The past year has seen many changes in international taxation signifying one more step towards the new tax reality for both taxpayers and tax authorities globally.

On the eve of the coming year 2016, we are glad to present you a review of the main changes in international taxation. Our final communication this year contains the most important international tax developments in 2015 that have significantly influenced the international tax practice.

Undoubtedly, one of the key events in 2015 was the OECD’s publication of the final version of actions to be taken under the Base Erosion and Profit Shifting Project (BEPS Project). As a result, many countries embarked on modifying their national laws in accordance with the BEPS Project, while at the supranational level changes were made to the EU Parent-Subsidiary Directive.

Given the dynamics of the evolution and reformation of international tax rules, tax professionals need to actively monitor all the changes in order to manage newly emerging tax risks effectively and ensure the stability of existing and new group structures amid the new fiscal reality in the coming 2016.

BEPS Project

On 5 October 2015, the OECD published the final version of the BEPS Action Plan. The project was first launched in 2013 and supported by G20 countries; 7/15 action reports were published in September 2014. In 2015 previously issued reports were consolidated with remaining reports and the final version of recommendations was approved.

The full text of the OECD’s recommendations as part of the BEPS Project for all actions can be found at: http://www.oecd.org/tax/beps-reports.htm

Finalization of the OECD reports on the BEPS Project actions is a fundamental shift from the advisory stage of the project to the stage of its practical implementation. The efficiency of developed actions will be determined by coherent and consistent adoption of the action plan by all states. In this regard, such taxpayers as international groups should evaluate the effect of innovations on existing structures and consider necessary changes to ownership, financing, operation structures, intellectual property ownership structures, etc. that will provide a balance between the tax efficiency and stability in terms of the impact of the BEPS measures adopted in the jurisdictions where the group operates.

EU Parent-Subsidiary Directive

Changes made to the EU Parent-Subsidiary Directive require EU member states to introduce rules corresponding to the new provisions of the Directive before 31 December 2015:

General Anti-Avoidance Rules, GAAR

• According to the Directive, dividends shall not be exempt from the withholding tax, if the main purpose of the structure is to get tax benefits (i.e. there are no commercial goals and the structure does not correspond to the economic reality).

Anti-Hybrid Rules

• No deduction from the tax base should be granted, if the payment is not included in the tax base by the payee (counteracting double non-taxation).

Changes made to the Directive could potentially complicate the use of companies being EU tax residents when establishing / operating holding and financial structures, in particular:

• multi-level asset-holding structures using European companies may lose tax efficiency, if there will be no sufficient physical presence at the EU holding company level. Thus, existing ownership structures will need to be checked up and restructured, if necessary;
• financing and trading structures using hybrid financial instruments implemented by EU companies may lose their tax efficiency. Thus, alternative financing structures need to be developed (in particular, inclusion of non-EU resident companies into existing structures) or the use of hybrid instruments should be rejected.

Automatic Information Exchange

In 2014, the OECD in response to the G20 request developed the Standard for Automatic Exchange of Financial Account Information which includes a model Competent Authority Agreement (CAA) and the Common Reporting Standard (CRS).

In October 2014, more than 50 states signed the Multilateral Competent Authority Agreement pursuant to Art. 6 of the Convention on Mutual Administrative Assistance in Tax Matters (currently more than 70 countries have signed the agreement). The Russian Federation declared that it would join the system of automatic information exchange starting from 2018.

In 2015, more than 40 countries that committed to early adoption of the automatic information exchange started to implement the CRS provisions into national laws. These states will be able to initiate their first automatic exchanges of financial account information starting from 2016.

Thus, financial account information becomes more and more transparent for tax authorities worldwide. As opposed to the FATCA program which focuses on American taxpayers, the CRS is a global international platform for automatic exchange of information between all states.

Main Changes in Tax Laws of Certain Jurisdictions

Cyprus

As a result of the 2013 financial crisis and active implementation of the BEPS Project worldwide, the Government of Cyprus is taking active steps to modernize its tax laws in order to maintain the competitiveness and attractiveness of the tax climate in this jurisdiction. At the same time, Cyprus is experiencing some pressure from the EU, which inevitably leads to the need for compliance of the Cyprus tax laws with the EU requirements and the BEPS Project:

• introduction of a Notional Interest Deduction (NID) regime. Under the new rules, Cypriot companies will be able to recognize “notional” interest in expenses for corporate income tax purposes and this notional interest will be calculated as a certain percentage of the company’s "new" equity (i.e. equity formed after 1 January 2015). The reference interest rate is the yield on 10-year government bonds of the country in which the equity is invested or the Cyprus government bonds (whichever is greater) increased by 3%. There is a number of restrictions on using the deduction: in particular, it cannot exceed 80% of the company’s taxable profit (calculated prior to NID). Moreover, several anti-abuse provisions apply;
• according to newly introduced rules, the special contribution for defense shall be paid by individuals if they are Cypriot tax residents and at the same time have their domicile in Cyprus;
• in mid-December, the Cyprus Parliament approved another package of amendments to the national tax legislation which includes provisions aimed at:
  • tax exemption of foreign exchange differences received (except in cases where the company’s main activity is trading in foreign currencies and related products);
  • introducing changes in accordance with the EU Parent-Subsidiary Directive;
  • limited deduction of expenses under the IP Box regime;
  • introducing new corporate income tax rules for groups of companies (group relief);
  • combating tax abuse in case of reorganization.

Netherlands

Currently, the Dutch tax legislation is undergoing active changes aimed at aligning it with the requirements of the BEPS Project and the European Union. These changes should be taken into account when structuring holding and financing activities using Dutch companies:

• wider application of the substantial interest taxation (SIT) rules, if a shareholder of a Dutch company does not have sufficient physical presence in the shareholder’s jurisdiction;
• dividend distribution by a Dutch cooperative will be subject to taxation in the Netherlands, if the structure is aimed at avoiding tax;
• introducing changes in accordance with the EU Parent-Subsidiary Directive (see above);
• new requirements for international companies to provide additional documentation for country-by-country reporting on transfer pricing;
• the IP Box reform in accordance with the OECD’s ‘modified nexus approach’. In accordance with this approach, a person is entitled to apply preferential tax treatment for income derived from using IP, if the person concerned bears the expenses for creating and developing this IP and the income and expenses are directly related;
• formalization of requirements concerning the physical presence of financial and IP companies.

Luxembourg

The Government of Luxembourg actively supports the BEPS Project, paying special attention to the fact that all states should follow uniform rules that would ensure implementation of the new standards worldwide. Some of the changes required for this (including those provided for by the EU Directive) have already been introduced into national laws of Luxembourg:

• changes in accordance with the EU Parent-Subsidiary Directive (see above);
• the IP Box reform in accordance with the OECD’s ‘modified nexus approach’ (application of the current tax regime (grandfathering) is possible till 2021);
• new rules of obtaining tax rulings. In particular, the Central Tax Ruling Commission has been established in Luxembourg which will issue mandatory tax opinions at the request of a taxpayer if the taxpayer meets certain conditions. The cost of obtaining a ruling will depend on the complexity of the inquiry and can be from EUR 3,000 to 10,000.

Switzerland

Currently, Switzerland continues implementing Swiss Corporate Tax Reform III and the process has not been completed yet. This reform is separate from the BEPS Project and its main goal is to abolish the regime of holding and mixed companies, as well as principal companies. At the same time, Switzerland has repeatedly declared its commitment to the BEPS Project and willingness to implement its provisions into national laws:

• a more complicated procedure of obtaining tax rulings (in particular, substantial presence of a Swiss company’s shareholder is required);
• the planned IP Box reform in accordance with the OECD’s ‘modified nexus approach’;
• new requirements for international companies to provide additional documentation for country-by-country reporting on transfer pricing.

Russia

• One year has passed since Federal Law No. 376-FZ dated 24.11.2014 (the so called “deoffshorization” law) came into force.
• This law has already been significantly amended by Federal Law No. 150-FZ dated 08.06.2015 in the middle of the year and legislators continue working on it further. In particular, on 22 December 2015 the State Duma of the Russian Federation approved in the first reading draft law No. 953192-6 providing for another package of amendments to “deoffshorization” legislation. This draft law is analyzed in more detail in our communication dated 25 December 2015.
• Taxpayers continue checking up and adapting foreign components of their groups to "deoffshorization" legislation and recent amendments thereto. In fact, a little more than a year is left before first notifications on controlled foreign companies (CFC) and CFC income tax returns will be submitted in 2017.
• To assist in effective tax planning under the new legislative regulation, we will continue to actively monitor the legislative and law enforcement practice in the coming 2016 and will promptly inform you about all latest developments.

We will be glad to discuss the impact of the above-mentioned tax initiatives on current and planned structures of your groups

Should you have any questions, please do not hesitate to contact us.