, the Polish government published draft amendment to income tax laws. This draft amendment would introduce new lower CIT rate @15% for so-called small taxpayers, as well as a number of important changes relating to catalogue of categories of non-resident income subject to taxation in Poland, exclusion of deferral of taxation of share exchange, where one of primary aims of this transaction is tax avoidance, rules of taxation of in- kind contribution of assets (other than going concern) and application of withholding tax exemption for interest and royalties depending on whether the recipient is beneficial owner thereof.

In detail

Lower CIT rate for small taxpayers and taxpayers commencing activities

Under the draft amendment, a new 15% CIT rate (as opposed to standard 19%) would be introduced for ‘small taxpayers’ (reporting gross sales for the preceding tax year of no more than EUR 1.2m). Lower CIT rate would also be applicable to the taxpayers commencing business activities in the first year of these activities. However, the preferential rate will not be applicable in the year in which activities are commenced and in the subsequent year where the taxpayer (i) was formed as a result of merger, demerger or transformation (except transformation between limited liability company, joint-stock company and joint- stock partnership), (ii) was formed by entities that contributed in-kind a going concern or assets exceeding the value of EUR 10ths, (iv) was formed by entities that contributed in-kind assets received as a result of liquidation of other taxpayers.

Catalogue of non-resident income subject to taxation in Poland

Draft amendment would introduce to the CIT Law and expand in the PIT Law a catalogue of income categories of non-resident taxpayers which are deemed earned in the territory of Poland, hence subject to taxation in Poland.

Besides income related to business activities carried out in Poland and Polish real property, such categories would include income from receivables settled by entities resident in Poland, regardless of the place where the agreement is concluded or performance is executed. Income earned in Poland would also include income from securities and derivatives quoted on Polish stock exchange, as well as direct or indirect transfer of shares in a company, partnership or investment fund whose assets are composed in at least 50% of real state or rights to real estate located in Poland. Also, dividends, interest and other payments subject to withholding tax would be deemed earned in Poland.

The proposed catalogue is exemplary, i.e. it does not exclude classification of other income categories as earned in Poland. It should be noted that Double Taxation Treaties concluded by Poland may in practice result in specific income being not taxable in Poland.

No deferral of taxation for share exchange lacking business justification

Deferral of taxation with respect to share exchange would not be applicable where one of the primary aims of the transaction is tax avoidance. This would be deemed to be the case where share exchange does not have business justification.

Taxation of in-kind contributions

The proposed amendment changes rules on recognition of taxable revenues related to in- kind contribution of assets other than a going concern.

Taxable revenues would no longer be equivalent to the face value of the shares issued in exchange for the contribution. Instead, in practice, taxable revenue would correspond to the market value of the contributed assets.

This change would eliminate existing controversies regarding taxation of in-kind contributions. At the same time, it would negatively affect execution of intra-group restructurings.

New requirements regarding withholding tax exemption for interest and royalties

It is proposed that the condition for application of exemption from withholding tax of interest and royalties – paid to associated companies from the European Union – would be that the interest recipient is beneficial owner thereof.

In order to apply the withholding tax exemption, the Polish payer would have to obtain a written statement which – besides other items – would confirm that the recipient company or permanent establishment is the beneficial owner of the payment.

Annihilation of shares in case of demerger

Draft amendment addresses also certain ambiguities relating to demerger of companies where the number of shares in a company being demerged remains unchanged while the face value thereof is decreased.

Status of amendment and entry into force

Draft amendment is currently at an early legislative stage within the Council of Ministers and is now open for public consultation. It is envisaged that the changes to the legislation would generally become binding as of 1 January 2017, while CIT taxpayers whose tax year will begin before that date would still be subject to ‘old’ regulations until the end of such tax year.

Romania: Intrastat thresholds for 2016


In brief

National Statistics Institute President’s Order no. 501/2015 approving next year’s Intrastat thresholds applicable for economic operators conducting Intracommunity trade has been published in the Official Gazette. The provisions will enter into force on 1 January 2016.

In detail

The new Order’s main amendments address the following topics:

  • The Intrastat thresholds for 2016 have been set at:
    • RON 900,000 for Intracommunity dispatches of goods;
    • RON 500,000 for Intracommunity arrivals of goods.
  • Economic operators will be obligated to submit Intrastat statements as of January 2016 if during 2015 they perform Intracommunity trade with an annual value per stream (arrivals and dispatches) higher than the established Intrastat thresholds;
  • Economic operators will have to submit Intrastat statements during 2016 as of the month in which the aggregate value of Intracommunity trade exceeds the Intrastat thresholds for dispatches and for arrivals of goods, respectively.
[Source: Official Gazette no. 858 dated 18 November 2015.]

The takeaway

  • The Intrastat thresholds set for 2016 for Intracommunity trade are: RON 900,000 for Intracommunity dispatches of goods and RON 500,000 for Intracommunity arrivals of goods.

Law on the recovery and resolution of insurers


In brief

Law no. 246/2015 was published in the Official Gazette on 2 November 2015 and regulates the available instruments for recovery of insurers, Romanian legal persons and resolution of their financial situation.

In detail

Law no. 246/2015 on the recovery and resolution of insurers was published in the Official Gazette of Romania no. 813 issued on 2 November 2015.

The law is only applicable for insurers that are Romanian legal entities and describes the measures that can be imposed by the Financial Supervision Authority (“FSA”) in relation to their recovery and resolution of their financial situation.

According to the law, each insurer has to develop and regularly update a recovery plan, which is subject to FSA evaluation.

In addition, the FSA establishes a resolution plan for Romanian insurers, as well as an individual plan for those insurers which hold a significant position in the national insurance system.

The law establishes a series of early intervention measures that can be taken by the FSA if an insurer violates or might violate in the near future the requirements for maintaining the insurance licence, as a result of the rapid deterioration of the financial situation which includes a deterioration of the solvency capital and of the own funds that cover solvency capital requirements. These measures include the appointment of a temporary director for a maximum of one year, to replace or cooperate with the insurer’s existing management. The legal deeds of the temporary director are subject to the FSA’s prior approval.

Resolution can be imposed by the FSA if an insurer enters or is likely to enter into a state of major difficulties and the measure is necessary from a public interest perspective.

The FSA appoints a resolution director, who carries out all of the responsibilities of the insurer’s shareholders and management.

The resolution measures may include share capital increases, shareholding changes or takeover of the control of the insurer by other insurers with adequate financial soundness.

Before ordering a resolution measure, the FSA will require a financial auditor to perform a valuation of the assets, liabilities and equity of the insurer in question.

The resolution instruments that can be applied by the FSA are:

  • Sale of activity and of portfolio

In this case, the FSA can transfer an insurer’s shares to a buyer, as well as any category of insurer assets, rights or obligations.

  • Bridge-institution

The bridge-institution is an entity controlled by the FSA, to which the FSA can transfer the shares, assets, rights and obligations of the insurer, with the consent of the latter’s shareholders not being mandatory in this case. The assets, rights and obligations can subsequently be transferred either to third parties or back to the insurer, as per FSA decision.

  • Separation of assets

In the case of separation of assets, the FSA has the authority to transfer the assets, rights and obligations of an insurer or of a bridge-institution to an asset management vehicle, without having to obtain the approval of the insurer’s shareholders.

Such asset management vehicles are controlled by the FSA and manage the assets so transferred, for the purpose of their sale or proper liquidation.

The FSA needs to ensure that, in the event of a resolution, the shareholders and creditors whose receivables have not been transferred receive an amount at least equal to the amount they would have received in the event of an insolvency procedure. If the received amount is less, they are entitled to be paid the difference from the resolution financing mechanisms.

Resolution financing mechanisms consist of the Insurers Resolution Fund set-up and managed by the Insured Guarantee Fund. Such fund is established with the insurers’ contributions, up to a maximum of 1% of the gross premiums collected. The specific percentage is to be approved by FSA regulations.

The law entered into force as of 5 November 2015.

The takeaway

Resolution will be financed by an Insurers Resolution Fund, with contributions from insurers, up to a maximum of 1% of gross premiums collected.

For a deeper discussion of how this issue might affect your business, please contact:

Sorin David, Romania Legal Leader,

Tel: +40 21 225 3770

Anda Rojanschi, Partner,

Tel: +40 21 225 3586

Dan Dascalu, Partner,

Tel: +40 21 225 3683

Manuela Guia, Partner,

Tel: +40 21 225 3586

Restructurings with the Polish SKA without stamp duty


On 22 April 2015, the Court of Justice of the European Union (‘CJEU’) rendered its judgment in the case Drukarnia Multipress sp. z o.o (‘Drukarnia’, case C-357/13). CJEU ruled, that the Polish tax on civil-law transactions (‘PCC’ or ‘TCLT’ being similar to stamp duty) levied on certain restructuring operations carried out by a partnership limited by shares (spolka komadytowo-akcyjna, ‘SKA’) is not compatible with the Directive 2008/7/EC. The positive resolution of the CJEU creates an opportunity to recover the PCC paid on restructurings of SKA.

Polish SKA

Under Polish tax law provisions the TCLT is levied on i.a. capital increase in the companies. Polish TCLT Act provides for the tax exemption for certain restructurings operations, however, only with regard to the capital companies (corporations).

The Polish SKA is a hybrid legal structure, having the characteristic elements of a partnership together with features of a capital company. Under the Polish TCLT law, the SKA is considered as partnership and thus the tax exemptions do not apply to the SKA.

Preliminary question

In the case concerned, Drukarnia intending to convert itself into a SKA and then to increase its capital by a contribution in kind made up of shares in other companies, applied to the Minister of Finance (‘Minister’) for a tax ruling.

Drukarnia submitted that a SKA was a capital company under the Directive 2008/7/EC. Consequently, those restructuring operations cannot be subject to the TCLT. The Minister rejected the Drukarnia’s position and stated that a SKA was not a ‘capital company’ within the meaning of that directive.

Drukarnia appealed against the interpretation and the Regional Administrative Court in Cracow referred the question to the CJEU for a preliminary ruling.

CJEU held that a Polish SKA must be regarded as a capital company under the Directive 2008/7/EC, even if only some of its capital and members are able to satisfy the conditions laid down by this Directive.

Consequences for the taxpayers

In the recent years the legal form of the Polish SKA has been often chosen by the taxpayers, since it provided for favorable taxation with the income tax. The SKA has been often established by conversion and thus subject to taxation with TCLT. In the light of the CJ verdict, the conversion of the capital company into the SKA shall be tax exempt and thus the PCC already levied may be recovered.

Furthermore, taxpayers will have strong arguments for seeking refunds on the PCC paid on the following restructurings:

  • mergers of an SKA with another capital company,
  • contributions of enterprises or its organized parts to an SKA,
  • contributions of some shares to an SKA.

 

 Your local contact person:

Witold Adamowicz, telephone: +48 22 746-4300, e-mail: witold.adamowicz@pl.pwc.com

Your contact person in Germany:

Magda Olszewska, telephone: +49 69 9585-2224 , e-mail: magda.olszewska@de.pwc.com

Estland: Gute Nachrichten für multinationale Konzerne


Zu der wahrscheinlich beachtenswertesten Änderung im Steuerrecht, auf die sich die neue Koalition geeinigt hat, gehört die Befreiung der Kapitalerträge aus der Veräußerung eines Anteils an einer ausländischen Tochtergesellschaft von der Körperschaftssteuer. Dies würde Estlands Attraktivität als Holdingstandort für multinationale Konzerne erheblich steigern.

Wenn beispielsweise eine estnische Holdinggesellschaft heute die Mehrheit ihrer Anteile an einer lettischen Tochtergesellschaft veräußern würde, würden die Nettoerträge bei späterer Verteilung als Dividenden der estnischen Körperschaftssteuer unterliegen. In vielen anderen europäischen Ländern würden Holdinggesellschaften in dieser Situation jedoch ganz oder teilweise von der Körperschaftssteuer befreit werden. Estland ist bei den Voraussetzungen für multinationale Holdinggesellschaften ganz klar in Verzug geraten. Es bleibt nun ein detaillierter Gesetzesentwurf des Finanzministeriums abzuwarten, der in naher Zukunft hoffentlich die richtigen Bedingungen dafür schaffen wird, dass Estland dem Wettbewerb um multinationale Holdinggesellschaften beitreten kann.