E-News from KPMG’s EU Tax Centre

OECD publishes aggregated statistics on International Compliance Assurance Programme

On January 29, 2024, the OECD released its first aggregated statistics (PDF 443 KB) on the Forum on Tax Administration’s International Compliance Assurance Programme. ICAP is a voluntary risk and assurance program that provides a framework for a multilateral risk assessment of multinational enterprises (MNEs) between multiple tax authorities, with the aim to improve multilateral tax certainty.

The issued statistics deal with the 20 ICAP cases, which have been completed by October 2023 (since the launch of the program in 2018). Key insights include:

• 22 tax administrations participate in ICAP, including the following EU countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, and Spain.
• On average, the time from submitting an ICAP request to obtaining the respective outcome letter amounted to 61 weeks, which is significantly shorter than completing an APA or a MAP, according to the OECD release. In this context, the statistics also indicate that involving a greater number of tax administrations does not necessarily take more time than a request where a smaller number of participating tax administrations are involved.
• With regards to 40 percent of the ICAP cases, the respective MNEs were assessed as having ‘low risk’ outcomes in all relevant core risk areas. Another 40 percent of the cases included assessments with a mix of ‘low-risk’ and ‘not low-risk’ outcome in one or two core areas. In only 20 percent of the cases, MNEs received ‘not low-risk’ outcomes in more than two risk areas covered.
• In approximately 30 percent of the cases, one or more issues identified benefitted from issue resolution within ICAP, avoiding the need for audits or MAPs. Additionally, it was observed that in some cases, MNEs and the tax authorities decided to go into APA procedures concerning identified risks.
• In terms of core risk areas, permanent establishments were considered ‘low-risk’ by the highest proportion of tax administrations, followed by tangible assets and services. Conversely, financing and intangible assets had the highest proportion of ‘not low-risk’ outcomes.

For more information, please refer to the OECD’s dedicated website.

OECD publishes working paper on the Global Minimum Tax and the taxation of MNEs

On January 9, 2024, the OECD released a working paper assessing the expected impact of the global minimum tax (Pillar Two) on the taxation of MNEs, based on data for the years 2017 to 2020. Key takeaways include:

• It is expected that around 90 percent of in-scope MNEs will be subject to Pillar Two by 2025.
• Pillar Two is estimated to reduce the level of global low-taxed profit (i.e., subject to an effective tax rate lower than 15 percent) from 36 percent to 7 percent of all profit over ten years. According to the working paper, this 81 percent reduction in global low-taxed profit is mainly attributable to the application of top-up-taxes but also to the reduction in profit shifting.
• Shifted profit is estimated to fall by half due to reduced profit shifting incentives as a result of Pillar Two implementation.
• It is further estimated that investment hubs could lose around 30 percent of their tax base.
• Global corporate income tax revenues are estimated to increase by USD 155-192 billion per year (approximately EUR 144-179 billion), which would represent 6.5 percent to 8.1 percent of global corporate income tax revenues. The estimate has been revised downwards slightly due to updated calculation methodology, as the OECD had previously announced expected revenues gains of around USD 220 billion (approximately EUR 205 billion) in January 2023 – see E-News Issue 169).
• According to the working paper, non-tax factors are expected to play a greater role in investment decisions, as the average tax rate differential across all jurisdictions (which is the absolute difference between each unique jurisdiction) is estimated to fall by around 30 percent.

For more information, please refer to a dedicated OECD webpage and KPMG’s dedicated Talking Tax episode 5. 

United Nations publishes webpage on framework convention on international tax cooperation

On December 22, 2023, the General Assembly of the United Nations (UN) approved a resolution for the “promotion of inclusive and effective international tax cooperation at the United Nations”. The resolution establishes a newly created intergovernmental Committee for the purpose of drafting terms of reference for a UN framework convention on international tax cooperation.

The UN has now published a dedicated webpage, which includes information on the next steps. Key takeaways include:

• Chairs of the UN regional groups were invited to transmit up to four nominations per group to the secretariat until January 15, 2024, with the aim of forming a bureau of 20 members.
• Substantive sessions with member jurisdictions are tentatively set in New York from April 26 to May 8, 2024 and from July 29 to August 16, 2024, pending approval by the Committee during an organizational session in February.
• According to the resolution, the aim is to finalize the Committee’s work by August 2024.

For previous coverage, please refer to E-News Issue 187.

Ministry of Finance published final guidance on German CFC rules

On December 22, 2023, the German Ministry of Finance (BMF) published final guidance on the application of German CFC rules, as amended by the ATAD Implementation Act in 2021, adapting the existing BMF guidance of May 14, 2004. Some of the key clarifications include:

• Catalogue of active income: any low-tax income is subject to the CFC rules if the income is derived through a type of activity that is not expressly defined as active (i.e., the passive income test). The guidance clarifies that a gain from the disposal of assets is considered as active income, to the extent that the assets were used to generate active income. In addition, the guidance notes that individual activities with a significant economic impact are not to be grouped together but are to be assessed separately, even if they have an economic connection with other activities.
• Change of control criterion: according to German CFC rules, the control of the foreign company also exists if the taxpayer is directly or indirectly entitled to more than half of the profit or liquidation proceeds of that company. The guidance clarifies that a shareholder position is not required in this context, and control can also be established through other contractual agreements such as hybrid financial instruments.
• Motive test: German CFC rules do not apply where taxpayers can demonstrate that at the level of an EU/EEA subsidiary a substantial economic activity is carried out with appropriate resources and by sufficiently qualified personnel, on an independent and autonomous basis. The guidance specifies the criteria of "substantial economic activity" and "material and personnel resources". In addition, the guidance notes that the motive test is excluded to third country-companies (based in non-EU/EEA jurisdictions) and also in cases where the substantial economic activity is predominantly provided by third parties (e.g. based on business management contracts). The updated clarification in the final guidance emphasizes that outsourcing to related parties within the jurisdiction does not lead to an exclusion from the motive test, a detail which was not provided in the previous draft.
• Low taxation: the guidance further clarifies that a foreign company is not considered to be low taxed (i.e., effective tax rate of less than 25 percent) on the sole ground that its tax liability is settled by another company that belongs to the same tax group or consolidated group. The guidance further clarifies that where a foreign company generates low-taxed passive income and belongs to a tax group, the German CFC tax charge needs to be determined separately for this company.

Notably, the final guidance continues to focus on a low tax threshold of 25 per cent and does not refer yet to the reduced low tax threshold of 15 per cent, which was recently implemented in the Minimum Tax Directive Implementation Act.

For more information, please refer to a report prepared by KPMG in Germany.

Legislative proposal to implement minimum taxation under Pillar Two

On January 30, 2024, the Latvian government published draft legislation to implement the EU Minimum Tax Directive. Key takeaways include:

• Latvia is considering making use of the option to defer the application of the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) – as per Article 50 of the EU Directive.
• Latvia would not transpose the entire EU Directive at this stage but only those administrative aspects that are required for the application of Article 50. As such, the draft only includes notification and information exchange requirements to enable a designated foreign constituent entity to submit the GloBE Information Return.
• Provisions on IIR and UTPR are not included in the draft and it has been indicated that the government plans to start applying the rules for fiscal years starting on or after December 31, 2029.
• However, it has not yet been clarified whether the government plans to also apply a Domestic Minimum Top-up Tax (DMTT) at a later stage.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker.(PDF 793KB)

DAC7 FAQ published

On January 1, 2024, the Dutch tax authorities published frequently asked questions (FAQs (PDF 110KB)), providing clarifications on the application of the Dutch reporting obligations and procedures under DAC7 (e.g. clarification of certain terms, reporting exemptions and exclusions, reporting location, relevant activities, data collection and verification). More specifically, the FAQs provide clarifications on, for example:

• The definition of the term “goods”, i.e., tangible assets, in line with Directive 2006/112/EC (the VAT Directive), providing clarification regarding, amongst others, the categorization of vouchers or energy;
• the treatment of non-EU property rental, i.e., being in scope of DAC7 when done by EU sellers;
• the treatment of mixed activities, which should preferably be treated separately. In case the activities are inseparably linked, the entire activity shall be reported unless the reportable part of the activity is subordinate to the overall activity;
• reporting procedures, concerning the provision of data and information about sellers via the tool Digipoort;
• information about the option to submit a concrete (not hypothetical) case to the DAC7 team within the Dutch tax authorities for the possibility to obtain the tax authorities’ view on desired issues.

Memorandum proposes changes to loss deduction rules for ownership changes

On January 22, 2024, the Swedish Ministry of Finance published a memorandum (PDF 465 KB) proposing changes to the rules on deductions of prior year losses. Key takeaways include:

• The deductible amount of prior year losses after a change in ownership would be increased to 300 percent (from the current 200 percent) of the cost of acquiring control of a loss-making company.
• An exception to this loss deduction limitation rule would be introduced if an individual (or certain other entities) gains direct control over a loss-making company, provided it already had indirect control prior to the ownership change.
• The “herd rule” would be simplified to provide that the loss deduction limitation applies when several independent individuals acquire shares with at least 20 percent (currently 5 percent) of all votes in a loss-making company over three (currently five) tax years and collectively acquire shares with more than 50 percent of all votes.
• The provision regarding capital contributions that have fully or partially resulted in a change in ownership, in cases where the acquirer has received an asset of real and special value through such contribution, is amended. This adjustment now extends to capital contributions made to a company within the same group as the loss-making entity, encompassing not only contributions directly provided to the deficit company.

The new rules would enter into force January 1, 2025.

For more information, please refer to a report prepared by KPMG in Sweden. 

Tax-neutral transfer of assets between partnerships with identical shareholding (Federal Constitutional Court)

On January 12, 2024, the Federal Constitutional Court (the Court) issued a decision in case 2BvL 8/13, concerning the book value of a transfer of assets between sister partnerships.

According to the respective section in the German Income Tax Act under review, transfers of assets between different businesses owned by the same taxpayer are treated as tax neutral. Additionally, the section permits tax-neutral asset transfers between a partnership and its partners, as well as between the partners of a partnership, subject to certain conditions. However, the current wording of this section does not encompass tax-neutral asset transfers between different partnerships with the same partnership structure (i.e., the same partners with the same ownership interest percentage in both partnerships).

In the case at hand, the Court deemed this provision inconsistent with German Constitutional law, as it violates the principle of equality. The Court argued that asset transfers between partnership with the same partnership structure would be subject to taxation based on the difference between the current and book values of the assets, placing them at a disadvantage compared to the other tax-neutral transfer scenarios. The Court considered the exclusion from tax neutrality arbitrary, as it would be possible to achieve the same tax-neutral result through a combination of asset transfers allowed by the same provision. However, this combination results in higher transfer costs and legal and economic risks, because it might be perceived as an abuse. In addition, this combination could potentially lead to adverse consequences during a later-stage insolvency procedure.

In the Court’s view, no objectively plausible reasons were evident to justify such unequal treatment of asset transferred between partnerships with identical shareholding.

Consequently, the Court required the legislature to enact new regulations retroactively for transfer processes after December 31, 2000.

For more details please refer to a report (PDF 387 KB) prepared by KPMG in Germany. 

Dutch Supreme Court rules that only the beneficial owner of dividends is entitled to claim a withholding tax credit

On January 19, 2024, the Dutch Supreme Court ruled that only the beneficial owner of a dividend distribution can claim a tax credit in relation to such distribution.

In the case at hand, a Dutch company (Dutch Co) part of a banking group applied a commercial strategy over several years, which involved the acquisition of shares in Dutch funds, entering into contracts on future exchanges with these shares as underlying value and lending them to its UK-based parent company (UK Co). Dutch Co argued that because the share-secured loans were constantly repaid before dividend distributions, it was entitled to credit the dividend withholding taxes (WHT) against its taxable income. In practice, the shares were acquired and placed in a securities deposit account in France, registered in the name of Dutch Co, and lent to UK Co. The latter always repaid the shares immediately before the dividend distributions and placed them back into Dutch Co’s securities account. After the dividend distributions, Dutch Co again lent the same class and number of shares to UK Co.

Following a challenge from the Dutch tax authorities and subsequent legal proceedings, the case was referred to the Amsterdam Court of Appeals, which found that the conditions to claim tax credits in relations to those dividend distributions were not met. The Amsterdam Court of Appeals ruled that Dutch Co should not be considered the legal owner in the absence of a valid deed of transfer of legal ownership, and that Dutch Co is unlikely to be the ultimate beneficial owner of the dividends. The taxpayer appealed the decision, which was referred to the Supreme Court.

The Supreme Court clarified that only the beneficial owner of the dividends can claim a tax credit in relation to the dividend WHT and stated that the beneficiary of the income is presumed to be the ultimate beneficial owner, as long they can dispose freely of the dividend and do not act just as a manager or agent (except in certain specific cases of dividend stripping).

Furthermore, the Supreme Court noted that the holding of these shares is a property law matter which, under Dutch international private law, must be determined in accordance with the legal system of the country on whose territory the account containing the securities is held. Therefore, the case was referred to the Court of Appeals in The Hague, which will have to determine if under French law on cashless securities, Dutch Co must be considered as the holder of the shares at the time the dividends were distributed.

For more details, please refer to a report prepared by KPMG in the Netherlands.

Supreme Administrative Court clarifies limitation rule for debt financing costs

On January 10, 2024, the Polish Supreme Administrative Court issued a judgment (case file II FSK 449/21) regarding the method of determining the maximum surplus of debt financing costs that a company can consider as tax-deductible expenses in a given taxable year. The relevant provision under dispute had been subject to various interpretations by tax authorities and regional courts, as it includes two distinct limits for deducting debt financing costs: a threshold of PLN 3,000,000 (approximately EUR 690,500) and 30 percent of EBITDA.

Tax authorities interpreted the provision to allow the deduction of debt financing costs up to PLN 3,000,000, provided this amount does not exceed 30 percent of EBITDA. Consequently, the entire cost must be referred to the 30 percent limit.

In contrast, the Regional Administrative Court primarily based its decision on the linguistic interpretation of these provision and ruled that only when the debt financing costs exceeded PLN 3,000,000 should the exceeding portion over PLN 3,000,000 be referred to 30 percent of EBITDA. The initial PLN 3,000,000 of debt financing costs, therefore, could be deducted without regard to the 30 percent limit.

The Supreme Administrative Court upheld the lower court’s decision and dismissed the authority’s cassation appeal. It based its decision on established jurisprudence, including the judgments of October 20, 2021 (case file II FSK 949/20), and October 26, 2021 (case file II FSK 979/21).

Spanish Constitutional Court declares certain measure of 2016 tax reform unconstitutional

On January 18, 2024, the Spanish Constitutional Court issued a press release regarding a ruling which annulled certain tax provisions introduced by Royal Decree-Law 3/2016 (RDL 3/2016). The Court held that RDL 3/2016 was not compliant with the Spanish Constitution as it infringed the substantive limits with regard to the type of legal act in question (i.e., a decree-law). Specifically, the Court referred to its previous case-law based on which a decree-law is not allowed to alter neither the general rules governing taxes, nor any of the essential elements thereof that affect the determination of the tax burden.

The RDL 3/2016 introduced restrictions on deductions and credits for corporate income tax purposes, including:

• limits on the offset of net operating losses and on the deduction of deferred tax assets;
• limits on the use of tax credits for double tax relief; and
• the reversal in equal parts over five years of impairment losses on shares deemed deductible for corporate income tax purposes between 2002 and 2013.

For more information, please refer to a report (PDF 507 KB) prepared by KPMG in Spain.

Implementation of Pillar Two – State of play and observations on domestic implementation

Pillar Two is happening. More than 30 jurisdictions around the world have either implemented the Global Anti-Base Erosion (GloBE) rules or have published draft legislation, with more expected to follow in 2024. While implementing legislation generally closely follows the OECD Model Rules, Commentary and subsequent Administrative Guidance, important variations arise with respect to:

• the timing of application of the three charging mechanisms: Domestic Minimum Top-up Tax (DMTT), Income Inclusion Rule (IIR) and Undertaxed Payments Rule (UTPR);
• whether jurisdictions opt to implement a DMTT, the timing of its application, the accounting standard the DMTT is based on, and the related administrative details (filing, allocation of liability, etc.);
• the extent to which OECD Administrative Guidance is reflected in domestic legislation; and
• administration, including filling requirements and deadlines, other than those related to the GloBE Information Return.

On February 22, 2024, a panel of KPMG tax specialists will discuss their observations on local implementation, practical tax and accounting considerations that in-scope groups should keep in mind when preparing for compliance with Pillar Two, as well as what more we can expected from the OECD Inclusive Framework going forward.

Please access the event page to register.

Beneficial ownership, governance and substance trends across the EU

The fight against tax avoidance and profit base erosion has been high on the agenda of international bodies – including the Organisation for Economic Co-operation and Development and the European Commission, as well as local tax authorities for the last decade. At EU level, approaches to abuse of double tax treaties and EU Directives have also been influenced by the decisions of the Court of Justice of the EU in the socalled “Danish cases”. The Commission is also attempting to take steps towards establishing a common minimum standard on criteria for denying treaty or EU Directive benefits to companies lacking economic substance and which are at risk of being misused for the purpose gaining tax advantages through the Unshell proposal.

With these developments in mind, KPMG’s EU Tax Centre conducted an internal survey across the network of KPMG firms based in Europe to identify common trends and key challenges for taxpayers in four main areas:

• beneficial ownership;
• substance;
• corporate governance;
• the wider anti-treaty shopping and anti-tax abuse frameworks applicable at a local level, with a particular focus on WHT-related measures; and - the practice of the tax authorities in BO and substance matters, and level of certainty taxpayers can obtain.

The survey covered responses from 27 European jurisdictions and includes survey information valid as at September 2023. A recent blog post outlines key findings and trends identified as a result of the survey.

KPMG EU Financial Services tax perspectives webcast

On February 6, 2024, KPMG held a new EU Financial Services tax perspectives session as part of the Future of Tax & Legal webcast series.

Countries across the EU and Europe continue to operate in an extremely unsettled environment. As geopolitical tensions persist, together with a slower growing economy, many financial services institutions face significant regulatory pressures. As organizations seek to transform their tax function through the use of new technologies and efficiently managing and utilizing data to drive new business models, will the tax landscape in Europe become even more volatile in the future, and what does this mean for financial services institutions?

Our panel of KPMG tax specialists shared their insights with respect to some of the latest proposals that are likely to impact financial services institution in the year ahead including:

• Pillar 2 implementation across Europe – state of play, including implications for those jurisdictions unable to enact legislation into local law prior to January 1, 2024.
• Update on European tax legislation enactment as it pertains to Financial Services groups including EU FASTER proposals and ATAD 3 – practical issues and challenges.
• Other key country developments – with a focus on France, Germany, and Ireland.

For a replay of the session, please access the event page to register.

Talking tax series

With tax-related issues rising up board level agendas and developing at pace, it’s more crucial than ever to stay informed of the developments and how they may impact your business.

With each new episode, KPMG Talking Tax delves into a specific topic of interest for tax leaders, breaking down complex concepts into insights you can use, all in under five minutes. Featuring Grant Wardell-Johnson, KPMG’s Global Head of Tax Policy, the bi-weekly releases are designed to keep you ahead of the curve, empowering you with the knowledge you need to make informed decisions in the ever-changing tax landscape.

Please access the dedicated KPMG webpage to explore a wide range of subjects to help you navigate the ever-evolving world of tax.