Presentation Title Arial, bold 36 point

1
CHANGES TO CORPORATE INCOME TAX RULES IN THE
CONTEXT OF EU INTEGRATION

Sylwia Sobowiec Slawomir 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

3
EU LAW ON DIRECT TAXATION contd

• Importance of the case law of European Court of
  Justice

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MERGER DIRECTIVE

• 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

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MERGER DIRECTIVE contd.

• Merger
• Division
• Transfer of assets
• Exchange of shares

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MERGER DIRECTIVE contd.

• 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 contd.

• Merger (first option)

shareholders
German GmbH B
UK Ltd A
(receiving company)
(dissolved)
Companies from two or more states
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MERGER DIRECTIVE contd.

• 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 contd.

• 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

10
MERGER DIRECTIVE contd.

• Division

shareholders
shareholders
transfer
transfer
NewCoA
UK Ltd
NewCoB
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MERGER DIRECTIVE contd.

• Transfer of Assets

shares
UK Ltd
Italian S.p.A
Branch
Branch
transfer
12
MERGER DIRECTIVE contd.

• Exchange of shares

shareholders
Italian S.p.A
transfer
UK Ltd
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MERGER DIRECTIVE contd.

• 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 contd.

• 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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INTEREST AND ROYALTY DIRECTIVE contd.

• 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 contd.
EU
P
interest/royalty
25
EU
R
19
INTEREST AND ROYALTY DIRECTIVE contd.
EU
R
interest/royalty
25
EU
P
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INTEREST AND ROYALTY DIRECTIVE contd.
EU
SHAREHOLDER
25
25
R
P
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 contd.

• 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 contd

• 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 contd

shares
P

A
100
transfer
S
100
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.
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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 contd

• 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 contd
P
S

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

RECEIVED DIVIDEND 81


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ADAPTATION OF POLISH REGULATIONS TO THE PARENT
SUBSIDIARY DIRECTIVE contd

• 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 contd
P
S

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

INCOME 200 DIVIDEND
90 TOTAL INCOME 290 CIT (19) 19 X
290 55,1 CIT 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?