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InTernATIonAl

TAX news
which Tax Consequences and opportunities arise from the Financial Crisis?
even though the global economy is showing signs of recovery, the financial crisis has left a wake of tax planning opportunities and pitfalls that multinational companies should consider. Despite the global impact of the financial crisis the tax ramifications are country specific. In this issue we present current developments from ten select jurisdictions. At the end of an economic crisis companies often need capital restructuring which should not affect the utilization of tax losses.
Dr. Christoph Seseke WTS Seseke France

August 2010

eDITorIAl

August 2010

Preface
The first good news after the global economic and financial crisis is an indicator of a spreading recovery. however, it will take months or even years to overcome the impact of this massive market downturn. This is reason enough for us to devote this issue of international Tax news, which is also distributed at the Conference of the international Fiscal association (iFa) in rome, to the specific effects of the economic and financial crisis on tax-related matters in various countries. The authors of this issue primarily deal with the question of how this affects companies in the respective countries. one thing is certain, at least in europe: Further tax cuts cannot be expected as governments have invested considerable amounts in boosting the economy and are now short of money. increased public spending to stimulate an economic recovery and consolidation requirements for national budgets hardly allow for a reduction in public revenues. in the course of the past two years, there has been some development in europe regarding company taxation and property/wealth taxes in particular. The european Commission has just published a eurostat report on this topic which states that the governments of the eu countries have applied fiscal measures so as to alleviate the impact of the economic crisis and to prevent an investment backlog. recently 39.3 per cent of the gross domestic product went directly to treasury. For the first time in four years, tax revenue as share of GDP declined from the previous years level in 2008, though only by 0.4 per cent. among european countries, Denmark tops the list with tax revenue as share of GDP of over 48 per cent. The lowest share is recorded in romania with only 28 per cent. The average tax burden in the 27 eu countries has remained high compared to other countries around the world. one reason for this is the comprehensive social systems in place throughout europe. Taxpayers in the eu are charged about a third more in taxes than their counterparts in the uS or Japan. however, an upward tendency can be observed in the area of excise taxes. on average, VaT in the eu has risen from 19.2 to 20.2 per cent in the last ten years. at the same time, income from excise taxes has declined, in 2008 by 0.7 per cent. This is the most significant decline ever recorded for an individual year and thus a clear indicator of the severity of the crisis. This issue of international Tax news tells you about companies most pressing concerns during the transition out of the crisis in terms of refinancing, ensuring tax losses, benefitting from tax incentives, and other tax matters. in individual cases, we also venture a look into the future and which developments pertaining to tax policy it might have in store for companies. These and other topics can be found on the following pages. i would like to thank the authors from russia and Scandinavia, France and italy, india and China, Portugal, ukraine and the uSa who have examined the tax-related aspects of the crisis for this issue. enjoy the read! yours sincerely, Winfried Figna Board member, WTS aG Steuerberatungsgesellschaft

Imprint
WTS alliance c/o WTS aG Steuerberatungsgesellschaft Thomas-Wimmer-ring 1-3 80539 munich, Germany www.wts.de press@wts.de editorial Team: Winfried Figna Tel. +49 (89) 2 86 46-178 Fax -49 (89) 2 86 46-111 Silke koehler Tel. +49 (89) 2 86 46-224 Fax +49 (89) 2 86 46-2323 authors: mark Gao, niclas holst Sonne, Dr. Christoph Seseke, Winfried Figna, kunjan Gandhi, Giovanni rolle, marina Lombardo, alexandre andrade, Vitaly Sinitsin, elena Bukuyeva, Stuart a. kwestel art Director: klaus Seele, liquidstream Printing: DrS Business Print Services Gmbh WTS alliance has members in argentinia australia austria Brazil China el Salvador Finland France Germany Ghana india indonesia iran italy Liberia malta mexico netherlands nigeria Poland Singapore Spain Sweden Switzerland Taiwan Turkey ukraine uSa
This issue of INTERNATIONAL TAX NEWS is published by WTS Alliance. The information is intended to provide general guidance with respect to the subject matter. This general guidance should not be relied on as a basis for undertaking any transaction or business decision, but rather the advice of a qualified tax consultant should be obtained based on a taxpayers individual circumstances. Although our articles are carefully reviewed, we accept no responsibility in the event of any inaccuracy or omission. For further information please refer to the authors.

Table of Contents
1. China: China enhances support to small and medium-sized enterprises .............................3 2. Denmark: Tax consequences of the restructuring of Danish companies .............................4 3. FranCe: Loss utilization and capital restructuring in France ................................................5 4. Germany: how do taxes affect the refinancing and recovery of German companies? .........6 5. inDia: Strengthened General anti-avoidance rules in india in order to increase tax revenues ...... 8 6. iTaLy: italian tax rules get worse in the light of liquidity restraints and declining profits .....10 . 7. PorTuGaL: Portuguese government introduces measures to consolidate the budget ........11 8. ruSSia: Ways of financing and refinancing in russia.........................................................12 9. ukraine: ukrainian economy suffers from additional tax burdens .....................................13 10. uSa: Claiming a loss for abandoned goodwill ....................................................................14

2 | InTernATIonAl TAX news

August 2010

ChInA

China enhances support to small and medium-sized enterprises


In order to alleviate the impact of the economic crisis and get the capital market recovered as soon as possible, China expanded the financing channels for small and medium-sized enterprises by launch of Growth Enterprise Market and encouragement of consolidated bonds issuance. Simultaneously, the Chinese government also provides the fiscal support by stressing the tax incentives for institutions which provide credit guarantees on small and medium-sized enterprises (the institutions), and by further reducing the tax burden on small and low profit enterprises.

GrowTh enTerPrIse MArkeT China launched the Growth enterprise market in 2009 with the aim to accelerate the development of autonomous-innovation enterprises and growing enterprises. in June 2009, Shenzhen Stock exchange announced rules of offering Stocks on the Growth enterprise market followed by twenty-eight stocks being listed on october 30th, 2009. The comparison of the requirements for stock issuance in the main Board market and the Growth enterprise market is listed in the chart below.
Growth Enterprise Market Main Board Cumulative net Profit Turnover rmB 10 million for the last 2 years rmB 50 million for the last 1 year rmB 30 million for the last 3 years rmB 300 million for the last 3 years no requirement rmB 30 million before issuance

TAX InCenTIves For CreDIT GuArAnTee InsTITuTIons For sMAll AnD MeDIuM-sIzeD enTerPrIses Exemption of Business Taxes Circular Gong Xin Lian Bu Qi ye [2009] no. 114 which is jointly published by the ministry of industry and information Technology and the State administration of Taxation has once more emphasized the business tax exemption for the institutions which has been carried out since 2006. Pre-Tax Deduction of Reserves according to Circular Cai Shui [2009] no. 62, the institutions are allowed to deduct guaranteed indemnity reserve at no more than 1% of the year-end guarantee liability balance and unmatured liability reserve at no more than 50% of the guarantee revenue of the current year before eiT. The above policies are restated and enhanced by the Circular Guo Fa [2009] no. 36 on Several opinions of Further accelerating Development of Small and medium-Sized enterprises published by the State Council on September 19th, 2009. Further Preferential Tax Rate for Small and Low Profit Enterprise according to Cai Shui [2009] no. 133, from January 1, 2010, to December 31, 2010, a small and low-profit enterprise with annual taxable income less than rmB 30,000 can deduct half of its taxable income for eiT which leads to an effective tax rate of 10%. Therefore, following the 20% preferential rate regulated by the new eiT Law effective in 2008, the enterprise can enjoy the further half off from the eiT.

Growth rate over 30% for the last 2 years of Turnover Total Capital rmB 30 million after issuance

ConsolIDATeD BonDs oF sMAll AnD MeDIuM-sIzeD enTerPrIses on march 28th, 2009, the ministry of industry and information Technology issued the Circular Gong Xin Ting Qi ye han [2009] no.170 to further encourage the consolidated bonds of small and medium-sized enterprises. Consolidated bonds refer to the kind of bond whose issuer is constituted of several small and medium-sized enterprises. The enterprises can determine their issuance scale separately but take the form of a combined bond with a same name to the investors. From the financial management perspective, the cost of consolidated bonds is lower than that of stocks, since the bond interests can be deducted before enterprise income tax (eiT) which has the advantage of tax shield.

ConTACT Person Mark Gao WTS Consulting (Shanghai) Ltd. unit 602, Tower 1, German Center Shanghai, no. 88 keyuan road, Pudong Shanghai, 201203 PrC China homepage: www.wts.de email: mark.gao@worldtaxservice.cn Telephone: +86 (0) 21 28 986 690 August 2010

3 | InTernATIonAl TAX news

DenMArk

Tax consequences of the restructuring of Danish companies


As a result of the financial crisis, an increasing number of Danish companies are in need of new capital or a debt reduction. This article focuses on the tax consequences of selected recapitalisation measures. increased by the amount of the debt reduction. on contrary, the debtor will not normally be liable to pay tax on gains on debts if the arrangement is considered collective. Carried forward tax losses and basket losses will, however, be reduced by the amount of the debt reduction. if debt is written down to an amount being lower than the value for the debtor, the debtor will also be liable to pay tax on the excess amount. The conversion of debts into shares or convertible bonds is treated as debt cancellation. moreover, a number of protective rules have been introduced to the effect that the cancellation of debts following a capital contribution is treated as debt cancellation under certain circumstances. TrAnsFer oF loss-MAkInG CoMPAnIes instead of the existing owners carrying out a recapitalisation, it may be considered to transfer the loss-making company to a new group of owners. The new owners will only be entitled to carry forward the tax loss of the transferred company if the company is a going concern at the date of transfer. if the transferred loss-making company is a shell company, the buyer will not be entitled to set off the loss against future income. if a loss-making company is transferred as a going concern, it should also be noted that the loss may only be set off against future income earned from business activities. solvenT lIquIDATIon oF loss-MAkInG CoMPAny if the owners decide to liquidate a loss-making company, the tax asset in the form of tax losses carried forward and basket losses will be lost. it is possible to transfer carried forward tax losses (but not basket losses) to another Danish consolidated company through a tax-free merger with the loss-making company as the discontinuing company. This, however, only applies to losses generated by the loss-making company while being jointly taxed with the receiving company. ConTACT Person Niclas Holst Sonne, Attorney-at-Law Accura Advokatpartnerselskab Tuborg Boulevard 1 2900 hellerup, Copenhagen Denmark homepage: www.accura.dk email: niclas.holst@accura.dk Telephone: +45 394 52 909 August 2010 CAPITAl InCreAse AnD ConTrIBuTIon The increase of a Danish companys share capital does not trigger any tax liability. if the company receives a capital contribution without increasing its share capital, such a contribution will be taxable unless the conditions for the receipt of tax-free contributions are met. This will normally be the case if the company making the contribution is an affiliated company or the (direct or indirect) parent company of the receiving company. CAPITAl reDuCTIon The reduction of a Danish companys share capital for the purpose of covering operating losses has no tax consequences. DeBT CAnCellATIon, CoMPosITIon wITh CreDITors AnD DeBT ConversIon Depending on the specific situation, a debt cancellation/composition with creditors will have the following tax consequences for a Danish debtor company (the debtor): Triggering of income tax Reduction of tax losses carried forward and basket losses No tax consequences InTrA-GrouP DeBTs normally, the cancellation of intra-group debts will have no tax consequences for the debtor. if the creditor is a foreign company, it is a condition, however, that the creditor is not entitled to set off the loss on the debt against its foreign income. if the debt is written down to an amount being lower than the value for the debtor, it may have tax consequences. if the debtor meets the conditions for receiving tax-fee contributions from the creditor, the debtor will most likely also be able to avoid any tax consequences in this situation. The tax exemption does not apply to foreign exchange gains. in case of partial debt cancellation, the debtor will therefore be liable to pay tax on any foreign exchange gains on the part of the debt being repaid. in that case, taxation may be avoided by cancelling the entire debt instead. eXTrA-GrouP DeBTs Taxation as a result of debt cancellation of extra-group debts depends on whether the arrangement with the creditors is individual or collective. Generally, the arrangement is collective if creditors representing more than 50% of the unsecured debts participate, and the remaining debts consist of minor claims only. The debtor will be liable to pay tax on gains on debts if the arrangement is considered individual. The taxable income of the debtor will be 4 | InTernATIonAl TAX news

FrAnCe

loss utilization and capital restructuring in France


At the end of an economic crisis companies often need capital restructuring (window dressing) which should not affect the utilization of tax losses. We will show in this article the most current way used in France to restructure the capital of companies after outlining the applicable tax utilization rules. Companies subject to corporate income tax, which are mainly stock companies (socitis anonymes and socits par actions simplifies) and limited companies (socitis responsabilit limites) have the choice between two loss utilization systems: loss carry forward permitting to compensate the losses realized with benefits in following business years; loss carry back applicable upon option permitting to carry back the losses realized to precedent business years. CArry ForwArD Carry forward of losses is not limited in time. The loss realized in one business year is considered as an expense in the following business year(s) and deducted as such from the benefit realized. nevertheless, losses may only be utilized in the enterprise which realized the losses to be carried forward. Therefore, losses may not be carried forward if a company changes its activity, its purpose and/or its tax regime. in case of merger losses of the merged company may be carried forward by the receiving company upon request and agreement of the tax administration. CArry BACk This regime permits the compensation of the deficit stated at the end of a business year with the benefits realized in the three precedent business years. The carry back is operated upon request by the company. Carry back is not permitted in business years where the company ceases its activity. The basis for the carry back is the benefit, including benefits of prior years carried forward, before taxes reduced by dividends distributed and benefits for which the corporate income tax has already been paid by tax credits (e.g. the tax credit for r&D costs). The carry back gives rise to a claim against the treasury amounting to the deficit carried back multiplied with the tax rate applicable in the concerned precedent business years. From an accounting point of view, the booking of the tax claim creates a (non taxable) benefit in the loss making business year. This tax claim may be used for tax payment in the five following business years. if not used within this delay it is reimbursed by the tax authorities. CoMPArIson oF The Two reGIMes The principal advantage of the carry forward is the reduction of the contribution sociale (social contribution) which is a tax amounting to 3.3% of the corporate income tax due by certain companies. as this contribution is calculated on the basis of the corporate income tax, the carry forward reduces not only the 5 | InTernATIonAl TAX news corporate income tax but also this contribution. in case of carry back, the contribution sociale is not reduced. Furthermore, a carry forward reduces the profit participation of the employees of the company mandatory in certain companies whilst the carry back does not. The carry back has the advantage that the tax saving is certain. Whilst the tax saving in case of carry forward depends on future benefits, the carry back confers a claim against the treasury for sure. Furthermore, it increases the equity of the company due to the booking of the tax claim in the balance sheet and the corresponding benefit. CAPITAl resTruCTurInG a simple way to compensate losses and increase the equity in particular within groups is the write-off of debts. in general the write-off will generate a benefit in the favored company which is taxable. existing tax losses will so be used or even worse tax generated. a payment into the capital reserves which is possible under certain jurisdictions (e.g. in Germany) is legally not permitted in France. The most common method of capital restructuring used in France is the so called coup daccordon which means a capital increase eventually realized by incorporation of debts followed by a capital reduction which is offset with the losses. even if accounting wise the losses disappear, they remain for tax purposes. So, this method permits the increase of the equity ratio without loosing the tax losses.

ConTACT Person Dr. Christoph Seseke WTS Seseke France SELARL 98 boulevard malesherbes 75017 Paris France homepage: www.wtsf.fr email: christoph.seseke@wtsf.fr Telephone: +33 (1) 53 19 93 98 August 2010

GerMAny / PAGe 1

how do taxes affect the refinancing and recovery of German companies?


Due to Germanys export oriented industries Germanys economy suffered a lot during the financial crisis in 2009. Huge banking institutions required direct protection and financial support from the German government to avoid a collapse during the financial crisis. Even if Germanys industry is softly turning upwards due to increased exports in the car industry, taking additional advantages from the increased value of the US Dollar, access to liquidity is still on the agenda of most of Germanys companies. The way to bank financing has become harder. Banks have modified their scoring models and risk evaluation methods. a portion of 40% would be taxable. if the requirements are met, the decree suspends this rule. in addition tax authorities grant a relief from taxes due on gains from recapitalization. For trade tax purposes the local tax office has to agree on that autonomously. in practice, due to the strict requirements, it is recommendable to agree in advance with the tax office on the application of this specific relief for recapitalization gains. MoDIFIeD InsTruMenTs oF FInAnCInG it is a rather interesting variation to combine the waiver with the instrument of a debtor warrant, i. e. an agreement that the loan revives if the company recovers and is able to repay the loan. To the extent that the waiver has been deemed taxable the revival of the loan will be treated as tax deductible expense. This effect might be very interesting from a tax planning perspective, since it allows a deduction without the loss limitation rules. at the moment, the market value of loan notes and bonds issued by companies is often below the principal amount. if the company is able to repurchase the notes from the market the company disposes off from the corresponding liability. in this case, however, the company would trigger a gain arising from the difference between fair market value of the note and the loan amount principal (confusion). There is a certain possibility that this gain also benefits from the specific recapitalization relief. another option might be to use a different group company to repurchase the notes. in that case the loan note will survive. under this scenario any capital gain can be postponed to the later repayment. Currently, stock listed companies are issuing convertibles. Depending on the features of this hybrid instrument, the component inherent for the future swap is treated as equity contribution for accounting and tax purposes as well. another advantage is that there is no change in shareholder ownership as long as the conversion has not been exercised. MeThoDs oF wInDow DressInG For balance sheet planning purposes there are various options in the German reorganization Tax act and special contribution rules for partnerships which allow a tax neutral transfer of assets on the one hand and a step up for accounting purposes in the single financial statement on the other. ouTlook on FuTure TAX leGIslATIon Germany's government announced a severe cut-back in public August 2010

MeAsures To reDuCe neGATIve TAX ConsequenCes oF CerTAIn TAX rules Some of Germanys tax rules implemented at the end of 2008 had turned out as very negative with regard to the economic recovery and business restructuring. For that reason the interest stripping rule acc. to 4h German income Tax Code (eStG) and limitation in loss carry forwards in case of share transfer acc. to sec. 8c German Corporate income Tax Code (kStG) have been modified at the end of 2009 in the so called "Wachstumsbeschleunigungsgesetz (Growth acceleration act)". The most material changes to the interest stripping rule were an increase in the interest cap from eur 1 million to eur 3 million for years from 2009 onwards and an increased ceiling from 1% to 2% for the equity ratio test for group companies compared to the group equity ratio. in addition a carry over for unutilized eBiTDa thresholds from years 2007 onwards has been newly introduced. Further the loss carry forward rule has been modified by a privilege for share transfers in the course of recapitalization. The prerequisites to benefit from the rules are rather strict, in particular the proper timing of buying the shares is most relevant. The loss carry forward rules in sec. 8c kStG have generally been modified by taking into account the hidden reserves at the point of buying the shares. The rule stipulates that up to the portion of underlying hidden reserves - which are subject to tax in Germany - the loss carry forward will not forfeit. The assumed hidden reserves are determined as difference between fair market value of shares and tax book equity. The fair market value can be regularly assumed by the actual purchase price. DIFFerenT wAys oF reCAPITAlIzATIon There are different ways to recapitalize a stressed company. one method is waiving loans from the shareholders and/or other creditors. The waiver of shareholder loans is treated as tax neutral contribution, however only up to the fair market value of the receivable at the date of waiver. This portion of the loan with a value of zero is treated as taxable income. The waiver of third party loans is always a taxable event. under former rules there was a privilege available for income generated from recapitalizing which was treated as tax exempt under certain circumstances. German tax authorities allow a similar exemption accordingly. Firstly, if certain requirements are met any gain arising from the recapitalization can be offset against loss carry forwards without taking into account the limitation in deducting losses. Generally, losses can be set off against profits up to eur 1 million without limitations. From the profit exceeding the eur 1 million threshold only 60% can be set off against the remaining losses. Thus, 6 | InTernATIonAl TAX news

GerMAny / PAGe 2

spending over the next years. By now, there is no announcement of increasing taxes. We see, however, that more often tax reforms are increasing the tax basis and disallowing tax structuring opportunities. There are early signals for further changes to VaT Code including VaT rates. in summary, there are different options of restructuring companies and companies' balance sheets. in any case the methods have to be accompanied by detailed tax planning.

ConTACT Person Winfried Figna - Head of M&A WTS AG Steuerberatungsgesellschaft Thomas-Wimmer-ring 1-3 80539 munich Germany homepage: www.wts.de e-mail: winfried.figna@wts.de Telephone: +49 (89) 286 46-178 7 | InTernATIonAl TAX news August 2010

InDIA / PAGe 1

strengthened General Anti-Avoidance rules in India in order to increase tax revenues


As every country struggles to increase their tax revenues in times of financial crisis, India introduced General Anti-Avoidance Rules (GAAR) as a tool to prevent tax leakage and increase the efficiency of the Tax Department to augment tax collections. Provisions of Indian GAAR have been codified in section 112 to section 114 and section 161 of the Code. Section 161 of the Code provides that the Commissioner of Income Tax can invoke GAAR, if the tax payer has entered into any arrangement which is an impermissible avoidance arrangement. an impermissible avoidance arrangement is defined to mean a step in, or a part or whole of, an arrangement whose main purpose is to obtain a tax benefit and it:

CreaTeS riGhTS or oBLiGaTionS BeTWeen PerSonS DeaLinG aT armS LenGTh

reSuLTS in The miSuSe or aBuSe oF The ProViSionS oF The DireCT TaX CoDe

GAAr
LaCkS CommerCiaL SuBSTanCe, in WhoLe or in ParT enTereD inTo or CarrieD ouT in a manner noT normaLLy emPLoyeD For Bona FiDe PurPoSeS

an arrangement, for the purpose of the above definition, would lack commercial substance if it results in significant tax benefit but does not have a significant effect upon the business risks, or net cash flows or the legal substance or effect of the avoidance arrangement as a whole is inconsistent with or differs significantly from the legal form of its individual steps or it includes round trip financing, etc. The consequences of declaring an arrangement as an impermissible avoidance arrangement may be determined by: Disregarding, combining or re-characterizing any step in, or a part or whole of, the impermissible avoidance arrangement Treating the impermissible avoidance arrangement as if it had not been entered into or carried out Treating or deeming parties or persons who are connected persons in relation to each other as one and the same Disregarding any accommodating party or treating any accommodating party and any other party as one and the same Re-allocating or re-characterizing any accrual or receipt of a capital or revenue nature or any expenditure, deduction, relief or rebate Re-characterizing any equity into debt or vice versa 8 | InTernATIonAl TAX news

The terms tax benefit, bona fide purpose, round trip financing and accommodating party have been defined in the Code broadly. it is well settled that it is unconstitutional for the assessing officer (ao) to attempt tax collection without authority of law or legal basis, and a taxpayer likewise cannot escape tax payments in disregard of the law, for he renders himself liable for prosecution as a tax evader. The Direct Tax Code has devised and introduced a General antiavoidance rule which empowers a Commissioner of income Tax to declare transactions as an impermissible avoidance arrangement if it results in tax benefits or creates rights or obligations between persons or results in abuse of DTC provisions to facilitate tax evasion. The path ahead indicates that the Gaar in the DTC indicate that the judicially accepted distinction between permissible tax planning and tax evasion is bound to be obliterated due to wider coverage and statutory incorporation, the goal of the Tax officer with regard to revenue leakage. Though the revised Discussion Paper on DTC has provided for a safeguard of a threshold limit for application of Gaar, and recourse to Dispute resolution Panel, the apprehension of it being applied arbitrarily and in a routine fashion still exists and one August 2010

InDIA / PAGe 2

hopes that it is applied and maturely to ensure that the business community is not subject to any uncertainty. DrP ProCeDure

DrAFT orDer By Ao

TAX PAyer Conveys ACCePTAnCe

30 DAys

FIles oBJeCTIon wITh DrP DrP PAsses DIreCTIon APPeAl BeFore The ITAT For The TAX PAyer Ao PAsses FInAl orDer

30 DAys

FIles oBJeCTIon

ConTACT Person Mr. Kunjan Gandhi World Tax Service India Pvt Ltd mafatlal house Backbay reclamation Churchgate i mumbai 400 020 india homepage: www.worldtaxservice.in email: kunjan.gandhi@wts.co.in Telephone: +91 (226) 14 55 600 9 | InTernATIonAl TAX news August 2010

ITAly

Italian tax rules get worse in the light of liquidity restraints and declining profits
Despite a so-called Anti-Crisis Decree (Law Decree No.185/2008) having reached the legislative floor back in early 2009 and a more recent Contingency Finance Act in Summer 2010 (Law Decree No. 78/2010), no specific corporate tax measure has been undertaken so far in view of the financial crisis. The sole exception is represented by the revision of the so called Industry Analyses which are used as a basis for the determination of presumptive turnover and income of SMEs. There are, however, some corporate income tax rules that may gain the spotlight in a time of generalised liquidity restraints paired with declining profits.

The InTeresT BArrIer rule interest expenses are fully deductible up to the amount of interest income. excess interest expenses are deductible up to an amount equal to 30% of the eBiTDa of the company. Since no escape clause is provided, this limitation may prove critical in times when operating losses are far from uncommon. however, the interest barrier rule is appeased in its impact by some carry-over measures: non deductible excess interest expenses can be deducted in the following fiscal years to the extent that excess interest accrued in those same years is lower than 30% EBITDA; starting from fiscal year 2010, it is also allowed to carry over, without temporal limitations the amount of EBITDA which has not already been matched by interest expenses. Finally, whereas a group of companies opts to be treated as a national fiscal unit, non-deductible excess interest expenses arising at a single company, may be offset against the excess eBiTDa of other group companies (including non-resident ones a unique feature among similar provisions adopted by other european Countries). BAD DeBT wrITe Downs The deduction of bad debt write downs is ordinarily subject to rather tight conditions which, in essence, require the demonstration that the write down is economically sounder than filing or carrying on a claim against the debtor. Such a condition is in any case deemed to be met when the debtor is subject to bankruptcy or analogous insolvency procedures. loss CArry ForwArD Losses can be carried forward for five years, including the year in which the loss has been incurred. under some conditions, a special regime applies to start-up i.e. losses incurred in the first three years following the start of the business; as such losses can be carried forward without temporal limitations. on the other hand, unlike other tax legislations, italian tax law does not allow the carry-back of losses. 10 | InTernATIonAl TAX news

Within the context of a fiscal unit, losses emerged following the set up of the fiscal unit can be offset against the fiscal unit income. re-CAPITAlIzATIon ThrouGh DeBT surrenDer While, generally speaking, a debt surrender generates a taxable capital gain on the part of the debtor, it is worth noting that a special regime applies when the surrender is made by a shareholder of the debtor. in this case, the amount of the surrender will increase the tax basis of the shares for the shareholder (thus reducing future, possible capital gains) but is tax neutral for the debtor company.

ConTACT Person Giovanni Rolle R&A Studio Tributario Associato Corso Francia, 32 10143 Torino italy homepage: www.taxworks.it e-mail: segreteria@taxworks.it Telephone: +39 (011) 433 83 51 Marina Lombardo R&A Studio Tributario Associato Piazza Santangelo, 1 20121 milano italy homepage: www.taxworks.it email: segreteria@taxworks.it Telephone: +39 (02) 40 04 70 79 August 2010

PorTuGAl

Portuguese government introduces measures to consolidate the budget


An article recently published in the OECD Review concluded on Budgeting1 in Portugal: Portugal has made substantial progress in addressing fiscal imbalance through a combination of fiscal restraint and an ambitious structural reform agenda. The Portuguese experience highlights that improving fiscal discipline does not just depend on having institutional mechanisms and rules in place; it also requires sustained political commitment, especially when cutting public expenditure. The global crisis became severe in the late year of 2008. ACCorDInG The oeCD PorTuGAl eConoMIC ouTlook 2010 The government has recently made some welcome moves to bring forward fiscal consolidation in 2010 and set a more ambitious target for the budget deficit also in 2011. This is essential to fostering investor confidence in fiscal sustainability and ensuring access to external financing. The new targets for the public deficit are 7.3% of GDP in 2010 (previously 8.3%), 4.6% in 2011 (previously 6.6%), 3.0% for 2012 and 2.0% for 2013. This means that the 3% target will be reached a year earlier than initially forecast2. The Portuguese government has decided in the Programme for Stability and Growth 2010-20133 (summarily known as PeC), on the following measures to deal with the financial crisis: a) on the expenditure side: (i) to anticipate the phasing out of all the anti-crisis stimulus measures; (ii) to reduce the transfers to the state-owned enterprise sector; (iii) to reinforce the reduction in central government expenditure; (iv) to reduce 5% in the salaries of holders of political and public management offices; (v) the reduction of capital expenditure; and (vi) the reduction in transfers to the regional and local governments. b) on the revenue side: (i) to increase all VaT rates by 1%; (ii) an additional taxation on personal income by adopting an increase of between 1% and 1.5% in the general rates of Personal income Tax (irS), and an increase of 1.5% in irS withholding rates; and (iii) the additional taxation on corporate income by adopting an increase of 2.5% of Corporate income Tax (irC) to taxable profits exceeding 2 million. Beyond the additional above-mentioned additional measures,, there is a set of measures initially planned by the Portuguese government for 2011 in the context of the Programme for Stability and Growth, that have been anticipated for 2010, namely (i) changes in the unemployment benefit scheme; (ii) the taxation of capital gains; and (iv) the creation of a special irS bracket taxed at a rate of 45%4. year: 2009; 2 official information; 3 official information; 4 official information of the ministry of Finance and Public administration.
1

ConTACT Person Alexandre Andrade, Head of Tax Department and Projects and Public Works Department CCA Carlos Cruz & Associados, Sociedade de Advogados, RL rua Victor Cordon, n. 10-a, 4th and 5th Floor Lisbon Portugal homepage: www.cca-advogados.com email: aa@cca-advogados.com Telephone: + 351 (21) 322 35 90 August 2010

11 | InTernATIonAl TAX news

russIA

ways of financing and refinancing in russia


When a Russian company finds itself in a difficult financial situation and/or needs financing/refinancing then the following measures to increase its assets can be taken:

InCreAse oF AuThorIzeD CAPITAl The shareholders can decide on the increase of the authorized capital of their company. The transfer of funds invested into the authorized capital is a non-taxable transaction, although in some cases VaT implications should be minded. For example, if the parent company invests a fixed asset instead of money then the latter should partially restore previously recovered input VaT proportionally to the fixed assets remaining book value. however, the subsidiary can recover the same VaT amount. sTrICT rules For MInIMuM neT AsseT vAlue The matter of much more serious concern in this case should be the state of net asset value. The russian corporate law provides that the companys net asset value should not be less than its authorized capital; otherwise the company shall be wound up. Thus, the increase of the authorized capital will set the bar of minimum acceptable volume of net assets at the same high level. The further decrease of the authorized capital is not always a way out, since it can result in a taxable income. CAPITAl InJeCTIons BeyonD AuThorIzeD CAPITAl InCreAse There are ways of making investments into a russian company without the authorized capital increase. But first of all it should be noted that the russian civil law as a general rule prohibits gifting (granting assets for free) between companies, even between a parent and a subsidiary. This restriction, should it be violated, implies certain civil law risks. however, there are some exceptions from this prohibition. For example, the Law on Limited Liability Societies (a type of russian business entity known as ooo which is more or less similar to Ltd./ LLC) makes provision for so-called assets investment, an injection of assets made by ooo shareholders without the increase of its authorized capital. another example is finance support rendered to a company in case of its insolvency or to prevent insolvency. requIreMenTs For TAX neuTrAl FunDInG anyway, regardless of civil law implications, the tax law provides that gratuitous transfer of funds or property will be exempt from corporate profit tax only if the granting party is a shareholder of the accepting company with the size of share in its capital exceeding 50 percent, or vice versa. it is not desirable to grant VaTable items to the accepting party because of VaT risks. 12 | InTernATIonAl TAX news

Waiving liabilities, in general, is not the tax neutral solution, since the russian Tax Code stipulates that accounts payable become a taxable income at the moment of write-off for any reason. however, the russian ministry of Finance believes that if the creditor waives the debt for the loan which he himself earlier issued to the debtor then such a situation should be regarded not as waiving debt but as just granting funds which can be tax neutral, but, again, only on conditions that one party owns more than 50 percent as a shareholder of another party. apart from those standard ways of financing/refinancing there could be some specific ways suitable for certain situations. For example, if a foreign manufacturer establishes a distribution company in russia, one of the methods of financing the latter could be trade credit (delay of payment). however, it should be noted that russian tax law regards trade credit as a kind of debt for thin capitalization rules purposes.

ConTACT Person Vitaly Sinitsin, Leading Lawyer, Tax & Legal Practice ENERGY CONSULTING/ Audit ZAO 7 Pavlovskaya ulitsa 115093 moscow russia homepage: www.ec-group.ru email: sinitsin_v@ ec-group.ru Telephone: +7 (495) 980 90 81 ext. 4151 August 2010

ukrAIne

ukrainian economy suffers from additional tax burdens


In the following we give a short overview with respect to certain changes in the tax environment in Ukraine which resulted from the efforts of the Ukrainian government to mitigate the impact of the financial crisis. In general, such efforts were aimed mainly at mitigating the impact of the financial crisis on the state budget, rather than on relieving the economy from extraordinary tax burdens. Among such changes are the following: MAnDATory PAyMenT oF DIvIDenDs In 2010 The Law of ukraine on State Budget of ukraine for 2010, which was adopted on april 27, 2010, and became effective on april 30, 2010 (Law on Budget), materially changed the order of payment of dividends by commercial companies. in particular, pursuant to the amendments to article 30 of the Law of ukraine on Joint-Stock Companies, introduced by the Law on Budget, in 2010 joint-stock companies are obliged to pay dividends in an amount not less than 30% of their net profit in the reporting year and/or their undistributed profit. The above-mentioned amount of dividends may be increased (but not reduced) by the resolution of shareholders meeting of a joint-stock company. Thus, in 2010 payment of dividends at the amount of at least 30% of the joint-stock companys profit is mandatory. it should be noted that, except for certain specific cases, payment of dividends is subject to advance corporate profit tax payment in an amount of 25% of the gross amount of dividends on top of such dividends. With this in view it is quite clear that establishing the mentioned requirement to mandatorily pay dividends the legislator ensures additional inflow of funds into the state budget. For the sake of completeness it should be noted that the Central Tax office of ukraine in its Letter as of may 18, 2010 no. 9637/7/15-0217, outlined the approach that the requirement to mandatorily pay dividends shall be applied to all types of business entities (i.e. not only to joint-stock companies but also, for example, to limited liability companies). This approach is not in line with the law, which explicitly provides for the discussed requirement only in respect of joint-stock companies. new rules For usInG CreDITeD AMounT oF InPuT vAT The Law of ukraine on amending Certain Legal acts of ukraine no. 2275-Vi as of may 20, 2010, introduced new rules for using credited amount of input VaT. Based on the mentioned Law (para. 3 of Final provisions) negative VaT balance accumulated by the taxpayer may reduce ongoing VaT liabilities of the taxpayer only in the amount of VaT actually paid by such taxpayer to the suppliers of goods (works, services). The unpaid part of the accumulated negative VaT balance is blocked in terms of its use as VaT credit for offsetting ongoing VaT liabilities. To compare, before the discussed amendments to the Law of ukraine on VaT were introduced, the unpaid part of the accumulated negative VaT balance could not be claimed for refund but still could be used for offsetting the ongoing VaT liabilities, i.e. as VaT credit of the next reporting period. 13 | InTernATIonAl TAX news The new rules shall be applied until January 1, 2011. Starting from January 1, 2011, blocked negative VaT balance may be accounted as VaT credit and offset against VaT liabilities under the rules existing before the discussed Law became effective. new rules For DeDuCTInG TAX losses oF PrevIous TAX PerIoDs The Law of ukraine on amending Certain Legal acts of ukraine no. 2275-Vi as of may 20, 2010 limited the amount of tax losses of previous tax periods, which is allowed to be deducted in 2010. namely, the amount allowed for deduction was reduced to 20 % of the tax losses accumulated by the taxpayer by January 1, 2010. The remainder (i.e. 80 % of such tax losses) shall be accounted as deductible expenses only starting from 2011. apart from the above changes it should be noted that in the nearest future in ukraine the adoption of the tax code is planned, the draft of which has already passed the first reading in Verkhovna rada of ukraine. Generally, the draft tax code, if finally adopted, may be assessed as considerably raising the tax burden. The draft tax code limits the list of expenses which are allowed for deduction. if compared with the effective tax legislation, which ensures comparatively balanced regulation of the relations between tax authorities and taxpayers, the draft tax code considerably widens powers and authorities of tax authorities and provides for additional obligations of the taxpayers. if adopted the tax code will bring along a lot of confusion with inevitably negative impact on the economy.

ConTACT Person Elena Bukuyeva, Senior Adviser KM Partners 5 Pankivska Vul., Fifth Floor 01033 kyiv ukraine homepage: www.km-partners.com email: o.bukuyeva@km-partners.com Telephone: +380 (44) 490 71 97 August 2010

usA

Claiming a loss for abandoned goodwill


When a US taxpayer acquires a business through an asset acquisition or a share purchase treated as an asset acquisition (e.g., LLC acquisition or qualified stock purchase with a Section 338 election), the purchaser will receive a fair market value (FMV) tax basis in the acquired assets. Under existing US tax regulations, the assets are categorized into seven classes and the purchase price is allocated in ascending order of class based on the FMV of the assets in each class. If the purchase price exceeds the FMV of the assets identified in classes I VI, the excess is allocated to class VII, which represents the goodwill or going concern value of the business acquired. Under Internal Revenue Code Section 197, the goodwill is amortized over a 15 year period for income tax purposes.

reCovery oF TAX BAsIs By DIsPosAl oF non PerForMInG BusIness For many growth oriented companies, an acquisition may involve the addition of a new product or service line to the purchasers existing lines of business. in some cases, the acquisition may be of new technology that is still in the development stage. if the newly acquired product line or technology does not perform as anticipated, the purchaser may decide to discontinue the line or to terminate further development of the acquired technology. in situations where the purchased assets can be sold to an unrelated party as a going concern, the taxpayer will generally be able to recover its remaining tax basis in the purchased assets at the time of the sale. reCovery oF TAX BAsIs ouTsIDe A TrAnsACTIon however, in many instances, the taxpayer may be unable to sell underperforming assets (e.g., where the product or service is no longer commercially viable). nevertheless, under the right circumstances the taxpayer may still be able to recover its remaining tax basis in the acquired goodwill in the year it discontinues the acquired business. DIsConTInuATIon oF A BusIness in order for abandoned goodwill to be deductible, the tax regulations require that there be a closed and completed transaction, fixed by identifiable events. The complete discontinuation of a business can qualify as an identifiable event that will entitle a taxpayer to claim a loss on purchased goodwill attributable to that business. a key factor is establishing that the purchased business has been terminated and that none of the assets of that business are being used in the taxpayers remaining business. as a further requirement to claim a loss on the abandoned goodwill, the regulations provide that the taxpayer may not retain any of its other Section 197 intangibles acquired in connection with the acquisition of the trade or business. wTs oBservATIons Taxpayers that have acquired a non-performing business should carefully review the current status of the business and utilization of the business assets, including intangibles. in appropriate circumstances, taxpayers may be entitled to claim a loss. in some circumstances, proactive steps may be taken to strengthen a taxpayers position for claiming a loss. 14 | InTernATIonAl TAX news

ConTACT Person Stuart A. Kwestel, J.D., LL.M., Managing Director World Tax Service US LLC 2120 headquarters Plaza morristown, nJ 07960 uSa email: skwestel@wtsus.com Telephone: +1 (973) 401 11 18 August 2010