News

New developments on International Tax Planning 2018 and 2019

Jersey, Isle of Man and Uruguay are out of the OECD Blacklist

The low tax jurisdictions of Jersey, Isle of Man and Uruguay have been found compliant by the OECD and, therefore, have been removed from the OECD blacklist of harmful tax havens or offshore jurisdictions offering no guarantees of exchange of information and financial transparency. This decision of the OECD, by itself, shall not produce immediate effects. However, it is expectable that during the course of 2018 and 2019 several OECD and other countries may remove these countries from their own blacklists ceasing thus to apply anti-tax avoidance rules such as (i) higher withholding taxes on payments made to Jersey, Isle of Man and or Uruguay; (ii) reversion of burden of proof as to the material and reasonable nature of such payments; (iii) CFC – controlled foreign corporation- rules by which undistributed profits of companies based in these countries could be allocated to shareholders and taxed in their home countries, among others, including anti-tax treaty rules.

Madeira International Business Centre out of the Brazilian Blacklist

Brazilian tax authorities have decided to remove the Madeira international Business Centre (MIBC) from the Brazilian domestic blacklist of tax havens or offshore jurisdictions and transfer MIBC to its “Greylist”. This has an immediate effect as of the 1st of January 2018 consisting in the reduction of the Brazilian withholding taxes applied on payments of income and gains to MIBC-based companies from current 25% rate to 15% rate which is equivalent to the double taxation treaty rate concluded between Portugal and Brazil.

Enhancement of Reporting Obligations and Exchange of Information

The landscape for international or cross-border tax planning for companies, especially large ones or multinationals and for high net worth individuals and family businesses will change dramatically starting as from 2018 and with further developments being prepared for 2019. There will be a significant enhancement of financial and tax reporting obligations for taxpayers and also for tax lawyers, tax advisers and intermediaries offering to their clients international or cross-border “aggressive” tax planning schemes or structures.

The main issue is that most of this legislation coming mainly from European Union (EU) tax legislation and inspired on the OECD standards on the so-called “BEPS”- base erosion and profit shifting anti-tax avoidance provisions, does not define in a clear manner the concept of “aggressive” tax planning. Legislation merely refers to certain indicators which in our view should be taken as mere examples, leading to uncertainty in the application of this legislation.

Other important issue is that certain reporting obligations when imposed upon tax lawyers and tax advisers may contend with attorney-client privilege or the secrecy to which tax advisers are obliged in many jurisdictions.

However, there is a number of provisions entering into force already as of the 1st of January 2018 that will take immediate effect that should be anticipated and planned in terms of compliance and also as to the necessary review of corporate and investment structures in place before these legislative developments in several relevant jurisdictions, including Portugal.

Registration of Ultimate Beneficial Owners (UBOs)

Portugal has already adopted a central registry of UBOs on shares or other equity on all sorts or commercial companies. Moreover, as from 30 November 2017, bearer shares have ceased to exist. Portuguese law on the registry of UBOs also amended the land registry law imposing that the price paid for the acquisition of real estate must not only be referred in the public deed of purchase but also it is required to identify the means of payment- bank check or bank transfer with identification of the bank account where purchase price has been transferred to.

Luxembourg has already adopted its own UBOs registry while The Netherlands and Belgium are contemplating its introduction which is expected for a very near future. Switzerland since it is not an EU Member State has no UBOs registry and according to the latest information available has no plans to introduce any UBOs registration, at least for the foreseeable future.

In principle, an UBO is deemed as any person that controls directly or indirectly 25% or more of the share or equity capital of a company, although the EU Member States may establish a lower threshold. To our knowledge, existing central UBOs registries of the EU countries which have already adopted such a registry, like Portugal or Luxembourg have chosen the 25% threshold.

However, this 25% threshold is being under discussion within the EU and it is likely that as from 2019 said threshold may be reduced.

Tax authorities of EU Member States will exchange information automatically or on a case by case basis on the registration of UBOs.

There will be also a parallel central registration of UBOs for trusts with similar rules as the one created for companies.

Automatic Exchange of Information on the Basis of Common Reporting Standards (CRS)

Under the initiative of the OECD, the EU has adopted an automatic exchange of information mechanism between the tax authorities of several countries on financial and tax information. This mechanism is based on a standard reporting base known as “CRS- common reporting standards” and in 2017 was adopted by around 49 countries, most of them EU Member States. In 2018, for the first time, Switzerland and Austria shall exchange automatically information on the basis of the CRS, together with approximately 50 other countries in the world.

The application of the CRS will cover most of the main financial jurisdictions of the world, including practically all of the major offshore jurisdictions. The impact of the CRS will be vast and its implications will refer back to 2017 and, thus, should be ascertained carefully.

Automatic Exchange of Information on Tax Rulings

For decades, the Netherlands, Luxembourg and Belgium have been jurisdictions that have welcomed foreign investments under very favourable tax regimes for holding companies, coordination centers, companies engaged in the funding of real estate transactions, investment funds, private equity companies, centralized financing and treasury of multinational companies, management of IP and IT rights, family business offices and more.

The above countries offered certainty and stability of tax regime through rulings issued by the local tax authorities which clarified the taxation applicable to the above activities. However, in 2018 and already by reference to 2017, The Netherlands, Luxembourg and Belgium will start the automatic exchange of information with all EU tax authorities on the tax rulings issued to companies and persons investing or making transactions in such countries. Therefore, an assessment of impact of such exchange of information referred to 2017 and to future tax years and a re-evaluation of the situation would be highly advisable.

Country by Country Reports

Large corporations with consolidated annual turnover of € 750 million or more were obliged to prepare and submit to the tax authorities of the EU country of its registered office a country by country report with essential financial and tax data of each of its subsidiaries. For the first time, these country by country reports shall be subject to exchange of information at the middle of the year 2018.

Multinational Companies Reports

It should be noted that the above country by country report is a reporting obligation imposed in addition to the master file and the local file that multinational companies with an annual turnover of € 50 million or above were already due to prepare and submit together with their annual corporate income tax returns for transfer pricing purposes. These master files and local files are now subject to exchange of information between the EU tax authorities as well.

Reporting of “Aggressive” Tax Planning Schemes

Indicators of an “aggressive” tax planning scheme or structure are:

  • Cross-border payments where no tax is due in both the paying country and in the recipient country;
  • Payments made to a country where corporate income tax is levied at a rate which is half of the average rate of the EU countries,
  • Cross-border shifting or transfer of losses;
  • Setting up of a scheme to exchange of information between EU tax authorities.

In these cases, it is proposed by the European Commission that tax lawyers, tax advisers and intermediaries proposing, offering or dealing with these structures or schemes are obliged to report the same to the tax authorities of their home country. Information should detail the structure, identify the indicator that the same is “aggressive” tax planning, report the amounts involved and the tax savings and the taxpayers involved. If the above tax professionals would fail to report or would be unable or legally barred to do so, this reporting obligation is imposed on the taxpayers concerned. Information on the structures or schemes is then gathered at an EU central database and made available to all EU tax authorities.

The European Commission is preparing this proposal so that this legislation could enter into force as of the 1st of January 2019.

EU Prenuptial law

The EU Succession Regulation has unified the law applicable to inheritance in the EU, allowing EU citizens, except in the UK, Ireland and Denmark, to choose the law applicable to their succession by means of will. This was a most important step for estate planning and family business succession planning.

It is expected that somewhere in 2018 or at latest in 2019, another EU Regulation or Directive will regulate the matrimonial property law. This may have the consequence of allowing spouses to choose the law applicable to the property regime of their marriage and also the law applicable to prenuptial agreements.

 

The OECD BEPS

OECD has launched in 2013 an initiative against BEPS- base erosion and profit shifting aiming to fight against tax avoidance and tax evasion in cross-border and international transactions and investments. The main purpose was to counteract schemes of structures that through the shifting of profits and or losses from one jurisdiction to another would allow companies and or high net worth individuals to locate in low tax or zero tax jurisdictions their gains or income otherwise taxable in the country or countries of origin and or of the source of such gains or income. BEPS is in its cruise speed of application now and substantial developments are expected for 2018 and 2019.

Tax Treaties Provisions and Multilateral Instrument (MLI)

BEPS main provisions are related to rules on the abuse of tax treaties and include:

  • Tightening of the definition of beneficial owner for purposes of a given company or person be eligible as beneficiary of a tax treaty;
  • A narrower definition of “place of effective management” of a company on the basis of the place of residence of the person or persons taking the key managerial decisions in order to avoid the interposition of holding companies and or companies benefiting from mere “passive” income, such as dividends, royalties, interest, technical assistance fees and similar income like certain rents;
  • In cases where a definition of “effective place of management” is achieved in a given tax treaty country, this could generate a situation where a company or a person could end up being deemed as resident for tax purposes in both tax treaty countries,
  • Tax treaties have rules of conflicts to ascertain which tax residency should prevail but the BEPS contain a provision stating that the tax authorities of both countries should try to sort out this conflict by mutual agreement, a procedure that may take quite a long time during which the company or person would be deprived from the benefits of the tax treaty,
  • Amendment of the entire network of tax treaties through a multilateral instrument (MLI) an international convention that once signed and ratified by five states will be in force and will act as an addendum to all existing tax treaty network of two given countries that have signed and ratified the MLI without the need to amend each given tax treaty one by one.

It should be noted that many multinational companies, private equity investments, family businesses and private wealth management structures qualify for the definition of “passive income” in many favourable jurisdictions where they set up companies or other entities, like foundations, benefiting from tax treaties. For the moment, these provisions of the BEPS concerning tax treaties are not yet in place, but 2018 should be the pivotal year to review all tax treat-base structures before tax treaties will be amended pursuant the BEPS and most in particular the MLI as once this would happen, sometime as from 2019, it may be already too late to comply with these new tax treaty provisions.

One of the situations where these provisions may have a greater impact will be when a given entity or person would migrate from a tax treaty jurisdiction to another. The provisions of the BEPS point out the mutual agreement between the tax authorities of both countries as the sole mechanism to deal with this situation with all the inherent long delays and uncertainty as to the outcome of the process. Hence, any planned migration should be anticipated for 2018.

Lisbon, December 30th 2018

João Valadas Coriel
Paulino Brilhante Santos