“Royalty Restrictions“ in Germany

11 July 2017

Germany has recently introduced new rules that will restrict the tax deductibility of related-party cross-border royalty payments if these payments are benefiting from a low taxation triggered by a harmful preferential tax regime in the country of the recipient.

Based on these new rules, such royalty expenses incurred after 31 December 2017 will no longer be fully deductible in Germany if the relevant income is subject to an effective tax rate of less than 25%:

In detail

For example, if the royalty income is subject to a preferential 10% effective tax rate, 60% of the royalty payments would not be deductible at the German taxpayer level.

However, if a recipient of cross-border royalty payments is subject to the regular tax rate (i.e. no preferential tax regime applies), the royalty restriction rule is not applicable, even if the effective tax rate is less than 25%.

Furthermore, patent box regimes which comply with the OECD “nexus” approach (i.e. under foreign law the preferential tax rate is only granted following an OECD-compliant “nexus” approach) are exempt from the new rule. A patent box of this kind is likely to be introduced in Switzerland in the context of tax package 17 (former corporate tax reform III).

It should however be noted that tax package 17 and therefore an
OECD-compliant Swiss patent box will probably not be introduced before 2020. Consequently, German royalty payments incurred between 1 January 2018 and the introduction of such a patent box in Switzerland could be subject to the new German royalty restriction rule if such royalties benefit from a Swiss preferential tax regime. The following regimes in Switzerland should be investigated in particular to establish whether or not they qualify as harmful preferential tax regimes:

  • Nidwalden IP Box
  • Mixed companies
  • Holding companies
  • Principal companies

An investigation into the impact of the new German limitation rules is recommended in order to determine their impact and to decide whether restructuring should be conducted before 1 January 2018.

In summary, there is still some uncertainty about how the new rules will be interpreted and applied. However, for now it can be assumed that all Swiss preferential regimes may potentially cause issues under the German royalty restriction rule.

There are, however, certain planning ideas which can help mitigate and/or reduce such issues. These solutions may depend on the very specific circumstances of your group and we advise you to have them analysed by your PwC tax consultant on a case-by-case basis.

For a more detailed discussion of how this might affect your business, please contact:

Armin Marti
Partner, Leader Corporate Tax
Tel. +41 58 792 43 43
armin.marti@ch.pwc.com

Stefan Schmid
Partner, Tax & Legal
+41 58 792 44 82
stefan.schmid@ch.pwc.com

Roman Brunner
Partner, Tax & Legal
+41 58 792 72 66
roman.brunner@ch.pwc.com

Urs Brügger
Partner, Tax & Legal
+41 58 792 45 10
urs.bruegger@ch.pwc.com

Reto Inauen
Senior Manager, Tax & Legal
+41 58 792 42 16
reto.inauen@ch.pwc.com

Leap ahead: 2016 China tax policy review and 2017 outlook

China Tax Policy Review and Outlook is a series of PwC China Tax annual publication designed to review key tax policy developments in China and discuss the trends and impacts to Chinese businesses from a forward-looking perspective. This 2016 China Tax Policy Review and 2017 Outlook is the second issue in the series.

2016 was a year of transition for China. It was also the first year of the 13th Five-Year Plan. The State Administration of Taxation has released a series of tax policies to support the transition of China’s economy. Turning eyes to the international taxation, China has voiced out her stance on international collaboration to foster growth, innovation and transparency, and her goal to establish a modern tax administrative system by 2020.

Highlights of the 2016 China Tax Policy Review and 2017 Outlook: 

  • Impact of the Business Tax to Value-added Tax Transformation Reform and outlook of the next phase of VAT reform
  • Innovation-driven tax incentives related to High-New Technology Enterprises, equity incentive plans, etc. and “green tax” initiatives (Resource Tax and Environmental Protection Tax)
  • Development of tax transparency (e.g. Country-by-Country Report and Common Reporting Standard) echoed by China’s digital administrative strategy (“Golden Tax III” and “Thousand Groups Project”) New trend of tax dispute resolution mechanism (e.g. tax administrative appeal and court litigation, Advance Pricing Arrangement, Mutual Agreement Procedure)
  • Key words for 2017 outlook, e.g. anti-tax avoidance, localisation of BEPS recommendations, details of Environmental Protection Tax Law, further cut in tax and government levies

With China’s increasing influence on the global economy and international taxation, we have more to expect in the years to come. As Mr. Wang Jun, the SAT Commissioner, commented, “The SAT will step up effort in 2017 to balance its focus on inbound and outbound taxation, and refine some of the existing rules to add more certainty and clarity.” Policies in the 2017 pipeline may include revised anti-avoidance rules related to Controlled Foreign Corporations, Thin Capitalization, etc.; rules to further implement the BEPS project recommendations regarding anti-treaty abuse; landmark reforms in terms of Individual Income Tax, Property Tax; the elaboration on the implementation of the Environmental Protection Tax Law; further cut in non-tax government levies; and what taxpayers are most earnestly waiting for, the new look of the Tax Collection and Administration Law.


Download the full report here.

 

Swiss Withholding Tax: Relieved requirements for the notification procedure

On 1 February 2017, the Swiss Federal Tax Administration (“SFTA”) informed that the relieved requirements for the notification procedure will enter into force on 15 February 2017.

Companies which have paid late payment interest on delayed notification applications and meet below reflected further requirements are entitled to claim back such late payment interest within 1 year.

Background

On 30 September 2016, both chambers of the Swiss parliament approved an amendment of the Swiss Withholding Tax Act, for which no referendum was called. As a result of the amended Swiss Withholding Tax Act, the notification procedure for withholding tax on dividend distributions shall – even in case the 30-days-filing-deadline was/is not met – be granted by the Swiss Tax Authorities, if the relevant material conditions for the notification procedure are/were fulfilled at the due date of the distribution.

Based on the transition rules, the amended law will also be applicable to cases which occurred prior to the enactment of the law changes, unless (i) the tax liability or the late payment interest is/are time-barred or (ii) was/were already finally assessed prior to 1 January 2011.

Kindly note that – despite of the amended Withholding Tax Act – we continuously recommend to strictly adhere to the 30-days-deadline for filing the relevant forms (e.g. 102/103 and 106/108) to avoid potential fines.

In case you have refrained from paying a late payment interest claim and your case was either suspended by the SFTA or an appeal is currently pending, we recommend analysing what next steps shall be taken.

Next Steps / Call to Action

If your company had missed the 30-day-deadline for the notification procedure, we recommend that you contact your PwC tax adviser who will be happy to help you analyse whether your company may be entitled to a refund or how to best deal with your pending.

Our contacts:

Stefan Schmid
Partner, Tax & Legal Services
+41 58 792 44 82
stefan.schmid@ch.pwc.com

Dr. Remo Küttel
Partner, Tax Services
+41 58 792 68 69
remo.kuettel@ch.pwc.com

Dr. Sarah Dahinden
Senior Manager, Tax & Legal Services
+41 58 792 44 25
sarah.dahinden@ch.pwc.com

Invitation Webcast: US Tax Reform and Impact on Companies Investing in the US

Wednesday, January 18, 1:00 pm.- 2:00 pm ET

Online registration

Whatever your resolutions, the start of a new year offers opportunities for new beginnings and improvements. As you look at 2017 and what’s ahead for your business, PwC’s Doing business in the United States can help guide you through the US tax system as you invest or expand your investments in the United States.

Wondering what’s the outlook for the US tax system this year? Join PwC for a closer look at tax reform and other tax policy issues specific to global companies investing in the United States.

When: 
Wednesday, January 18, 1:00 pm.- 2:00 pm ET

What:

  • How is the US tax system unique?
  • What is the process of transforming tax reform into US law?
  • What are the option for tax reform and how do they compare and contrast (Camp plan, Trump proposal, Republican Blueprint)
  • What are the consequences for US inbound companies, from interest
    educibility, treatment of intangibles, state taxes, and border adjustability?

Speakers:

  • Chris Kong, US Inbound Tax Leader
  • Peter Merrill, US National Economics and Statistics Principal
  • Pam Olson, US Deputy Tax Leader & Washington National Tax Services Leader
  • Oren Penn, US Inbound Tax and International Tax Services, Principal

For further details please refer to our registration page.

Changes on Swiss Withholding Tax Act approved by Federal Assembly

On 20 September 2016, the Swiss Council of States approved an amendment of the Swiss Withholding Tax Act. As a result, the notification procedure for withholding tax on dividend distributions shall – even in case the 30-days-filing-deadline is not met – be granted by the Swiss Tax Authorities, if the relevant conditions for the notification procedure are fulfilled.

The Council of States also accepted a transition rule, which was proposed by the National Council in the amended Swiss Withholding Tax Act. Based on this transition rule, the amended law shall also be applicable for cases which occurred prior to the enactment of the law changes, unless (i) the tax liability or the late payment interest is/are time-barred (“verjährt”) or (ii) was/were already finally assessed prior to 1 January 2011.

As a consequence, taxpayers who had to pay late payment interest due to missing the 30-days-deadline for filing the notification procedure, may in principle retroactively claim back respective late payment interest. After the (potential) enforcement of the new law, the taxpayer will have to make an official request in this regard within one year.

On 22 September 2016, the National Council has settled a last difference in respect of the penal provisions. The provisions agreed by both chambers do now foresee that missing the 30-days-filing-deadline may lead to an administrative fine of up to CHF 5’000.

In a last step, the revision of the Swiss Withholding Tax Act has to be adopted by the final vote of both chambers of the Swiss parliament, which is scheduled for 30 September 2016. In case no referendum is levied (a 100 days-deadline applies), the Federal Council (Swiss government) will – presumably by mid/end January 2017 – determine the exact date of entry into force.

History

Dividend distributions of Swiss companies are subject to Swiss withholding tax levied at a rate of 35%. For distributions to qualifying parent companies, it is under certain conditions possible for the paying company to apply for a notification procedure, whereas the necessary forms need to be filed within 30 days of the due date of such dividend.

In 2011, the Swiss Supreme Court decided that the 30-days-deadline in order to apply for the notification procedure is a non-extendable deadline, whereas missing this deadline leads to the forfeiture of the notification procedure even if all other conditions would otherwise be met.

The Swiss federal tax administration had thereafter consequently levied Swiss withholding tax in case of a missed notification deadline with the effect that late payment interest is due as of the original due date of the withholding tax (interest rate of 5%). Several court cases in this respect are currently pending.

Next Steps/Call to Action

On 30 September 2016, both chambers of the Swiss parliament are scheduled to confirm in a final vote the revision of the Swiss Withholding Tax Act. In case no referendum will be called, the Federal Counsel will determine the date of entry in to force of the amended Law at the beginning of next year.

The current implications of a missed deadline clearly show the importance of complying with tax compliance requirements.

Although in future the missing of the 30-days-filing-deadline should no longer lead to late payment interest, compliance with all filing obligations will remain of high importance.

We will inform you on further developments in this regard and if potential next steps need to be considered.

 

Stefan Schmid
Partner
Tax & Legal Services
stefan.schmid@ch.pwc.com
Dr. Remo Küttel
Partner
Tax Services
remo.kuettel@ch.pwc.com
Dr. Sarah Dahinden
Senior Manager
Tax & Legal Services
sarah.dahinden@ch.pwc.com

US Swiss Webcast – Doing business in the United States

Doing business in the United States has always presented unique opportunities and challenges for Swiss companies. The investment, financing and tax environment is an important field and several US tax developments will impact Swiss companies doing business in the US.

Get access to the recording of this webcast through the link below.  Join an insightful discussion on the current US issues facing you and your peers — tax directors, CFOs and investors of Swiss companies doing business and investing in the US via US operation and subsidiaries.

Title: US Swiss Webcast – Doing business in the United States
Date:  6 July 2016
Time:  11:00 Eastern/ 17:00 CET – 60 minutes

Online recording

These and other questions will be addressed during our webcast, which we cordially invite you view:

  • US competitiveness in a global economy
    What do foreign investor,CFOs, tax directors of US inbound companies have to say?
  • Section 385 proposed regulations
    On April 4, 2016, the Internal Revenue Service and US Treasury Department proposed regulations under Section 385 targeting related party funding transactions. Their implication is so broad, that many routine corporate treasury activities could have profound impact on how US inbound companies deploy and manage cash. The proposed rules do not only impact US groups but also US inbound companies. Do you know how you could be impacted?
  • US double tax treaty update
    What protection does the double tax treaty give Swiss companies investing in the US? In the light of the international developments on OECD and EU level, what changes are to be expected considering the new draft of the US model tax treaty?
  • US federal and state audit issues
    Treaties may not protect you against US state taxes; what other trends do you need to know about?
  • US tax reform: To be or not to be?
    With the presidential campaign ongoing, how realistic is a US tax reform considering the candidates and political environment. Many voices call for a US tax reform but what are the chances for success? How would a US tax reform impact foreign companies operating in the US?

We look forward to welcoming you online.

To access the webcast (via PC or Mobile device) – click on the following link to open the recording of the webcast:

Online recording

Complete the required registration fields and select “Submit”. The webcast will open to enable you to view the recording of the presentation.

Audio for this webcast will be heard through your computer speakers.  If you have problems hearing audio, please get in touch with Marcus Lier.

Speakers of this webcast

Céline C. Jundt
Swiss Tax Desk New York
+1 646 471 61 38
martina.walt@ch.pwc.com

Oren Penn, Principal
Washington National Tax
oren.penn@us.pwc.com

Swiss Supreme Court: tax-privileged quasi-merger status is only granted if the receiving company is issuing its own shares

Swiss Supreme Court denies qualification of a specific transaction as a quasi-merger and hence as a Swiss tax-neutral restructuring

In Switzerland, the quasi-merger is not formally stipulated under Swiss merger law. Yet, in Swiss tax practice, quasi-mergers typically qualify as tax neutral restructurings (“tax privileged” restructurings), if certain criteria are met.

According to Swiss Tax Administration Circular Letter No. 5, “Reorganisations”, a Swiss tax-privileged quasi-merger usually requires that the receiving company takes over at least 50% of the target’s voting power. In addition, the target’s shareholders may receive a maximum of 50% of the total consideration in cash for their previously held shares in the target. Consequently at least 50% of the total consideration must be paid in new shares (of the receiving company). Typically, the receiving company procures the shares for the share-exchange by way of a capital increase.

In the case at hand, individual A held 100% of the shares of X-AG and 50% of the shares in Y-AG as part of his private wealth. In 2007, A transferred his interest of 50% of Y-AG at book value to X-AG. Subsequently, A held his interest of 50% in Y-AG indirectly via X-AG.

In its decision of 10 June 2015 (2C_976/2014), the Swiss Supreme Court confirmed Circular Letter No. 5 and ruled that in the absence of an increase of the capital level of X-AG, the transfer of the Y-shares does not qualify as a quasi-merger for Swiss tax purposes. As a result, the difference between the market value and the book value of the 50% interest in the Y-shares was subject to Swiss stamp duty on the issuance of capital.

Companies and individuals engaging in quasi-mergers must therefore carefully structure a transaction in order to ensure qualification as a tax neutral reorganisation.

Swiss Administrative Court disallows capital contribution reserves that were previously offset with losses

In its decision of 4 June 2015, the Swiss Administrative Court came to the conclusion that capital contribution reserves, which were in the past offset with losses, are definitely lost.

Background

Until 31 December 2010, any repayment of share premium and any other shareholder contributions that have not resulted in an increase of nominal capital were generally treated as a distribution of profit for both income tax and withholding tax purposes. As part of “Corporate Tax Reform II”, this so-called nominal principle was replaced by the capital contribution principle, which entered into force as of 1 January 2011.

The capital contribution principle allows repayment of shareholder contributions without triggering a liability for Swiss withholding tax at the level of the distributing company (article 5 para. 1bis Federal Withholding Tax Act), and without income tax consequences at the level of the Swiss individual shareholder.

Under the transition period specified by the Act, capital contributions are in principle qualified for the aforementioned tax treatment if accumulated after 31 December 1996, provided some further requirements are met, e.g. proper declaration vis-à-vis the Swiss Federal Tax Administration and recording in a special sub-account of the statutory reserves.

On 9 December 2010, the Swiss Federal Tax Administration (SFTA) published the Circular Letter “Capital Contribution Principle” No. 29 that covers questions regarding this change in law. The Circular Letter states that the offsetting of capital contributions with losses – even during the transition period between 31 December 1996 and 31 December 2010 – leads to a definitive elimination of such capital contributions. This part of Circular Letter No. 29 was extensively discussed within the tax community.

Decision of 4 June 2015 of Swiss Administrative Court

Relevant Tax
The company at question received during the transition period two potentially qualifying contributions, namely a direct contribution of CHF 840,000 in 2002 and a waiver of shareholder loans in the amount of CHF 425,479 in 2004, in total CHF 1,265,479. The waiver of CHF 425,479 was reported as income in the company’s 2004 profit and loss statement. The surplus of CHF 840,000 was offset with losses in the balance sheet of the company as per 31 December 2006. Consequently, both items no longer appeared as such on the balance sheets dated 31 December 2004 and 31 December 2006, respectively.

In its balance sheet dated 31 December 2009, the taxpayer reported capital contribution reserves of CHF 1,265,479 and declared that amount to the SFTA. The SFTA subsequently rejected those capital contribution reserves.

Considerations of the Swiss Administrative Court
In its decision of 4 June 2015, the Swiss Administrative Court came to the conclusion that capital contribution reserves which have been offset with losses are finally eliminated at the time they were offset. The Court justified its ruling with the following main arguments:

  • Firstly, the Swiss Administrative Court recognises that the amount of CHF 1,265,479 is eligible for qualification as a capital contribution reserve.
  • As to the question at hand, the principle that Swiss tax accounting follows Swiss book accounting (“Massgeblichkeitsprinzip”) is also relevant for Swiss withholding tax matters.
  • Consequently, the (potential) capital contribution reserve of CHF 1,265,479 was – due to the previous offset with losses – definitively consumed “at the latest by 31 December 2006”.
  • The decision of the Swiss Administrative Court further states that the interpretation of article 5 para. 1bis Federal Withholding Tax Act already leads to the conclusion that (potential) capital contribution reserves are definitively consumed when offset with losses. Accordingly, the court takes the view that Circular Letter No. 29 is consistent with the existing law.
  • In the opinion of the Swiss Administrative Court, it was not possible to re-establish the capital contribution reserves of CHF 1,265,479 in the company’s 2009 balance sheet as the full amount had already been offset with losses in the past.
  • The Swiss Administrative Court does not see a discrimination against those who did not offset but instead “kept” their losses.

Current conclusion

In our view, the relevant legal provisions of the various tax laws – in particular article 5 para. 1bis Federal Withholding Tax Act – do not mention any limitations for qualifying capital contributions. Therefore, a limiting interpretation of this principle would be contrary to its purpose and it should therefore be possible to re-establish capital contributions which were – in particular during the transition period – offset with losses.

This decision of the Swiss Administrative Court could still be appealed to the Swiss Supreme Court. If no appeal is lodged, this decision will become final and legally binding within a few weeks. In any case, an envisaged shareholders’ waiver and/or an offsetting of contributions with losses should be carefully analysed to prevent unintended tax consequences.

Should you have any questions in this regard, please get in touch with your usual PwC contact or the following PwC Corporate Tax specialists:

Stefan Schmid
Partner, Tax and Legal
stefan.schmid@ch.pwc.com
+41 58 792 44 82

Dr Sarah Dahinden
Senior Manager, Tax & Legal, Attorney at Law
sarah.dahinden@ch.pwc.com
+41 58 792 44 25