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The following article discusses session two in the IR Global Virtual Series on 'Tax Efficient Inbound Investment: Tax Structures for Cross-Border Acquisitions
Lebanon – WA The major tax pitfall we have in Lebanon is not directly linked to the tax itself, but to the entity’s performance. Most of our cases have been to do with compliance, involving lots of companies which never really paid attention to the laws around residency. There are regulations that define who is tax resident or not, and that clarifies the application of withholding tax vis-à-vis income tax and other taxes.
Many businesses don’t have the best tax advice and therefore their activities are not in compliance with the rules relevant to their specific entities nor transactions.
For instance, foreign investors cannot own any companies engaged in financial monetary transactions, such as banks. These have to be owned by Lebanese. Another thing is that they often have the wrong tax adviser, without an international outlook, who is not aware of the proper application procedures for a double tax treaty.
Netherlands – FK When investing into The Netherlands, we have to separate private and corporate investors. The overall tax rate should be balanced since behind every corporate investor sits a private investor with a pension fund. The Dutch tax system is relatively simple since corporates are taxed on gross revenue.
We don’t have income tax on capital gains from real estate. We don’t make the separation in the type of income as they do in the US, it’s just that income is income and capital gains are capital gains.
Because of our tax treaties, it is possible to work around any double taxation for foreign investors, but you need to demonstrate substance by showing things like sufficient salary costs or operational offices.
Italy – TF One of the most serious tax pitfalls in Italy is the overall level of taxation applicable to businesses. In addition to the Italian corporate income tax of 24 per cent, Italian businesses are also subject to a regional tax on productive activities with a standard rate of 3.9 per cent.
Therefore, when a foreign investor intends to start a business in Italy (either manufacturing or trading in nature), it has to take into account not only the standard corporate income tax but also the additional regional tax on productive activities that vary from region to region. The Italian Government has, in fact, left a margin of discretion for each region to set its own level of such additional regional tax.
Another pitfall is likely to be the relations with the Italian tax authorities. They are quite aggressive, especially with respect to tax issues with an international dimension, such as transfer pricing rules, controlled foreign corporation (CFC) rules and similar.
Recently, the Italian Government also modified the domestic definition of permanent establishment (‘PE’) in order to align with the changes agreed upon at the OECD level, as resulting from the Action 7 – Final report 2018 – of the BEPS project. Such changes are aimed at broadening the Italian domestic definition of PE in order to tackle harmful tax structures that were not covered by the previous PE definition.
In addition to the above, a new concept of digital PE has been introduced in the Italian tax code. This is an anti-avoidance provision pursuant to which a foreign company can be considered as having a PE and, thus, be taxed in Italy, even if it does not have a physical presence in the Italian territory. It is designed to counteract the big foreign digital companies, like Google or Apple, and applies when a company has a significant and ongoing economic presence.
These changes to the Italian PE definition are not currently recognised by the Italian international tax treaty network, because there are no equivalent provisions therein; thus foreign investors/companies can still be protected by a relevant double tax treaty if there is one in force between Italy and the state of residence of the foreign investor.
From Jan 1st 2019, Italy is also likely to enforce a Web Tax, which is a new tax on digital transactions that apply to services supplied through electronic means.
The Web Tax is computed as 3 per cent of the gross compensation paid by Italian resident businesses (and Italian PE’s of non-resident companies) for the digital services supplied, regardless of where the transaction is concluded and where the services supplier is resident. However, the Web Tax is not due if the digital service supplier does not exceed the threshold of 3000 transactions during any calendar year.
USA – JS The US has an extensive tax regulatory regime that applies to foreign investors and there are different sorts of rules that apply depending on what the investor is doing in the US. If they buy US real estate, we have a different sort of rule that applies.
In a real estate investment, there is a withholding tax that applies to the sale. The purchaser must withhold 15 per cent of the sale price and remit it to the US Treasury as a surety against the tax obligations of the foreign seller.
When you have a foreigner generating passive income in the US, it is subject to 30 per cent withholding tax. Whoever pays passive income to a foreign investor must withhold 30 per cent and remit it to the US Treasury. It includes things like interest income, dividends, rents, royalties and salaries.
The US does have income tax treaties with 60 countries, which reduce the withholding tax to anywhere between 0 – 15 per cent.
Special rules apply for capital gains on assets other than real estate. The US does not tax foreign investors on the sale of capital assets (other than real estate), in order to encourage foreign investors to buy them. This can include interest in a legal entity or shares in a public company.
The other tax advice I have for foreigners is to remember that the US will impose 40 per cent tax on the value of the assets a foreigner owns in the US at the time of death. This applies to any property with the exception of bank accounts.
We often see foreign investors purchase assets in their own name, but if they die holding those assets, then 40 per cent of the value goes to the US Government. One of the reasons we structure inbound investments through a foreign corporation or a foreign trust is so that we can avoid the 40 per cent estate tax.
With regard to withholding tax, you either structure the investment in such a way that the income is not subject to 30 per cent withholding tax, or you structure it through a treaty country. There are obviously provisions against treaty shopping, to ensure you have substance in that country.
USA – TS With regard to withholding tax on real estate, although it’s a flat withholding tax, the investor can file a tax return reporting the gain on the sale and they will receive a refund on the withholding tax.
One of the biggest pitfalls in the US is compliance orientated. Depending on the jurisdictions the business operates in, you could have filing and taxpaying obligations in 50 different states. That applies not only for income tax but, depending on the activity, there could also be state and local sales taxes. The administrative obligations alone can become quite burdensome.
Contributors
Wissam Abousleiman (WA) Abousleiman & Co – Lebanon www.irglobal.com/advisor/wissam-abousleiman
Friggo Kraaijeveld (FK) KC Legal – Netherlands www.irglobal.com/advisor/friggo-kraaijeveld
Jacob Stein (JS) Aliant LLP – USA, California www.irglobal.com/advisor/jacob-stein
Tommaso Fonti (TF) Bacciardi and Partners – Italy https://www.irglobal.com/advisor/tommaso-fonti
Todd Skinner (TS) Skinner + Company – USA, Arizona www.irglobal.com/advisor/todd-skinner