Owen, Christopher: Offshore Survey – April 2008

On 8 November 2007, the European Court of Justice issued its ruling in the Dutch Amurta case (C-379/05), which concerned the Dutch exemption for dividend withholding tax which distinguishes between dividends paid to domestic companies and dividends paid to foreign companies. According to the ECJ, the Dutch rule constitutes a restriction on the free movement of capital since it treats non-resident shareholders less favourably than comparable resident shareholders. This restriction cannot be justified, it said, unless the restrictive effects of the Dutch withholding taxation is neutralised under the relevant tax treaty in the shareholder’s resident state. The case concerned a Portuguese company that held 14% of the shares in a Dutch company. In 2002, the Dutch company made a dividend payment to its shareholders. The dividend paid to the Portuguese company was subject to Dutch dividend withholding tax whereas the dividend paid to another shareholder, a Dutch resident company, was exempt from dividend withholding tax under Dutch tax law. The question was whether the Dutch levy of withholding tax was compatible with the free movement of capital as guaranteed by the EC Treaty. The ECJ held that it was not. The Dutch levy of withholding tax constituted a restriction on the free movement of capital since it treated non-resident shareholders less favourably than comparable resident shareholders. According to the ECJ, it was of no relevance whether the Portuguese company might be entitled to a full refund of the Dutch withholding tax under Portuguese national tax law. But the tax position of the shareholder in Portugal under the relevant tax treaty was relevant. It was left to the Dutch national court to determine whether the Dutch-Portuguese tax treaty was applicable and, if so, whether the restrictive effects were neutralised. The ECJ ruling of the ECJ is in line with its other recent case law such as the Denkavit ruling issued on 14 December 2006. In this case, the ECJ held that the French dividend withholding tax exemption, which only applied to domestic dividends, was in breach of the EC Treaty. The Amurta case further clarifies that only a possible relief under a tax treaty should be taken into account. A possible relief based on national tax law should be disregarded. As of 1 January 2007, the Dutch withholding tax exemption was extended to apply equally to dividends paid to companies resident in either the Netherlands or one of the other EU Member States. But the law, as amended, may also still be incompatible because it relates to shareholdings by companies resident in EEA countries outside the EU, Switzerland, and possibly third countries.

19 December 2007, the Luxembourg parliament approved a bill that provides for an 80% exemption for net income and net capital gains from intellectual property. This reduces the effective tax rate for that income from the general rate of 29.63% to 5.93%. The government said the measure was in line with integrated guidelines for growth and jobs presented by the European Commission, which called for increasing investment in research and development, particularly by private businesses. The government also hopes the measure will increase Luxembourg’s attractiveness as a financial hub. The bill applies to net income stemming from the use of, or concession to use, the rights to: copyrights on software, patents, trademarks, designs and models. Net income is defined as gross income minus costs directly related to that income, including depreciation and amortisation. Net capital gains on the alienation of such intellectual property would also be 80% exempt. To prevent abuse, the exemption does not apply to intellectual property acquired from related companies. For self-developed patents used by taxpayers in their business operations, there is a deduction equal to 80% of the net income that could have been realised if the patent had been licensed to a third party, as of the date that application for registration of the patent is pending. The bill applies to intellectual property acquired or constituted after 31 December 2007.

13 March 2008, UK Chancellor Alistair Darling confirmed the proposed £30,000 annual levy on non-domiciled residents in the UK, as of 6 April, but said income or capital gains earned on offshore trusts would not be taxed provided it remained outside the UK. In his first budget speech, Darling said adults who have been living in the UK for seven out of the past 10 years will pay the £30,000 levy, although they can remit up to £2,000 a year before paying. Darling also confirmed that those non-doms opting to pay the levy would no longer qualify for UK personal tax allowances. In a bid to reassure non-doms about the new rules after months of damaging speculation, Darling said: “The changes announced mark the end of the residence and domicile review and offer a package of reforms that will both protect UK competitiveness and deliver greater fairness. They will not be revisited for the rest of this Parliament or the next.” HM Revenue and Customs said that the annual levy would relate specifically to unremitted income and gains so that the annual charge can be offset against tax levied in foreign countries. US citizens have yet to hear whether the annual levy, which has been changed from a charge to a tax, will be remitted against their US taxation. While no formal deal has been agreed with the US Internal Revenue Service, the Budget included a legal opinion from US law firm Skadden indicating this matter could be resolved in due course. The residency rules that oblige a person to pay UK tax if they stay in the UK for at least 90 days in a year will also be changed such that if a person spends midnight in the UK it will count as a day towards that 90-day period. The government had previously proposed counting even a few hours’ visit to the UK towards the 90-day total. Separately, the Budget changes the UK capital gains tax rate to 18% and abolishes the taper relief system. The move had been aimed at private equity but caused an outcry when it threatened smaller businesses. As a result, employees who own more than 5% of a company will only pay 10% on the first £1 million of gains when they sell.

24 January 2008, the UK ratified the OECD and Council of Europe’s Convention on Mutual Administrative Assistance in Tax Matters. The move, which brings the number of signatories to 13, marked the twentieth anniversary of its opening for signature on 25 January 1988. The convention covers all taxes and allows exchange of information, simultaneous multilateral tax examinations and assistance in tax collection. It also contains provisions to protect the confidentiality of the information exchanged and sets out the safeguards that each party must put in place. The existing parties are Azerbaijan, Belgium, Denmark, Finland, France, Iceland, Italy, the Netherlands, Norway, Poland, Sweden, the UK and the US. Canada and Ukraine have signed the convention and are in the process of ratification. Paolo Ciocca, chair of the OECD’s Committee on Fiscal Affairs, said: “I was pleased to learn at this week’s Committee meeting that a number of other OECD countries intend to sign the convention. This reflects the growing interest in multilateral administrative co-operation and the convention provides the necessary legal framework and safeguards to facilitate such co-operation.”

14 January 2008, US Senate investigators issued subpoenas against three Wall Street banks and Swiss bank UBS as part of an inquiry into whether they improperly structured transactions to help hedge funds avoid dividend taxes. Citigroup, Lehman Brothers, Morgan Stanley, together with UBS, are being investigated over the alleged use of derivatives by offshore investors to help avoid withholding taxes on US share dividends. Investigators are demanding emails, marketing material and other documents dating back to 2000 related to these transactions, as well as information about clients who executed trades. The Senate Permanent Subcommittee on Investigations launched the investigation and federal tax authorities are also seeking information. More than $1 billion in withholding taxes on US stock dividends could be at stake.