1 CHANGES TO CORPORATE INCOME TAX RULES IN THE CONTEXT OF EU INTEGRATION Sylwia Sobowiec Sławomir Boruc ( presentation prepared with the help of Baker.

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CHANGES TO CORPORATE INCOME TAX RULES IN THE

CONTEXT OF EU INTEGRATION

Sylwia Sobowiec

Sławomir Boruc

(presentation prepared with the help of

Baker & McKenzie Amsterdam office)

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EU LAW ON DIRECT TAXATION

Merger Directive Parent Subsidiary Directive Interest and Royalty Directive Savings Directive Arbitration Convention

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EU LAW ON DIRECT TAXATION cont’d

Importance of the case law of European Court of Justice

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Aims:

Enable tax free business reorganization Safeguard fiscal interest of member states (defer

taxation) Deny benefits of the Directive in the case of tax

evasion or avoidance

MERGER DIRECTIVE

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MERGER DIRECTIVE cont’d.

Merger Division Transfer of assets Exchange of shares

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MERGER DIRECTIVE cont’d.

Merger (3 possibilities)

Company A

Being dissolved without going into liquidation Transferring all assets and liabilities to another

existing company B In exchange for shares (and cash) issued

to the shareholders of company A

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MERGER DIRECTIVE cont’d.

Merger (first option)

shareholders

German GmbH

B

UK Ltd

A

Companies from two or more states

(receiving company) (dissolved)

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MERGER DIRECTIVE cont’d.

Merger (other options)

same as above, only German GmbH and UK Ltd. both transfer assets / liabilities to NewCo

subsidiary merged into parent company

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MERGER DIRECTIVE cont’d.

Division

Company A being dissolved (without going into liquidation)

Transfer of all assets and liabilities to two or more companies

In exchange for shares (and cash) issued

to the shareholders of company A

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MERGER DIRECTIVE cont’d.

Division

shareholders shareholders

NewCoA

UK Ltd

NewCoB

transfer

transfer

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MERGER DIRECTIVE cont’d.

Transfer of Assets

Branch Branch

Italian S.p.A

UK Ltdshares

transfer

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MERGER DIRECTIVE cont’d.

Exchange of shares

Italian S.p.A

UK Ltd

shareholders

transfer

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MERGER DIRECTIVE cont’d.

Mergers and divisions are not possible in many member states according to domestic commercial law

Companies from two or more member states

Companies listed in the annex to the Directive

Possibility of implementing min. 25% holding (10% is proposed) in the capital of the transferring

company in order to benefit from the Directive

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PARENT SUBSIDIARY DIRECTIVE

Companies from different member states listed in the Annex

Parent holds at least 25% in the capital of subsidiary (10% holding is proposed)

Option to introduce two year holding period (Denkavit case)

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PARENT SUBSIDIARY DIRECTIVE cont’d.

No withholding tax on dividends

Dividends received exempt from tax or credit is given for corporate income tax paid by subsidiary on those profits

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INTEREST AND ROYALTY DIRECTIVE WHT rates

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Current EU members

Interest Royalty Future EU members Interest Royalty

Austria 0 20 Cyprus 0 5/10 Belgium 15 0 The Czech Republic 15 25 Denmark 0 30 Estonia 26 15 Finland 0 29 Hungary 18 18 France 15 33,3 Latvia 10 15 Germany 25 25 Lithuania 10 10 Greece 35 20 Malta 0 0 Ireland 20 20 Poland 20 20 Italy 12,5/27 22,5 Slovakia 25 25 Luksemburg 0 10 Slovenia 0 0 Holland 0 0 Portugal 20 15 Spain 18 25 Sweden 0 0

Slovenia will apply 20% withholding tax rate from January 1, 2004

The United Kingdom

20 24 According to Baker & McKenzie Amsterdam

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INTEREST AND ROYALTY DIRECTIVE cont’d.

Exemption of interest and royalties from withholding tax

Interest and royalties paid by a company/PE of one member state to a company/PE of another member state

The recipient must be the beneficial owner of interest and royalties

Both the payer and the recipient must be associated (with each other)

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INTEREST AND ROYALTY DIRECTIVE cont’d.

P

R

25%

interest/royalty

EU

EU

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INTEREST AND ROYALTY DIRECTIVE cont’d.

R

P

25%

interest/royalty

EU

EU

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INTEREST AND ROYALTY DIRECTIVE cont’d.

SHAREHOLDER

R

25%

P

25%

EU

EU

EU

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SAVINGS DIRECTIVE

AIM

Taxation of savings income in the Member State in which the beneficial owner being an individual is a resident

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SAVINGS DIRECTIVE cont’d.

SCOPE

Exchange of information (almost all EU countries)

Withholding tax (Austria, Belgium, Luxembourg and non-EU countries: Switzerland, Liechtenstein, Monaco, Andorra, San Marino)

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HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE

Harmonization of provisions regarding:

• Mergers• Divisions• Transfer of assets

Lack of harmonization in the case of exchange of shares

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HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE cont’d

Exchange of shares – a company acquires shares in another company as a result of which the first will hold a majority of voting rights in that other company in exchange for shares of the acquiring company issued to shareholders of the other company

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HARMONIZATION OF POLISH TAX REGULATIONS WITH THE MERGER DIRECTIVE cont’d

P A

S

P – holds shares in S with a nominal value of 100 m.u.

P – contributes the shares it holds in S to A at the

market price of 1000 m.u. and takes up shares

in A for 1000 m.u.

100%

shares

100% transfer

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ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE

Exemption from withholding tax on dividends (and other revenue from sharing in profits of legal persons)

paid by Polish company received by EU company (subject to corporate income

tax) EU company holds for at least 2 years a minimum of

25% shares in capital of Polish company

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ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

Exemption does not apply to:

profits from the redemption of shares profits from the sale of shares for the purpose of their

redemption liquidation profits

Obligation to keep the shares for 2 years –

how it will work in practice (Denkavit case)

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ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

INCOME 100 CIT (19%) 19INCOME AFTER CIT 81DIVIDEND 81WHT 0% 0PAID DIVIDEND 81

PS

RECEIVED DIVIDEND 81

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ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

Tax Credit

Polish parent authorised to deduct from its tax any corporate income tax paid by EU subsidiary on profits out of which dividend was paid

Polish parent holds at least 25% of shares in EU subsidiary for at least 2 years

Tax credit is limited to the amount of Polish tax that relates to foreign income

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ADAPTATION OF POLISH REGULATIONS TO THE PARENT SUBSIDIARY DIRECTIVE cont’d

INCOME 100 CIT (10%) 10INCOME AFTER CIT 90DIVIDEND 90WHT 0% 0PAID DIVIDEND 90

PS

INCOME 200 DIVIDEND 90TOTAL INCOME 290CIT (19%)19% X 290 55,1CIT TO PAY (55,1 – 10) 45,1

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HARMONIZATION OF POLISH REGULATIONS WITH THE INTEREST AND ROYALTY DIRECTIVE

No changes to the regulations were proposed

Poland has asked for transitional periods 5% withholding tax on interest for 8 years 10% withholding tax on royalties during the first 4 years

and 5% tax during the next 4 years

No response from EU was reported to date

What will happen after May 1, 2004?

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HARMONIZATION OF POLISH REGULATIONS WITH SAVINGS DIRECTIVE

No changes were proposed

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HARMONIZATION OF POLISH REGULATIONS WITH EU DIRECTIVES

Are Polish thin capitalisation rules in line with EU regulations?