Double Tax Treaties: Asia & Europe

www.istructuring.com
Double Tax Treaties: Asia & Europe
September 18 12:00 – 12:45 BST
John Timpany, KPMG
Roy Saunders, IFS Consultants
Register at: https://www.brighttalk.com/webcast/11641/123471

Benefits and Limitations of Key Double Tax Treaties for
Asian and European Business Structuring
Roy Saunders, IFS Consultants
John Timpany, KPMG China
The material contained herein is not intended to provide and should not be relied upon for accounting, legal or tax advice.
www.istructuring.comwww.istructuring.com

Agenda
• Hong Kong
• Applying tax treaties in Asia
• European Union
• Applying tax treaties in the EU

Introducing Hong Kong to the world of international business structuring
• Low rate “simple” tax system
• Purely territorial
• No tax on capital gains
• Stable tax law and administration
• Rule of law respected
• Common law based legal system
• Free flow of capital / people / information
• Primary platform for inbound and outbound Chinese investment

Hong Kong
Hong Kong CoInvestment Assets
Non-DTT States
Dividends: 0% WHT;
Royalties: 4.95% WHT
(if IPRs used in HK)
Interest: 0% WHT
• 16.5% Corporate Tax
• Profits (incl. interest, royalties)
taxed on the basis of territoriality
• DIPN-21 on Locality of Profits
• No tax on capital gains
• No VAT
• Dividends fully exempt
• Capital gains exempt unless
reclassified as trading profits
DTTs
• 28 effective DTTs, primarily with
Asia and the EU
• Best in class treaties with China,
Indonesia and Japan
• Good treaties for accessing Europe
(Luxembourg, UK)
• Canada

Hong Kong source rules
• Only Hong Kong sourced profits taxable
• Dividends location of payer (local dividends exempt)
• Interest; “provision of credit” or “operations” test
• Gains on securities; location of exchange or place where contracts to acquire /
dispose are effected
• Royalties; location of use of the IP
• Trading profits; sourced where contracts to acquire / dispose are effected
• With relatively simple structuring holding companies will pay no tax in
Hong Kong

Singapore
Singapore CoInvestment Assets
Non-DTT States
Dividends: 0% WHT
Royalties: 10% WHT
Interest: 15% WHT
• 17% CT
• Tax imposed on income accruing in
and derived from Singapore, or
received in Singapore from outside
Singapore
• No capital gains tax
• Special regimes for inter alia
Approved Securities Company, Fund
Management, Operational
Headquarters, Insurance, Treasury,
Global Trading Companies, Aircraft
Activities
• Dividends exempt
• Foreign branch profits exempt
• Foreign-sourced service income exempt
PROVIDED
• Headline foreign tax is 15%; and
• Foreign income subject to tax; and
• IRAS is satisfied that the tax exemption
would be beneficial to the resident
Companies engaged in substantial business
activities overseas which are unable to qualify
for the exemptions may be offered
concessionary treatment
DTTs
• 69 comprehensive, 8 limited
(shipping/air transport) DTTs
• Most of Asia-Pacific and the EU
• Remittance clauses in many treaties

Asian double tax treaties: benefits and
limitations
• Use of treaties can provide significant savings on
income and gains
• Beneficial Ownership tests
• Novel interpretations
• Administrative pre-clearance of treaty claims
• China; Notice 124 / 601
• Indonesian; DGT 1
• Korea
• Conduit Companies
• Obtaining residency certificates

European double tax treaties: benefits
and limitations
• Purpose of double tax treaties
• Limitation of Benefits
• Beneficial Ownership Test
• Conduit Companies

Netherlands
Dutch Co
CT: 20%/25% (>€200k)
Investment Company
IP Company
Shipping activities
EU Non-EU
Innovation box: 5% on royalties/gains
• Self-developed patents post 31/12/09;
• Qualifying R&D
Royalties conduit
• Subject to minimal foreign WHT and 0%
WHT;
• Min. spread subject to a Ruling.
Tonnage tax on maritime
shipping activities by NL
companies and PEs of foreign
companies.
Taxable income calculated
according to net tonnage.
>5%
Full participation exemption
• Predominant motive test; failing
which
• Asset test — 50%+ non-portfolio
assets; and
• Subject to tax — 10%.
Rulings available
Dividends / gains fully
exempt
Interest, royalties: 0% WHT;
Dividends: 15%, subj. to DTT
WHT subject to EU Tax Directives

Luxembourg
Luxembourg Co
CT: 29.22%
SOPARFI
regime
IPRs
EU Non-EU
Exempt dividends and gains from:
• EU resident company, covered
under Parent Subsidiary Directive;
or
• Foreign company subject to at least
10.5% tax, held for 12 months; and
• Either 10% share capital or
acquisition price ≥€1.2 mil (≥€6 mil
for gains).
exempt
Int, royalties, liq. proceeds: 0% WHT;
Dividends: 15%; 0% if:
• paid to EEA/CH/DTT co liable to at least
10.5% tax; and
• holds 10% shares OR acqd. shares €1.2
mil. and held for 1 year.
CT 5.76% (80% exemption) on qualifying
IP royalties/gains + net wealth tax
exemption
• Software ©, patents, tm, domain
names, created / acquired post 31 Dec
07;
• Related expenses must be activated in
the balance sheet;
• Not acquired from an associated
company.
80% CT exemption on
qualifying IPRs
Securitisation Vehicle
(SV)
(société de titrisation)
• Corporate entity or fund that securitises
underlying assets;
• Fully liable to tax and benefitting from DTTs,
hw distributions treated as an expense – an
agreed return for the assets securitised;
• No wealth tax
• Assets’ “compartments” shielded from
creditors’ claims and allowing channelling of
returns to specified investors.

Cyprus
Cyprus CoInvestment Assets
International Shipping
activities
EU Non-EU
Tonnage tax – no tax on
income, gains and no
stamp duty
Foreign dividends fully exempt , if:
• Subsidiary pursues active business
(>50% investment activities); and
• Liable to min. 5% tax;
Foreign gains fully exempt
exempt
Interest, dividends: 0% WHT;
Royalties: 5/10% WHT; 0% if IPRs
not used in Cyprus
• 12.5% CT with 80% exemption for
IPR profits;
• Profits from foreign PEs exempt
(same test as for dividends), hw
losses are allowed.
• Inward and outward corporate
migration
• Low taxable margins subject to
rulings

Malta
International Shipping
activities
IP Company
Investment assets
International
Aviation activities
Ownership, lease,
operation
Malta Co
• 35% CT, however 5%
effectively
• Remittance basis of taxation
for res. non-dom companies
• Inward and outward
corporate migration
• DTT with Hong Kong signed
yet not ratified
Tonnage tax – no tax on
income, gains and no stamp
duty
• Remittance basis of taxation
even if income arises in
Malta;
• Only resident not domiciled
companies
Malta Hold Co
Foreign Hold Co
(domestic reliefs / EU
Directives)
0% WHT — dividends, interest, royalties
Refund of 6/7ths of CT

United Kingdom
UK Co
CT: 20/21%
Investment Company
IP activities
Shareholder Non-EU
Patent box (effective from 1 April 2013):
• 10% on royalties/gains from “qualifying patents”;
• Patents registered with IPO, EPA, certain EEA States
Royalties conduit
• Royalties from IPRs not exploited in the UK liable to
tax only on the minimal margin
Substantial shareholding exemption
• Holding of at least 10% of shares,
entitled to at least 10% of the
profits available for distribution,
entitled to at least 10 per cent of
the assets on a winding up.
• 12 months holding period
• Sole trading company / trading
group condition
Non-SMEs
• Distribution is in an “exempt class”;
• Not a non-dividend distribution, e.g.
Interest;
• No tax deduction for dividends paid.
SMEs
• Payer resident in a DTT State;
• No tax deduction for dividends paid;
• Dividends not paid under a tax
advantage scheme.
Dividends fully exempt
Dividends: 0% WHT;
Int., royalties: 20%, subj. to DTT
and EU Tax Directives
Gains on sale of shares exempt in
the hands of non-residents
£10 mil @ 10% tax under
Entrepreneurs’ relief
Trading company
Gain on sale of shares
exempt under SSE

Which location is best?
• The choice will depend on a number of factors
including:
• Nature/location of business operations
• Target entities – Asian or European
• Trading or Passive activities
• Substance required
• Where are the shareholders?
• Investment strategy
• Financing requirements
• Exit strategy

Beneficial ownership
– court cases
• Indofoods v JP Morgan
• Prévost Car
• MIL Investments
• Velcro Canada Inc
• Four necessary elements to consider
– possession, use, risk, and control
• The corporate veil is not to be pierced unless the corporation
has ‘absolutely no discretion’ with regard to the use of the
funds.

Beneficial ownership –
burden of proof
• Who has the legal right to receive income from the company?
• Does the recipient of income from the company have exclusive possession and control of income
received?
• Is income received comingled with other monies in the recipient’s account and exposed to
currency fluctuation risk?
• Does interest earned on income received belong to the recipient?
• Does the recipient of income have to seek instructions in dealing with the funds received?
• Did the amount of the income received from the company differ from the amount paid out to
third parties?

Limitation of Benefits
• 1962 Federal Decree in Switzerland
• Remittance provisions in treaties
• 1992 US LOB provision in Dutch/US treaty
• 1994 Anti-treaty shopping law in Germany
• US Double tax treaties general LOB provisions
• 2014 OECD BEPS initiative

Impact of Future Changes : BEPS and the
OECD approach
• Greater transparency
• Will increase the trend towards alignment of holding structures and
business operations
• Will the changes actually shift tax revenue to the growing emerging
economies?

Knowledge Bank International ConferencesMember Directory Branch Events
• To create an international organisation with branches throughout the world dedicated to
advancing the practice of international business structuring across multiple disciplines.
• To promote the practice of international business structuring as transparent, effective
and professional without the aggressive tax connotations currently perceived by the
public.
• To create a community where professionals at all levels learn from each other and have
access to worldwide knowledge and contacts opening up professional and commercial
opportunities for all .
• To professionalise the practice of International Business Structuring.
For further information please contact:
jay.abai@istructuring.com or call +44 (0) 20 7030 3310
The IBSA Vision
Corporate Directory

Double Tax Treaties: Asia & Europe

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