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International 

Tax Alert 

Issue eight 

Autumn 2011

Chairman’s Note 

Welcome to the November 2011 edition of the PKF International 

Tax Alert (ITA), an online publication that summarises the latest 

key tax changes from selected countries around the world. In 

this eighth edition, there are contributions from PKF member 

firms’ tax experts in 26 countries. 

The ITA is issued three times per year and can be downloaded 

from the PKF International website at www.pkf.com 

Jon Hills, Chairman 

PKF International Tax Committee 

News in Brief 3 

Austria 4 

Dr Thomas Ausserlechner provides a quick summary 

of the latest changes 

Australia 5 

Lance Cunningham looks at four topical issues 

including carbons emissions pricing 

Belgium 9 

Stefan Creemers explains the changes to non-resident 

tax liability 

Canada 10 

Bill Macaulay explains the new treaty developments 

plus inbound and outbound investment changes 

Chile 13 

Antonio Melys Alvarez sets out the new simplified 

procedure and exemption from administrative duties 

for foreign investors 

Cyprus 14 

Nicholas Stavrinides updates on new tax treaties 

Germany 15 

PKF Deutschland introduces the new double-taxation 

treaty between Germany and Switzerland 

Ghana 16 

Emmanuel Afoakwah highlights the tax proposals 

in 2011 fiscal year budget 

Hungary 17 

Vadkerti Krisztián reports on regulated investment 

companies, a new corporate entity 

India 18 

S Santhanakrishnan explains the Indian 

Transfer Pricing rules 

Ireland 20 

Sarah Murphy outlines the changes to the 

Relevant Contracts Tax 

Kenya 21 

Martin Kisuu summarises the changes to Kenya’s 

VAT law 

Lebanon 23 

Elie Chartouni explains the modernization of the law 

for offshore companies 

1 // PKF International Tax Alert All Regions 

Issue 8 November 2011

Malaysia 26 

Lee Yiing Ting summarises the latest tax changes 

including the introduction of ‘designated areas’ 

Netherlands 28 

Jan Roeland explains the Government’s 2012 

Tax Proposals 

Pakistan 31 

Malik Haroon Ahmad summarises changes to 

income, sales, federal excise duty, customs and 

capital value taxes 

Paraguay 33 

Silvia Raquel Aguero promotes the country’s 

tax benefits 

Romania 34 

Carmen Mataragiu explains the recent changes to 

VAT and income tax 

Slovak Republic 36 

Richard Budd outlines the recent amendments to tax 

and business legislation 

Slovenia 38 

Tomaž Lajnšček sets out the 2011 tax changes 

South Africa 39 

Eugene du Plessis explains the proposed tax 

amendments to the Taxation Laws Amendment Bill 

(the TLAB) issued in June 2011 

Spain 42 

Aischa Laarbi outlines recent changes to corporate tax, 

wealth tax and VAT 

Uganda 44 

Albert Beine describes the Ugandan Transfer Pricing Rules 

UK 46 

Jon Hills reviews the latest UK R & D developments 

USA 48 

Leo Parmegiani updates on Reporting of Specified 

Foreign Assets 

USA 50 

Brent Lipschultz explains the new IRS Voluntary 

Compliance Program (VCP) 

USA 51 

Harold Adrion and Jon Hills identify the problems 

of US LLCs for non-US investors 



News in Brief 

New Double Taxation Treaty 

between Germany and Turkey 

The Federal Republic of Germany and the Republic of Turkey 

signed a Double Taxation on Income and Prevention of 

Smuggling Tax Agreement in Berlin on 19 September 2011. 

This is intended to make both countries more attractive to 

investors. 

It was agreed to implement the provisions of the Agreement 

from 1 January 2011. Turkey has now concluded Double 

Taxation Agreements with 82 countries of which 74 are in 

force. 

For more information please contact: 

Selman Uysal 

Sun Bagimsiz Dis Denetim Yeminli 

T: +90 232 466 01 22 

E: selmanuysal@pkfizmir.com 

IRS Rules on Creditability of 

UK Special Remittance Tax 

The IRS issued Revenue Ruling 2011-19 ruling that US 

individuals resident in the United Kingdom who elect to pay 

the £30,000 levy for non-domiciliaries may claim a foreign 

tax credit for that amount. The IRS determined that the 

remittance basis charge (RBC) applied to long-term nondomiciliaries 

- those resident in the UK for seven of the last 

nine years but who continue to claim foreign domicile - falls 

under the code section 901 definition of a creditable foreign 

income tax. 

Under changes introduced by the UK in 2008, long-term 

non-domiciliaries must pay the additional charge to remain 

within the UK remittance-based tax regime. Under the 

remittance tax regime, a non-dom is not taxed on foreignsource 

income that remains offshore but will instead be 

taxed only on income remitted to the UK and on UK - 

source income. 

Uncertainty surrounding the treatment of the tax under US 

rules raised the specter of double taxation for US nationals 

who claimed U.K. non-dom status. Because of the unique 

nature of the charge, it was not clear whether it would be 

creditable under reg. section 901-2(a)(1), which requires 

that "the predominant character of that tax is that of an 

income tax in the US sense." 

In its analysis, the IRS determined that the remittance basis 

charge and remittance basis taxation are a single tax, which 

it terms the long-term non-domiciliary levy, for section 901 

purposes. 



Austria Update 

Publication of financial statements 

In accordance with European Union legislation, corporate 

enterprises have to publish their financial statements within 

nine months after balance sheet date. If they miss this date, 

the entities face a fine of at least EUR 1,400/4,200/8,400 

(depending on the size of the corporation). Foreign 

corporations that support an Austrian subsidiary registered 

in the commercial register are also required to publish their 

foreign financial statements in German language. 

Tax treatment of American S 

Corporations by Austrian fiscal 

authorities is unlawful 

Under American civil law, an S corporation is considered 

a corporate entity but for tax purposes it is deemed a passthrough 

entity. Therefore, S corporations combine the 

benefits of transparent taxation with the advantages of 

limited liability on corporate level. Austrian fiscal authorities 

regard these advantages to be excessive and seek to 

create a right of taxation via profit allocation leading to 

double taxation for Austrian investors. 

Increase of R&D Bonus 

Austrian fiscal authorities refund 10% (8% by 31 Dec 2010) 

of research & development costs according to Frascati 

definition of the OECD. 

Interest from Group acquisitions 

Interest arising from the acquisition of subsidiaries within the 

group is no longer deductible after 31 December 2010. 


Dr Thomas Ausserlechner 

T: +43 1 512 8780 

E: Thomas.ausserlechner@pkf.at 

W: www.pkf.at 



Australian Update 

Lance Cunningham looks at four topical issues: 

■ Carbon Emissions Pricing Scheme 

■ New Mining and Petroleum Taxes 

■ Tax Exemption for Non-residents Managed Funds 

■ New Tax Incentives for Research and Development 

1.Carbon Emissions Pricing 

Scheme 

In response to the threat of climate change caused by the 

human-generated greenhouse gas emissions, the Australian 

Government has introduced a carbon emissions pricing 

scheme to commence on 1 July 2012. Australia will be 

joining a number of other countries that have introduced 

emissions trading schemes (ETS), including the European 

Union, New Zealand, Switzerland and a number of States in 

the United States. Japan and South Korea are also piloting 

an ETS. A straight carbon tax has also been introduced in 

a number of other countries. 

The scheme will have two components. Firstly, a price will 

be set for the emissions of carbon from large emitting 

installations such as electricity producers, steel makers and 

aluminium smelters. This aspect of the scheme will target 

Australia's top 500 polluters, generally being any business 

responsible for direct greenhouse gas emissions of more 

than 25,000 tonnes of carbon (or carbon equivalent) annually. 

The second component relates to the use of fuels for heavy 

road transport, domestic aviation, marine and rail transport 

and fuels used for off road use. For these fuels, the fuel tax 

credits and excise schemes will be amended to give the 

same economic effect to these fuels as the imposition of 

the carbon tax/ETS. 

Carbon Tax/ETS for large emitters 

For the first two years the scheme will operate like a tax 

with the Government dictating the price for greenhouse gas 

emission permits. From 1 July 2015, it is proposed the 

scheme will become a cap-and-trade emissions trading 

scheme with the Government setting the cap on the amount 

of greenhouse gas that can be emitted by Australian emitters 

and the price of permits being set by the market (with a 

price floor and ceiling set by the Government). 

The initial price of permits will be $23 per tonne of carbon 

(or equivalent of other green house gases) increasing to 

$24.15 on 1 July 2013 and $25.40 on 1 July 2014. 

Some trade exposed industries will be given free permits 

to ensure they are not adversely affected by international 

competition. After 1 July 2015 some permits will continue 

to be provided free by the Government to trade exposed 

industries until a more extensive international ETS is 

introduced. 

Transport fuel taxes 

The carbon tax / ETS scheme does not apply to the use of 

transport fuels but a broadly equivalent cost will be imposed 

in the form of selective reductions of fuel tax credits and 

excise changes to fuels for domestic aviation, marine and 

rail transport and the use of transport type fuels used for 

off-road use (e.g. diesel generators on a mine site). From 

1 July 2014, the Government also intends to extend the 

fuel tax credit reductions to heavy on-road vehicles. 

There will be no additional tax on fuel used by households 

or private and light commercial vehicles. Small business, 

agriculture, forestry and fishing industries will also not have 

any carbon price added to the cost of off-road use of fuel. 

Renewable fuels and non-combustible fuels used for 

lubrication will not bear a carbon price. 

The concessions 

Although end consumers will not be directly affected by 

this scheme it is likely to result in higher prices for certain 

products and services. To offset these higher prices, and to 

make it more politically palatable, the scheme also contains 

tax reductions and welfare increases for individuals. There 

will also be various grants and assistance packages for 

manufacturers, coal and steel producers and the 

agricultural industry. 

2.New Mining and 

Petroleum Taxes 

The Australian Government proposes to introduce a Mineral 

Resource Rent Tax (MRRT) on profits made on mining of coal 

and iron ore in Australia. It will also extend the operation of 



Australia Update continued 

the existing Petroleum Resource Rent Tax (PRRT) to include 

all petroleum projects on Australian territory, either at sea or 

on land. This will be associated with a general reduction in 

the income tax rate for companies. These changes are 

proposed to start from 1 July 2012. 

Australia is experiencing a two-speed economy with industries 

associated with resource extraction enjoying boom times 

while other industries are feeling some of the contraction 

that most of the rest of the world is experiencing following 

the global financial crisis. The proposed reduction in the 

general company tax rate and the imposition of the resources 

rent taxes may help to spread some of the advantages of 

the resources boom to the rest of the Australian Economy. 

The report to Government that recommended this approach 

suggested a wide ranging resources rent tax with a reduction 

in the company income tax rate from 30% to 25%. However, 

due to various political problems and lobbying by vested 

interests, the resource rent tax has been limited to a few 

high value commodities such as coal, iron ore, petroleum 

and natural gas. The reduction in company tax rate has also 

been limited to a 1% decrease from 30% to 29% (with a 

promise to consider further reductions in the future). 

Mining Resources Rent Tax 

This tax will apply from 1 July 2012 to iron ore and coal 

producers with MRRT profits of at least $50 million per 

annum. Smaller producers are exempt from MRRT but they 

will have compliance and record keeping requirements. 

The MRRT is a tax on the value of the extracted iron ore or 

coal at the taxing point, which is generally when the taxable 

resource leaves the 'run-of-mine' stockpile, less the costs 

incurred in getting the commodity to the taxing point (known 

as upstream costs). This calculation is designed to identify 

the value of the resource as it leaves the ground and before 

further processing occurs. The MRRT profit is further reduced 

by an allowance for any State or Territory Government 

royalties paid on the extracted resource and also an 

allowance for past year losses on the project. The result 

is the MRRT profit. 

The rate of tax applied to the MRRT profit is 30%. However, 

this is decreased by a 25% extraction factor, which reduces 

the effective tax rate to 22.5%. The extraction factor is an 

approximation of the value of the miner's specialist skills 

used to extract the resources and bring it to the taxing point. 

The liability to tax will commence at profits of $50 million but 

with a phase in for profits up to $100 million so the full tax is 

only payable once profits exceed $100million. 

Pre-May 2010 Projects 

The MRRT only applies to new projects that start after 

1 May 2010 (the date of the Government's announcement 

for a resource rent tax) and to the increase in value of existing 

projects as at 1 May 2010. Taxpayers with projects that are 

in existence at 1 May 2010 have to identify the value of their 

project's starting base. The starting base is the value of the 

project as at 1 May 2010 plus certain capital expenditure 

incurred between 2 July 2010 and 30 June 2012 (the start 

date for the MRRT). The starting base can be written off 

against the MRRT profits over time. 

Petroleum Resource Rent Tax 

The PRRT currently applies only to certain offshore petroleum 

projects but from 1 July 2012 it will also apply to all offshore 

and onshore oil, gas and coal seam methane projects, 

including the North West Shelf project but excluding projects 

in the Timor Sea joint development area. There is no 

threshold before PRRT applies, unlike the MRRT with its 

$50M threshold. 

The PRRT will continue to apply at the rate of 40% of PRRT 

assessable profits. These will generally be calculated in 

accordance with the prevailing PRRT rules with some 

adjustments including: 

■ Projects transitioning into the PRRT may apply the 

starting base for their project to be written off against 

PRRT profits; and 

■ All royalties paid to State and Territory Governments 

will be credited against PRRT. 

3.Tax Exemption for 

Non-residents Managed Funds 

The Australian Government has announced concessions 

that will exempt some non-residents with managed funds 

from Australian tax. 

These concessions are to apply to foreign investment funds 




that fit the definition of an IMR (Investment Manager 

Regime) foreign fund, which generally requires the fund to: 

■ not be an Australian resident for income tax purposes 

■ be recognised under a foreign law as a collective 

investment vehicle 

■ not have its day to day control reside in the members 

of the fund 

■ not carry on a trading business in Australia i.e. all of its 

Australian sourced income is passive investment income 

■ be widely held and not closely held. 

IMR income 

These provisions apply where the IMR foreign fund has IMR 

income or losses. IMR income comprises returns or gains 

deemed to have an Australian source in accordance with the 

relevant articles of the double tax agreements (e.g. business 

profits article and agency article) derived from financial 

arrangements, other then: 

■ debt or equity interests issued by an entity (including 

derivatives over those interests) where the fund holds 

more than 10% or more of the entity 

■ derivatives issued in relation to Australian real property 

(and indirect interests in Australian real property) 

■ arrangements where the fund can vote at a meeting of 

the issuer, participate in operational decisions of the 

issuer, or deal with the assets of the issuer. 

Fin 48 Amendments 

There are two related sets of concessions in these proposed 

amendments. The first set of rules are designed to alleviate 

problems that some IMR foreign funds had in complying with 

the United States Fin 48 rules over the last few years because 

of uncertainties in applying Australian tax laws to their 

investments. These amendments will apply to the 2010/2011 

and previous years and will provide that the IMR fund income 

and gains made by the IMR foreign funds will not be 

assessable income of the fund provided that the fund: 

■ has not lodged an Australian income tax return in 

relation to any income year 

■ has not received an assessment of tax (or had its 

beneficiaries assessed if the fund was a trust) prior to 

18 December 2010 

■ has not been notified by the Commissioner of an 

intention for the fund to be audited (prior to 

18 December 2010). 

Investment Manager Regime - Conduit Income 

The second set of concessions applies to the 2010/2011 

and subsequent years. They will operate to exclude from 

Australian income tax all IMR income and losses, as well as 

IMR capital gains and losses, where the IMR fund does not 

have a place of business in Australia but it is treated as having 

a permanent establishment in Australia solely as a result of 

engaging an Australian-based investment manager who 

habitually exercises a general authority to negotiate and 

conclude contracts on behalf of the fund. 

4.New Tax Incentives for 

Research and Development 

The Australian Government has changed the taxation 

incentive regime for companies conducting research and 

development (R&D) activities in Australia. Effective for 

income years commencing from 1 July 2011, the new 

provisions provide an increased level of financial assistance 

to an expanded range of companies. However, the 

legislation defining what is "research and development" 

for tax purposes has been changed considerably. 

Access for foreign companies 

The concession will be expanded to encompass foreign 

companies operating in Australia through a permanent 

establishment. This will bring in foreign companies carrying 

on R&D through a branch in Australia. Foreign ownership of 

the results of the R&D activity is specifically accommodated 

under the new regime. 

From tax deductions to tax credits 

One of the fundamental changes to the R&D tax incentive 

regime involves changing the nature of the tax benefit from 

additional tax deductions to a tax credit. Under the existing 

incentive, companies are generally allowed a 125% tax 

deduction on eligible R&D expenditure with up to 175% tax 

deduction on increased R&D expenditure. 




Under the new credit regime R&D expenditure will become 

non-tax deductible, although subject to a tax credit at either 

the 45% or 40% rate (against the current 30% tax rate). The 

rate of tax credit will depend on whether company group 

turnover is less than $20M (45% credit) or more than $20M 

(40% credit). This equates to 150% and 133% rates of tax 

deductions under the current scheme, hence the increased 

level of headline financial assistance. For companies with less 

than $20M group turnover, the 45% credit is refundable if the 

companies are in a tax loss position. 

Changes to the R&D activities’ eligibility criteria 

The definition of what constitutes R&D for tax purposes 

has been completely overhauled with the introduction of 

new terminology. The previous focus for 'core R&D' on 

'systematic, investigative and experimental activities involving 

innovation or high levels of technical risk' has been replaced 

with 'experimental activities for the purpose of creating new 

knowledge'. While there would appear to be little substantive 

difference in the application of the new terminology, it will be 

in the administrative interpretation where uncertainty is likely 

to be introduced, with the Government flagging the intent 

for a tighter interpretation of eligibility. 

Areas targeted for specific tightening are those where the 

Government considers the activities were part of 'business 

as usual' for certain businesses. Businesses engaged in 

some form of production such as manufacturers and mining 

companies, along with certain computer software 

developments will have to review their R&D claims carefully, 

particularly where the R&D activities themselves produce 

or are directly related to producing goods or services. 


Lance Cunningham 

Director of Taxation - PKF Australia Limited 

T: +61 2 9251 4100 

E: lance.cunningham@pkf.com.au 

W: www.pkf.com.au 



Belgium Update 

Non-resident taxation 

Stefan Creemers explains how the new definition of taxable 

period affects Belgian non-resident tax liability and, in 

particular, executives benefitting from the special tax status. 

Belgium is known for its beneficial special tax status for 

foreign executives who are temporarily assigned to Belgium. 

Even if these executives move (with their family) to Belgium, 

they are deemed to be non-resident taxpayers during the 

full length of their assignment. Under this special tax status, 

they shall only be taxed in Belgium on that part of their 

income that is related to activities physically performed in 

Belgium (“travel exclusion”). Moreover, special tax deductions 

(related to expenses to be borne by the employer) can be 

made, even on a favourable, lump sum basis. 

The year of arrival or departure in Belgium could turn out 

to be even more beneficial. However, this has recently 

changed. To the extent possible, we now advise that a 

Belgian assignment should be set up in such a manner that 

it starts on 1 January or at year end. The end date of the 

Belgian assignment should be set on 31 December or the 

beginning of the calendar year. Planning your assignment 

start date and end date will significantly decrease the tax 

impact of this new measure. Since this new legislation is 

applicable as of income derived during 2010, it might be 

worthwhile to verify whether the necessary tax provisions 

have been made. 

Old legislation : the taxable period in Belgian non-resident 

personal income tax coincides with the (full) calendar year 

prior to the year of assessment. For example, the taxable 

period of income year 2011 is related to assessment year 

2012. There was one exception to this rule. In the case 

where taxable income was only obtained during a time 

period that started after 1 January or ceased before 

31 December, the taxable period coincided with that part 

of the year during which taxable income was obtained. 

■ 

ceased to be obtained prior to 31 December, the taxable 

period ends on that date only if the taxpayer’s tax position 

changes (from resident to non-resident or vice 

versa). 

Impact on Belgian non-resident tax liability 

According to Belgian non-resident tax legislation, 

personalised tax credits (e.g. for dependent children, 

non-working spouse, etc) are only applicable provided that 

the non-resident tax payer disposes of an abode in Belgium 

during the full taxable period (or acquires more than 75% 

of his taxable professional income from Belgian sources). 

An abode is defined as the place where the taxpayer 

resides (with his family), even without this being his 

permanent normal tax residence (special tax status of 

non-resident, see above). 

Consequently, if a non-resident (and in particular a foreign 

executive benefitting from this special status) arrives in or 

departs from Belgium in the course of the taxable period 

and obtains income taxable in Belgium, he will, under the 

new regulation, not be entitled to the personalised tax credits 

because he did not dispose of an abode during the full 

taxable period. Under these specific circumstances, the 

Belgian tax liability will increase (unless the so-called 75% 

rule or double tax treaty provisions can be applied). 


Stefan Creemers 

PKF Belgium 

T: +32 (0)2 242 11 41 

F: +32 (0)2 242 03 45 

E: scr@pkf.be 

New legislation : By way of a Royal Decree (dated 

22 December 2010) Belgian legislation was adapted and 

now indicates that if the taxable income is 

■ obtained only after 1 January, the taxable period starts 

as of that date only if the taxpayer’s tax position 

changed on that date (from resident to non-resident or 

vice versa) 



Canada Update 

New Canadian treaty-based 

withholding rate and benefit forms 

In April 2011, the Canada Revenue Agency (CRA) released 

final versions of declaration forms that should be used by 

non-residents of Canada to provide the CRA and Canadian 

resident payers with information regarding their residency 

status and eligibility for treaty benefits. 

These new forms are important for both Canadian resident 

payers and non-resident payees of interest, dividends, rents, 

royalties, management fees and other similar payments 

which are subject to Part XIII non-resident withholding tax 

in Canada and may be eligible for a reduced withholding 

tax rate under a treaty. The forms can also be used when 

requesting a refund of Part XIII withholding tax, obtaining 

a Regulation 105 withholding tax waiver, requesting a 

certificate of compliance or filing a Canadian tax return for 

a hybrid entity. 

The introduction of these forms resulted from the changes 

in the Fifth Protocol to the Canada-US Tax Treaty. The forms 

are similar to the US Form W-8BEN, Certificate of Foreign 

Status of Beneficial Owner for United States Tax Withholdings. 

■ NR 301 - Declaration of Eligibility for Benefits under a 

Tax Treaty for a Non-Resident Taxpayer (i.e., Individual, 

Corporation or Trust) 

■ 

■ 

NR 302 - Declaration of Eligibility for Benefits under a 

Tax Treaty for a Partnership with Non-Resident Partners 

NR 303 - Declaration of Eligibility for Benefits under a 

Tax Treaty for a Hybrid Entity. 

For the purposes of the forms, a hybrid entity is an entity 

that is considered "fiscally transparent" under the tax laws 

of a country that Canada has a tax treaty with and not 

"fiscally transparent" for Canadian tax purposes. For 

example, a US limited liability company is generally treated 

as a partnership for US tax purposes, but is treated by the 

CRA as a corporation for Canadian tax purposes. 

Additional information and copies of the forms and 

instructions can be obtained from the CRA website. 

Our commentary is available on the Smythe Ratcliffe LLP 

website at http://www.smytheratcliffe.com/pdf/Cross-Border- 

Tax-Update-NR301-302-and-303.pdf. 

Inbound investment into Canada 

US businesses continue to find it difficult to structure their 

new and ongoing ventures in Canada in the wake of the 

Fifth Protocol to the Canada-US Tax Treaty signed in 2007. 

An unlimited liability company (ULC) is a certain type of 

Canadian corporation that can be incorporated in the 

provinces of Nova Scotia, Alberta and British Columbia. 



Canada Update continued 

A ULC is generally treated as a fiscally transparent entity 

for US tax purposes but is taxed as a corporation under 

Canadian rules. ULCs have been very popular with US 

investors seeking a flow-through entity for their tax structure. 

New Article IV(7)(b), however, will generally eliminate the 

treaty benefit to a US resident member of a ULC on a 

cross-border payment from the ULC to the member by 

deeming the member not to be a US resident for treaty 

purposes (and thereby eliminating treaty benefits) where the 

treatment of the amount under US law is not the same as 

its treatment would be if the ULC were not treated as fiscally 

transparent under US law. On a dividend to the US member, 

the loss of the treaty benefit could be as much as a 25% 

versus 5% Canadian withholding tax rate. Solutions may 

include: 

■ Inserting an intervening foreign entity (such as a Dutch 

Co-op or a Luxembourg SARL between Canada and the 

US member). 

■ Using a strategy to increase the paid-up capital for 

Canadian tax purposes that will result in a deemed 

dividend for Canadian tax purposes followed by a return 

of capital distribution to the US member. This will generally 

result in the availability of the applicable treaty-reduced 

rate, 5% in the case of qualifying corporations. 

We recently came across a situation with a structure 

proposed by another advisor, which was to have a US LLC 

be the member of the Canadian ULC. Article IV(6) is a 

favourable rule which gives US members of a fiscally 

transparent entity such as a US LLC or US partnership. As 

a result of the strict wording in Article IV(6), there is a problem 

in obtaining the treaty-reduced rate in a PUC increase strategy 

where the ULC member is an LLC. The US does not recognise 

the PUC increase amount as a taxable amount. As it is a 

disregarded amount, the CRA does not consider the US 

member to have derived the PUC increase amount through 

the LLC for US tax purposes and Canada will apply a 25% 

withholding tax rate to the deemed dividend on the PUC 

increase. In contrast to an LLC needing the help of Article 

IV(6) to get treaty benefits for its members, the CRA will 

generally look through a partnership to give treaty benefits to 

its members. A member of a US partnership will still be able 

to obtain the treaty-based rate on the PUC increase strategy. 

Where partnerships do not work for commercial reasons, the 

Dutch or Luxembourg planning may be appropriate. The 

CRA also considers a Subchapter S Corporation to be able 

to get treaty benefits in its own right without the need to use 

Article IV(6). 

Outbound investment into Canada 

On 19 August 2011, Canada’s Finance Minister introduced 

a long-awaited package of proposed amendments to 

Canada’s foreign affiliate rules, Canada’s tax regime for 

foreign subsidiaries and significant investees of Canadian 

multinational corporations, referred to as the foreign affiliate 

rules. The 200-page package replaces a number of 

controversial amendments proposed in 2004 but never 

enacted. The period for comments from interested parties 

on the current foreign affiliate rules package closes on 

19 October 2011. Given the Government’s majority in the 

House of Commons, it is expected that this package may 

be passed into law within the next few months. Some of 

the changes will have retroactive effect. The proposed rules 

offer some simplifications over the 2004 proposals but apply 

back to 2004 or earlier with some modifications to the rules 

as they will apply going forward. The coming-into-force rules 

are complicated as a result of the transitional rules and the 

ability to make elections to have the rules apply to 2004 and 

prior years. 

The 2011 package includes revisions to the foreign affiliate 

reorganisation and distribution rules originally proposed on 

27 February 2004. It also includes new proposals in place 

of the proposals that suspended certain gains from the sale 

of shares and other assets of foreign affiliates for the purpose 

of the surplus accounting rules. 

In its December 2008 report to the Minister of Finance, the 

Advisory Panel on Canada’s System of International Taxation 

recommended fundamental changes to Canada’s system of 

international taxation, particularly in respect of its exemption 

system for foreign source business income earned by foreign 

affiliates. In its covering Release, Finance Canada indicated 

that, at this time, the priority is to encourage countries to 

enter into Tax Information Exchange Agreements with Canada 

and to provide exempt surplus treatment as an incentive to 

those which choose to do so. 

The 19 August 2011 proposals contain the following 

components: 

■ Hybrid surplus – a new surplus account to capture 

gains from the sale of foreign affiliate shares 

■ Upstream loans – a rule to protect the integrity of the 

hybrid and taxable surplus regimes by discouraging 

transactions designed to avoid taxation of taxable 



Canada Update continued 

■ 

■ 

■ 

■ 

■ 

■ 

dividends through the use of loans from foreign affiliates 

to their Canadian shareholders 

Reorganisations – rules to: 

■ Allow more generous foreign accrual property income 

(FAPI) rollover treatment of asset dispositions by a 

foreign affiliate in the context of mergers and liquidations 

by, for example, allowing all types of property, not just 

capital property, to qualify for rollover treatment; and 

■ Prevent the duplication of losses on certain share-forshare 

transactions 

Return of capital – rules to allow more generous and 

simplified treatment of distributions from the capital of a 

foreign affiliate by allowing taxpayers to elect to have the 

full amount of their cost of the shares be returned before 

any distributions become taxable 

Surplus reclassification – a rule to reclassify certain 

gains from business asset sales from exempt to taxable 

surplus in situations where a taxpayer forces the 

disposition of such an asset for the primary purpose 

of creating exempt surplus 

Stop-loss rules – amendments to: 

■ Provide relief from loss denial rules that apply on the 

disposition of shares of a foreign affiliate by allowing 

a portion of such a loss to the extent the taxpayer 

realises a foreign exchange gain on a related financial 

instrument 

■ Ensure that certain loss denial rules do not apply in 

the computation of foreign affiliate surplus balances 

and apply properly in the context of foreign accrual 

property losses 

FAPI capital losses – new rules to align the FAPI system 

with domestic rules by providing that capital losses can 

only be deducted against capital gains 

Various other technical changes. 

The Agreement between Canada and the Republic of Turkey 

for the avoidance of double taxation and the prevention of 

fiscal evasion with respect to taxes on income and on capital 

entered into force on 4 May 2011. The Agreement was 

signed on 14 July 2009. In accordance with Article 28 of the 

Agreement, its provisions have effect in Canada: in respect 

of withholding taxes, on amounts paid or credited to 

non-residents on or after 1 January 2012; and in respect 

of other taxes, for taxation years beginning on or after 

1 January 2012. 

Tax Information Exchange Agreements with the following 

countries have either been signed or entered into force in 

2011: St Vincent and the Grenadines; Costa Rica; 

Bermuda, Cayman Islands; Antigua and Barbuda; Grenada; 

Montserrat; Uruguay; Guernsey; Isle of Man; Jersey; 

Netherlands in respect of the Netherlands Antilles. 


Bill Macaulay 

Tax Partner 

Smythe Ratcliffe LLP, Chartered Accountants 

Vancouver, BC, Canada 

T: +1 604 694 7536 

E: bmacaulay@smytheratcliffe.com 

Treaty developments 

Negotiations to update the income tax treaty between 

Canada and the United Kingdom commenced the week 

of 3 October 2011. 

Negotiations for an income tax treaty between the 

Government of Canada and the Government of the Hong 

Kong Special Administrative Region of the People's 

Republic of China commenced the week of 27 June 2011. 



Chile Update 

New simplified procedure and 

exemption from administrative 

duties for foreign investors 

According to Resolution No. 36 of 2011 of the IRS, 

investors without domicile or residence in Chile including, 

under certain conditions, those taxpayers domiciled, 

resident or incorporated in countries or territories that are 

considered tax havens or preferential tax regimes, can get 

their tax identity number in a simplified procedure and be 

released from obligations to give notice of the start up of 

activities, keep accounting records and submit an annual 

income tax return derived from capital or operations 

indicated below, when operating through institutions 

operating in Chile as their "agents responsible for tax 

purposes in Chile”. 

To this end, the Chilean source income should come only 

from certain investments or operations pointed out in 

Resolution No. 36, such as the purchases and sales of 

shares of publicly traded corporations, investment in 

derivative instruments (known as forwards, futures, swaps), 

investments in fixed income instruments, instruments of 

financial intermediation, in mutual funds shares, in 

investment funds shares and others. 

Any interested party may request the IRS to consider other 

operations not included in Resolution No.36. 

The "officials responsible for tax purposes in Chile" or simply 

"agents" are, among others, the banking institutions operating 

in Chile, stockbrokers, securities dealers, the overall fund 

management companies, mutual fund administrators and 

administrators of public funds who areestablished in the 

country. 


Antonio Melys 

Tax Division Director 

PKF Chile Auditores Consultores Ltda 

T: +56 2 650 43 00 

E: amelys@pkfchile 



Cyprus Update 

Tax treaty update 

Cyprus has concluded three new agreements – with 

Denmark, Slovenie and United Arab Emirates. 

1.Cyprus - Denmark 

The new tax treaty replacing the old 1981 treaty will enter 

into force from the 1st January 2012. In the new treaty, 

there is no withholding tax on income from interest and 

royalties, as well as on dividend, assuming a holding of 

10% for a minimum shareholder period of 12 months. 

2.Cyprus - Slovenia 

The new tax treaty replacing the old 1985 Yugoslavia treaty 

will enter into force from the 1st January 2012. In the new 

treaty, there is a 5% withholding tax on dividend, interest 

and royalties income. 

The special contribution for the 

defence in republic law 

■ 

The rate of defence tax on interest has increased from 

10% to 15%. 


Nicholas Stavrinides 

Director 

PKF Savvides & Co Ltd 

T: +357 25 868 000 

E: nicholas.s@pkf.com.cy 

3.Cyprus - United Arab Emirates 

A double tax treaty has been signed and will enter into 

force from the 1st January 2012. In the treaty, there is no 

withholding tax on dividend, interest and royalties income. 

Changes in Cyprus tax legislation 

The income tax law 

■ 

■ 

A new income tax rate of 35% is introduced for individuals 

with taxable income in excess of EUR60,000, effective 

from the tax year 2011. 

50% exemption will be given to previously non-Cypriot 

tax residents for employment in Cyprus if the income 

from employment exceeds EUR100,000. The exemption 

is given for five years starting from 1st January 2012. 

The exemption applies irrespective of nationality (i.e. to 

Cypriots and non-Cypriots). 



Germany Update 

New double-taxation treaty 

between Germany and 

Switzerland 

The finance ministers of Germany and Switzerland have 

reached an agreement on a new double-taxation treaty 

that resolves open questions for the taxation of capital and 

investment income which have existed for decades. The 

goal was to reach fairness in taxation, especially for German 

tax payers. 

Both countries are satisfied with the outcome of the 

negotiations. The privacy protection for Swiss banks 

remains and the German tax claim is warranted. The 

regulations of the OECD-model convention for the 

exchange of information’s are implied. 

With this treaty the bordering counties also try to diminish 

the distortion of competition. German citizens should no 

longer be prevented to open a bank account in Swiss 

banks, but at the same time tax evasion should no longer 

be an element of the investment for Germans. 

However the most important parts of the new doubletaxation 

treaty are the taxation for past and future capital 

and investment income in Switzerland. 

People who had money on deposit in Switzerland on 

31 December 2010 have to make a single payment to 

satisfy their tax responsibilities for the past years. 

The tax rate will be 19% - 34%. There are different 

components which determine the exact tax rate. This will 

be done with the help of a calculation formula. The bank 

will collect the money and will transfer the money to the 

German authority. There will be no further prosecution. 

2 billion Swiss francs in guaranteed money. This money will 

be absorbed with incoming tax payments of German taxpayers 

and will be repaid to the credit institutes. 

For future capital and investment income there will be a 

flat-rate withholding tax in amount of 26.375%, which 

equals the German flat-rate withholding tax for capital and 

investment income. Again the Swiss bank will retain the tax 

and transfer the money to Germany. 

Another not inconsiderable part of the double-taxation 

accord is the simplification of requests for further information 

on possible investors. The only requirement will be the name 

and a plausible reason for the request. For the first two 

years after the treaty comes into force, each country is 

allowed to make 750 to 999 requests. After the two year 

span, this margin will be adjusted. 

There is still no permission to perform ‘fishing expeditions’, 

which means that Germany cannot select random people 

and request further information about possible deposits. 

The treaty is still awaiting the approval of both parliaments 

but there few doubts that the new double taxation treaty 

will be approved. 

After the approval by both parliaments, the treaty will come 

into force on 1 January of the following year. It is expected 

that this approval will come in 2012 so that the double 

taxation treaty will come in to force on 1 January 2013. 


PKF Deutschland GmbH 

Wirtschaftsprüfungsgesellschaft 

There will also be another option for the investor. He can 

voluntarily reveal all his deposits. In this case, the Swiss bank 

will send the balance of accounts for each 31 December 

from 2002 up to the day that the agreement comes in to 

force. These assets will be taxed. 

To save the minimum German income for this past taxation 

and in recognition of their willingness to co-operate with 

agreement, Swiss credit institutes pledge to contribute 



Ghana Update 

Highlights of the tax proposals in 2011 fiscal year budget. 

Domestic Tax (Direct taxes) 

Withholding Tax 

■ 

■ 

Threshold is now GH¢ 500 instead of GH¢50 

Foreign suppliers of service now at 15% instead of 5%. 

Gift Tax rate increased from 5% to 15% so as to be in line 

with the Capital Gains tax rate. 

National Fiscal Stabilisation Levy which was introduced in 

mid 2009 intended to last for 18 months is now extended 

for an additional year to end 2011. 

Institutions with tax-free status due to their non-profit 

making objectives are now to have their incomes from 

commercial activities subjected to tax. The Commissioner- 

General of the GRA is to initiate an amendment of the tax 

law to enable Government tax all commercial activities 

undertaken by such institutions. 

Taxation of Professionals 

■ A special desk in the Domestic Tax Division of GRA is 

set up from January 2011 to monitor compliance of 

professionals in their tax payment. These include 

accountants, surveyors, building contractors, medical 

doctors, lawyers, economists, bankers, insurers and 

consultants. 

Mining Royalties to be paid monthly instead of quarterly 

All NGOs and charitable organisations are to re-apply 

for tax exempt status on periodic basis with their audited 

financial statements and a certified record of their activities 

by the appropriate sector ministry. 

The following items, which were zero-rated, have been 

re-classified as VAT exempt items: 

a) Locally produced pharmaceuticals 

b) Locally produced textbooks and exercise books 

c) Locally manufactured agricultural and machinery and 

other agricultural implements and tools. 

Haulage and vehicle hiring are now taxable under the VAT 

Law. 

Communication Service Tax 

Communication Service Tax is extended to all companies 

and persons across the communication industry and now 

includes the following: 

a) Public Corporate Data Operators 

b) Providers of Radio(FM) broadcasting services 

c) Providers of Free-to-air television services. 


Emmanuel Afoakwah 

Tax Manager 

PKF Ghana 

T: +233 21 221 266 

M: +233 (0)20 8191932 

E:eafoakwah@pkfghana.com 

Domestic Tax (Indirect taxes) 

VAT 

The threshold is increased from the current GH¢ 10,000 to 

GH¢ 90,000 for both goods and services. VAT taxpayers 

whose annual business turnover fall between GH¢ 10,000 

and GH¢90,000 will now operate VAT Flat Rate Scheme, 

charging a flat rate of 3%. 



Hungary Update 

Introduction of new corporate entity: the regulated 

investment company. 

Regulated investment companies 

A new type of corporation has become available in Hungary, 

the regulated investment company (RIC). This new company 

is largely similar to the real estate investment trusts that exist 

in several other countries. RICs may also invest through their 

‘special purpose entities’ (SPE) into real property projects. 

Both RICs and SPEs are exempted from corporate income 

tax and local business tax but they are subject to a 2% 

discount rate of transfer duty. The profits are taxed at the 

shareholders of the RICs. 

The RIC is a publicly held company limited by shares and 

must be engaged in one of the following activities: 

■ Sale of real property 

■ Renting and operating of real property 

■ Management of real property 

■ Holding activities. 

There are certain limitations to the owners of a RIC: 

■ No more than 10% of the shares or voting rights is held 

by insurance companies or credit institutions 

■ Must have a 25% ratio of public ownership on a 

regulated market 

■ At least 25% of the shares must be held by shareholders 

owning less than 5% of the RIC. 

that have not been paid is not in line with the VAT Directive. 

The relevant legislation has been changed and taxpayers 

are now allowed to reclaim such VAT. All related penalties 

from the previous periods can be reclaimed as well. 

The Government has revealed the main features of the tax 

changes effective from 2012: 

■ The standard rate of VAT is expected to be increased 

from 25% to 27% 

■ The current rate of 20.32% personal income tax will be 

decreased to 16% up to a monthly tax base of 202,000 

HUF (approx. 700 EUR), and to 18.16% above this limit. 

At the same time, a tax credit will no longer be available 

to ensure the PIT exemption for the minimum wage 

■ Reverse VAT will be introduced in agriculture 

■ The minimum wage will be increased to 92,000 HUF 

(approx. 320 EUR) 

■ The excise duty on cigarettes, alcohol and diesel will be 

increased from 1 November 2011 

■ The game tax will be significantly increased from 

1 November 2011. 


Vadkerti Krisztián 

PKF Hungary 

T: +36 1 391 4220 

F: +36 1 391 4221 

E: vadkerti.krisztian@pkf.hu 

The other conditions for RICs include: 

■ At least 90% of the profits must be paid to the shareholders 

as dividend 

■ Its initial capital is not less than 10 billion HUF 

■ Its real property assets must be revaluated at least 

quarterly 

■ Can only own shares of other RICs or SPEs 

■ There are certain limitations to the asset and liability 

structure. 

Other recent changes 

The European Court of Justice ruled that the Hungarian 

legislation which did not allow the reclaim of VAT on invoices 



India Update 

An introduction to Transfer 

Pricing Law in India 

The law on Transfer Pricing has evolved in India as a logical 

consequence of the exponential increase in international 

transactions post globalisation. The participation of multinational 

groups in the economic activities of India has given 

rise to complex issues, particularly so when it involves 

transactions between two enterprises belonging to the 

same multinational group. 

The Finance Act 2001 introduced an entire gamut of 

provisions dealing with Transfer Pricing (TP) which came 

into force on 1 April 2002 and are applicable to the 

assessment year 2002–03 and subsequent years. 

The law essentially mandates arm's length pricing of 

international transactions between associated enterprises, 

specifies the methods for determining the arm's length 

price (ALP), details the documentation requirements for 

companies entering into international transactions, and 

stipulates penalties for non-compliance. 

Key features of Transfer Pricing Regulations 

The Transfer Pricing law in India requires that pricing of 

international transactions between two Associated 

Enterprises (AEs), either or both of whom are non-residents, 

should be at arm's length, a detailed definition of which has 

been given in the law. The definition is given based on 

certain objective parameters to assess the relationship 

between two entities and include: 

■ Share Capital Criterion: When one AE holds 26% or 

more of share capital in the other or when a third party 

holds 26% or more share capital in both AEs 

■ Loan-based Criterion: Loan advanced by one AE 

constitutes 51% or more of total assets of another AE 

■ Management Control Criterion: More than half of the 

directors or one or more executive directors are actually 

appointed by one AE in the other AE. 

If the TP provisions are applicable, the ALP of the international 

transaction(s) has to be determined. The pricing at 

arm's length would need to be established by internationally 

accepted transfer pricing methods including: 

1. Comparable Uncontrolled Price Method (CUP) 

2. Resale Price Method (RPM) 

3. Cost Plus Method (CPM) 

4. Profit Split Method (PSM) 

5. Transactional Net Margin Method (TNMM) 

To date, judicial pronouncements indicate a bias towards 

the CUP method. 



India Update continued 

Safe harbour provisions 

'Safe harbour' refers to circumstances in which the tax 

authorities will accept the transfer price declared by the 

assessee. The principle is that, where the application of the 

most appropriate method results in more than one price, 

a price which differs from the average of such prices within 

a permissible range may be taken as the ALP. The allowable 

variation will be such percentage as may be notified by the 

Central Government. As of now, no percentage has been 

notified. 

Penalties for non-compliance 

Assessees with international transactions of the value 

exceeding Rs.1 crore are statutorily required to maintain 

and submit the prescribed documents with regard to the 

international transactions entered into by them. A report 

from a Chartered Accountant, as prescribed in Form 3CEB, 

also needs to be provided before the due date for filing the 

return of income. 

Non-compliance with these statutory requirements attracts 

a levy of penalties under the law. 

Nature of Default 

Failure to maintain prescribed 

information / documents 

Penalty Prescribed 

2% of value of international 

transaction 

Advance Pricing Agreement (APA) 

An APA is an arrangement between the taxpayer and the 

taxing authority whereby the two parties agree on the transfer 

pricing policy for specified transactions of the taxpayer over 

a given period of time. Such a ruling would be binding on 

the taxpayer and the tax authorities. The scheme is intended 

to bring certainty in the tax liability of the transacting parties 

but, as the concept is not yet in the current law, the 

provisions are still at the conceptual stage. 

In summary, Transfer Pricing Law in India is in an evolving 

stage and, considering the practical issues, there is 

considerable scope for litigation in this area. Hopefully, 

in the near future, the law would become streamlined by 

means of amendments to remove the difficulties in 

application and also by way of judicial pronouncements. 


S. Santhanakrishnan 

PKF Sridhar & Santhanam 

T: +91 44 2811 2895 

E: sk@pkfindia.in 

W: www.pkfindia.in 

Failure to provide information / 

documents during audit 

In case of adjustment to 

taxpayer’s income by AO 

consequent to determination 

of ALP and assessee not being 

able to explain the genuineness 

(leading to inference of 

concealment) 

Failure to provide certificate 

in Form 3CEB 

2% of value of international 

transaction 

100 – 300% of the tax 

on adjustment amount 

Rs 1,000,000 

The penalty can be waived if the assessee can prove that 

the default is due to a reasonable cause. 



Ireland Update 

Domestic Tax Changes 

Relevant Contracts Tax 

Relevant Contracts Tax (RCT) applies to payments made 

by a principal to a subcontractor under a “relevant contract”. 

A “relevant contract”is a contract to carry out relevant 

operations in the construction, forestry or meat processing 

industry. RCT applies to both resident and non-resident 

contractors operating in the construction, forestry or meat 

processing industry in Ireland. 

Tax of 35% is deducted by a principal contractor on 

payments to a subcontractor unless the principal contractor 

has received a relevant payments card for the subcontractor. 

Where tax is deducted, the principal contractor gives the 

subcontractor a certificate, which the subcontractor uses 

to claim credit for, or repayment of, the tax withheld. 

A new electronic system for RCT is being introduced by 

the Irish Revenue Commissioners on 1st January 2012. All 

principals in the construction, forestry and meat processing 

industry will be obliged to submit information, data and 

payments to Revenue electronically. 

From 1st January 2012, all relevant contracts, including 

those that are ongoing at the end of December 2011, must 

be registered online. Principals must notify all payments on 

relevant contracts to the Irish Revenue Commissioners 

online from 1st January 2012. It will not be possible to notify 

a payment on-line unless the contract has been registered. 

Each time a payment is to be made by a principal to a 

subcontractor, the principal must notify the Irish Revenue 

Commissioners (by electronic means) of their intention to 

make a payment and the gross amount of the payment. 

The Irish Revenue Commissioners will set out the rate of 

tax and the amount to be deducted from the payment. 

This is a significant change from the previous RCT system 

when a principal paid a subcontractor with the use of the 

annual Relevant Payments Card. 

Levy on Pension Schemes 

An annual levy of 0.6% on the market value of assets in 

pension schemes has been introduced. The levy is charged 

at 0.6% on the aggregate of the market value of the assets 

of the pension scheme at the 30th June in each year 

(alternative valuation dates may apply depending on the 

particular pension scheme). The levy is payable to the Irish 

Revenue Commissioners on the 25th September in each year. 


Catherine McGovern 

PKF Tax Consulting Ltd 

E: c.mcgovern@pkf.ie 

The new system will have three tax deduction rates: 0%, 20% 

and 35%. Subcontractors who satisfy the current criteria for 

a C2 card (tax affairs up to date) will qualify for the 0% rate. 

In certain cases, a subcontractor will be pay the 35% rate. 

These are likely to be subcontractors who are not registered 

with the Irish Revenue Commissioners or where there are 

serious compliance issues to be addressed. All other subcontractors 

will be eligible for the standard 20% rate. 



Kenya Update 

Deemed interest provisions 

The Finance Bill, 2011 which came into effect on 9 June 

2011 introduced Section 16(5) of the Income Tax Act (ITA) 

giving powers to the Commissioner of Income Tax to 

prescribe the form and manner in which deemed interest 

is to be computed. Deemed interest means an amount of 

interest deemed to be payable by a resident person in 

respect of any outstanding loan provided or secured by a 

controlling non-resident or its non-resident associate, where 

such loans have been provided free of interest and if the 

local entity is thinly capitalised. 

Introduction of the deemed interest principle is a move to 

combat tax avoidance schemes by some Multinational 

Enterprises (MNEs) which previously offered loans to their 

subsidiaries at no charge. With the introduction and 

enforcement of the deemed interest principle, thinly 

capitalised companies are now likely to face restriction of 

a higher proportion of their actual interest expense. 

Additionally, the deemed interest will be a disallowable 

expense on such companies and they will have to account 

for withholding tax at the rate of 15% on such expenses. 

A company is thinly capitalised where it is in the control of 

a non-resident person alone or together with four or fewer 

other persons and if the highest amount of all loans held by 

the company at any time during the year of income exceeds 

the greater of three times the sum of the revenue reserves 

and the issued and paid up capital of all classes of shares 

of the company. Thin capitalisation is, however, not 

applicable to banks or financial institutions licensed under 

the Banking Act. For purposes of thin capitalisation, control 

in relation to a body corporate means the power of a 

person to secure, by means of the holding of shares or the 

possession of voting power in or in relation to that or 

another body corporate, or by virtue of powers conferred by 

the Articles of Association or other document regulating that 

or another body corporate, that the affairs of the first 

mentioned body corporate are conducted in accordance 

with the wishes of that person, provided that in the case of 

a body corporate, unless otherwise expressly provided for 

by the Articles of Association or other documents regulating 

it control means the holding of shares or voting power of 

25 % or more. In relation to a partnership, it means the right 

to a share of more than one half of the assets or of more 

than one half of the income of the partnership. 

New VAT law in Kenya 

As part of law reform in Kenya, the Minister of Finance has 

proposed to introduce a new VAT law in Kenya. The Draft 

VAT Bill, 2011 which was released on 26 July 2011, proposes 

to impose the standard rate of 16% VAT on most of the items 

which were previously exempt from VAT or attracted VAT 



Kenya Update continued 

at 0%. This is in a bid to address the huge backlog of VAT 

refund cases that have been a nightmare to the Kenya 

Revenue Authority (KRA). 

The Bill, which is still in its draft stages, has faced 

resistance from various stakeholders who have made 

various submissions to the Minister for consideration and 

implementation into the Bill. It is expected that the Bill will 

undergo further amendments before being presented 

before Parliament for legislation into law. 

Other than increasing the threshold of items attracting VAT, 

other changes being proposed include extinguishing VAT 

remission schemes currently available under the VAT Act, 

expansion of the definition of the word ‘business’ for VAT 

purposes to include any profession, vocation or occupation 

and the requirement to deposit 50% of any tax in dispute 

before a taxpayer can secure audience before a VAT Tribunal 

in case of a VAT dispute with the KRA. In addition to this 

and as a way to curb tax evasion through transfer pricing, 

the Bill provides that the market value of a supply where the 

supply is between related parties, shall be the value for tax 

purposes as opposed to consideration which is currently 

recognized as the value for tax. This provision is likely to be 

faced with difficulty in implementation especially where 

shared services centers and cost contribution agreements 

are in place. It also means VAT will be due even where there 

is no consideration. 

Efforts towards prevention of tax avoidance schemes have 

also been given a boost by the Bill empowering the KRA 

to overturn any scheme or arrangement which has been 

designed solely for the purpose creating a tax benefit and 

which is of no economic substance. Thus investors will 

have to revise their restructuring strategies so as not to be 

construed as tax avoidance schemes. 

In addition to this, the draft law introduces a provision which 

makes it possible for a non-resident supplier who meets 

VAT registration requirements to appoint a tax representative 

in Kenya and at the same time empowers the KRA to 

appoint such a tax representative in Kenya for an overseas 

supplier in the event that the supplier fails to appoint one. 


Martin Kisuu 

Regional Tax Partner 

PKF Eastern Africa 

T: +254 020 427 0000 

F: +254 020 444 7233 

E: mkisuu@ke.pkfea.com 



Lebanon Update 

Modernisation of the law 

number 19 regarding the 

offshore company in Lebanon 

The recent modernisation of the law regulating the offshore 

company in Lebanon has transformed it considerably. 

The offshore company is capable of managing all kinds of 

activities or “economic projects” abroad, with the exception 

of banking, financial activities, and insurance. 

The new offshore company can be used as a holding 

company to manage its foreign affiliates and grant loans to 

foreign companies in which it holds 20% of their capital. 

All of the members of its board of directors may be foreigners 

and its chairman or company representative is exempted 

from the requirement of obtaining a work permit if he is a 

foreigner who does not reside in Lebanon. 

From the fiscal standpoint, the new law radically clarifies the 

scope of taxation and clearly exempts all of the transactions 

that are carried out abroad. 

In this way, the revenues of its subsidiaries and the added 

values realised when they are sold are completely exempt 

from taxes. Payments made to third parties in return for 

services that are rendered abroad are exempted from the 

income tax, as is the remuneration of salaried employees 

who work abroad. 

In addition, the stocks and the shareholders of offshore 

companies are excluded from the scope of succession rights. 

With such a modern, transparent and tax-exempt juridical 

structure, Lebanese offshore companies should experience 

a considerable expansion. 

A) Object of the offshore company 

The offshore companies may not undertake any insurance 

operations whatsoever, nor any operations and activities 

undertaken by banks, financial institutions and all institutions 

subject to the control of the central bank of Lebanon. 

Offshore companies are authorised to carry out exclusively 

the following activities: 

(a) Negotiating and signing contracts and agreements 

concerning operations and transactions conducted abroad 

in relation to assets located abroad or in the free zones 

(b) Managing from Lebanon companies and institutions with 

offshore activities, exporting professional, administrative and 

regulatory services as well as all kinds of information services 

and IT programs to companies located abroad and upon 

the latter’s request 

(c) Carrying out tripartite or multipartite foreign trade 

transactions abroad. For this purpose, offshore companies 

may negotiate and sign contracts, ship goods and issue 

invoices with regards to activities and transactions 

performed abroad or via the Lebanese free zones. This 

includes the use of the facilities available in the Lebanese 



Lebanon Update continued 

free zones for the storage of the imported goods intended 

for export 

(d) Carrying out maritime transport activities 

(e) Acquiring shares, interests, bonds and participations 

in foreign non-resident institutions and companies, and 

granting loans to non-resident foreign institutions of which 

the offshore company holds more than 20% of the capital 

(f) Acquiring or benefiting from the rights reverting to 

agencies for products and goods, and representing foreign 

companies in foreign markets 

(g) Opening branches and representation offices abroad 

(h) Building, operating, managing and acquiring all kinds 

of economic projects 

(i) Opening credits and taking out loans for financing the 

abovementioned activities and transactions from banks and 

financial institutions residing abroad or in Lebanon 

(j) Renting offices in Lebanon and acquiring the real estate 

properties necessary for the activities thereof, subject to the 

provisions of the law governing the acquisition by foreigners 

of real estate rights in Lebanon. 

B) Exceptions to the legal regime applicable 

to Lebanese joint-stock companies 

As above mentioned, the offshore company shall be 

incorporated under the form of joint-stock company and 

shall abide by the legal provisions governing joint-stock 

companies. However, Legislative Decree # 46/83 specified 

some exceptions compared to other types of Lebanese 

joint-stock companies and which are set forth below. 

1. Capital and Accounting 

(a) The offshore company’s capital may be set in a foreign 

currency. 

(b) Its accounts and balance sheets may be kept in the 

same currency as of the capital. 

(c) The offshore company is exempted from the obligation 

of appointing a complementary auditor. Furthermore, by 

virtue of Legislative Decree # 46/83, offshore companies 

are authorised to appoint the principal auditor(s), that 

remains mandatory, or renew its appointment, for a 

3-year period. 

2. Offshore management 

(a) It is only in 2008 that the legislator exempted the 

offshore company from the obligation of appointing two 

Lebanese nationals within its board of directors. 

(b) The chairman of the board and since the 2008 reform, 

the company’s authorised signatory are exempted from 

the requirement of obtaining a work permit if they are 

non-resident foreigners. 

3. Appointment of a lawyer 

The company is not subject to the obligation of appointing 

a lawyer, unless its capital exceeds 50 million Lebanese 

pounds (equivalent to USD 33,333) or its total annual 

balance sheets exceed the equivalent of USD 500,000. 

C) Tax Regime and exemptions 

1. The offshore income 

The offshore company is exempted from the income tax 

on revenues, and is subject to a lump sum tax of 1 million 

Lebanese pounds (equivalent to USD 667). The company 

is subject to this tax as of the first financial year, whatever 

its duration. 

2. The exemption of some amounts paid by the offshore 

(a) The dividends distributed by offshore companies are 

exempted from the tax on movable capital income. 

(b) The interest paid by the offshore company to legal 

entities or natural persons residing abroad are also subject 

to tax exemption. 

(c) Moreover, the offshore company is exempted from the 

tax on the amounts paid to legal entities or natural persons 

abroad, in return for services provided abroad. 

3. The exemption of some movable capital incomes 

Offshore companies are also exempted from the tax on 

movable capitals levied on their income and revenues 

arising from the investment of their assets abroad. 



Lebanon Update continued 

Summary of the relevant information regarding the offshore company in Lebanon: 

Capital 

Shareholders 

Minimum capital of 30,000,000 Lebanese 

pounds (approximately USD 20,000) or the 

equivalent amount in foreign currency. 

There should be at least three shareholders. 

Legal entities may be shareholders. 

Capital gain tax on 

the assignment of 

interest held in 

foreign companies 

VAT liability 

None 

None 

Responsibility 

Responsibility limited to the contributions 

made by the shareholders. 

Inception taxes 

• Fixed stamp duty: 1 million Lebanese 

pounds (equivalent to USD 667) 

Corporate rights 

Management bodies 

Shares: Nominal value set down in the 

by-laws (minimum LBP 1,000 equivalent to 

USD 0.67). Possible payment of one-quarter 

of the nominal value of the shares paid in 

cash or in foreign currency. 

Board of Directors 

• Three to 12 members. 

• Members of the board of directors may 

be legal entities. The members of the 

board may all be foreign nationals. 

• Only shareholders can be appointed as 

members of the board of directors. 

Obligation to 

appoint a lawyer 

• Judge's Pension Fund: 500,000 Lebanese 

pounds (equivalent to USD 333) +1.5 % of 

the capital subscribed. 

• Diverse duties: 5% of the capital 

subscribed. 

• Miscellaneous expenses, including stamps 

affixed on the inception documents and 

the requested copies. 

Yes, provided that the capital exceeds 50 

million Lebanese pounds (equivalent to USD 

33,333) or if the total balance sheet exceeds 

USD 500,000. 

Appointment and 

dismissal 

The chairman of the board of directors: 

must be a natural person; he exercises the 

function of general manager. 

No maximum number of terms for the 

members of the board or the chairman of 

the board of directors 


Members of the board are elected by the 

general meeting for a maximum period of 

three years and may be dismissed by the 

general meeting. The chairman of the board 

of directors is appointed and dismissed by 

the board of directors. 

Regulations 

governing 

repatriation of funds 

outside Lebanon 

Incorporation time 

period needed for 

an offshore company 

Lebanon has a firm Bank secrecy regulation. 

Furthermore, the repatriation of funds 

outside Lebanon has a free movement 

and there is no fiscal or legal constraint 

regarding this. 

Between one to three days 

Powers 


All powers are granted to by the articles 

of association, the law and the general 

meetings of shareholders. 

Accounting currency 

Tax on profit 

Tax on distribution 

of dividends 

Capital gains tax 

on the assignment 

of interest held in 

Lebanese companies 

Same currency as the capital 

None. Annual lump sum taxation of 1 million 

Lebanese pounds (equivalent to USD 663) 

None 

The offshore companies are not entitled to 

hold interest in Lebanese companies or to 

generate revenues from Lebanon. 


Elie Chartouni 

Partner 

PKF Emile Chartouni & Sons 

T: +961 (1) 493 220 

F : +961 (1) 492 728 

E : eliechartouni@pkflb.com 



Malaysia Update 

Below is a summary of the recent tax changes or developments 

in Malaysia. The national budget for year 2012 was announced 

on 7 October 2011 and a snapshot of the key budget proposals 

will be included in the next issue of the Tax Alert. 

Income Tax (Exchange of Information) Rules 2011 

The Income Tax (Exchange of information) Rules 2011 was 

issued on 20 July 2011. The Rules provide that a competent 

authority may request for tax information from the Director 

General of a person to whom a double tax agreement 

entered into by the government of such competent authority 

with the Government of Malaysia relates. The Director 

General may also make a request from a bank which has 

the information of such person, as requested by the 

competent authority. 

“Information” means any information required to be 

disclosed pursuant to the article on exchange information 

of a double taxation arrangement. 

A “competent authority” refers to an authorised servant or 

agent of a government of any territory outside Malaysia with 

which the Government of Malaysia has entered into a 

double tax agreement. 

Double Taxation Relief (The Government of the 

Republic of South Africa) (Amendment) Order 2011 

The Order amends the Double Taxation Relief (The 

Government of the Republic of South Africa) Order 2005 as 

specified in the Schedule in accordance with the Protocol 

Amending The Agreement Between The Government Of 

Malaysia And The Government Of The Republic Of South 

Africa For The Avoidance Of Double Taxation And The 

Prevention Of Fiscal Evasion With Respect To Taxes On 

Income. 

The Order declares that the arrangements specified in the 

Schedule have been made by the Government of Malaysia 

with the Government of the Republic of South Africa with a 

view to amending the previous arrangements affording relief 

from double taxation in relation to Malaysian tax and South 

African tax (as defined in each case in the arrangements) and 

that it is expedient that those arrangements shall have effect. 

Income Tax (Exemption) (No. 4) Order 2011 

This Order shall have effect from the Year of Assessment 

2011 and exempts any person from income tax in respect 

of gains or profits received (in lieu of interest) derived from the 

sukuk wakala under the concept of Al-Wakala Bil Istismar. 

Income received under this Order is not subject to withholding 



Malaysia Update continued 

tax under Section 109 of the Income Tax Act 1967. 

Income Tax (Exemption) (No.5) Order 2011 

[PU (A) 325/2011 

Under this Order, a person who has obtained his/ her first 

Green Building Index (GBI) certificate issued on or after 

24 October 2009 but not later than 31 December 2014 by 

the Board of Architects Malaysia will be exempted from the 

payment of income tax in respect of the statutory income 

from his/ her business. The amount so exempted shall be 

equal to the qualifying expenditure incurred for the purpose 

of obtaining the GBI certificate. 

Petroleum (Income Tax) (Amendment) Bill 2011 

Petroleum (Income Tax) (Amendment) Bill 2011 was passed 

on 11 July 2011. The amendment was to reduce the 

income tax rate from 38% to 25% for marginal oilfields. 

The amendment would also expedite capital allowance from 

10 to five years for marginal oilfields and allow investment 

allowance for projects which require high capital expenditure 

and technical skills. 

Customs (Prohibition of Imports) (Amendment) 

(No.3) Order 2011 

The Order, which will come into operation on 1 November 

2011, amends the Customs (Prohibition of Imports) Order 

in Part II of the Fourth Schedule by inserting the particulars 

relating to aluminium products. 

Draft Goods and Service Tax (GST) Guideline 

The implementation of GST has been deferred by the 

government to a later date which is to be announced. 

However, The Royal Malaysian Customs has released the 

following draft GST industry guides and these industry 

guides are prepared to assist in understanding the GST. 

Draft GST specific Guide on Designated Areas 

As a developing nation, Malaysia strongly encourages the 

development of export-oriented industries. To support this 

policy, various facilities have been introduced by the 

government, namely the formation of licensed warehouse, 

free industrial and commercial zones, licensed manufacturing 

warehouses and free ports. 

Before the implementation of GST, free ports, with minor 

exceptions, are free from all types of custom duties, excise 

duties, service tax and sales tax. Under Customs Act 1967, 

free ports are regarded as places outside the Principal 

Customs Area (PCA). To maintain this status quo, special 

provisions and rules are introduced under the GST system 

for the free ports and they are to be known as “designated 

area”. 

Draft GST Guide on Relief on Second-Hand 

Goods Released 

The Royal Malaysian Customs has released the draft GST 

Guide on Relief on Second-hand Goods (Margin Scheme). 

The Industry Guide is prepared to assist in understanding 

the Goods and Services Tax and operation of Margin Scheme. 

GST Draft Guide on Auctioneer 

This Industry Guide is prepared to provide an understanding 

of the Goods and Services Tax and its implications on 

Auctioneer. 

GST Draft Industry Guide on Transfer of Business 

as a Going Concern released 

This Industry Guide is prepared to provide an understanding 

of the Goods and Services Tax and its implications on 

Transfer of Business as a Going Concern (TOGC). 

Draft GST Industry Guide on Duty Free Shop 

This Industry Guide is prepared to assist in understanding 

the Goods and Services Tax and its implications on Duty 

Free Shop. 

GST Draft Industry / Specific Guides: Update 

The Royal Malaysian Customs has released certain draft 

GST Industry Guides /draft GST specific guides. 


Lee Yiing Ting 

Senior Tax Manager 

PKF Malaysia 

T : +603 2032 3828 

F: +603 2032 1868 

E : yiingting@pkfmalaysia.com 



The Netherlands Update 

This article summarises a selection of recent tax 

developments in the Netherlands. The content below is of 

a general nature and should by no means be regarded as 

an exhaustive outline and should also not be regarded as 

a substitute for a detailed legal advice. 

2012 Tax proposals 

On 15 September 2011, the Dutch government published 

the 2012 Tax Proposals. These contain a number of 

measures aimed at implementing the ambition of the Dutch 

government to achieve a simpler, more solid and fraudresistant 

tax system. The proposed enactment date is 

1 January 2012. 

1. Limitation on interest deduction concerning 

acquisition holdings 

A common structure in the Netherlands is that an acquisition 

vehicle borrows funds to acquire shares in the Dutch target 

company and subsequently forms either a fiscal unity or 

legally (de)merges with the target company. Through these 

actions, the interest expenses of the acquisition vehicle can 

be deducted from the operating profits of the Dutch target 

company and therefore reducing the Dutch tax base. 

Current rules that do no allow interest deduction, such as 

thin capitalisation, could be avoided by borrowing funds 

the acquisition’s vehicle equity by contribution of shares 

in other subsidiaries (in which the Dutch participation 

exemption applied). 

To challenge this undesirable base erosion, the 2012 Tax 

Proposals contains a new provision to disallow the deduction 

of acquisition interest. This provision applies to interest paid 

or accrued on intra-group and third party debt used for the 

acquisition of Dutch target companies that subsequently 

become part of a fiscal unity or that are merged with the 

acquiring company. Interest deduction against the profits 

of the target companies is not allowed except: 

■ 

■ 

If and to the extent the interest does not exceed 

€1.000.000; or 

if and to the extent the debt equity ratio (of the fiscal 

unity) does not exceed 2:1. For this calculation, the 

amount of equity will be reduced by the tax book value 

of participations that qualify for the participation 

exemption. Furthermore, the goodwill that arises due to 

the acquisition can be added to the fiscal unity’s equity 

(taken into account 10% yearly depreciation of the 

goodwill) for the calculation of the 2:1 debt equity ratio. 

Furthermore, acquisitions that resulted in a fiscal unity or 

a legal (de)merger with the target company that occurred 

before January 1, 2012 are grandfathered. 

2. Object exemption of profits and losses of 

foreign permanent establishments (PE) 

Currently, foreign PE losses are deductible from the worldwide 

tax profits of Dutch taxpayers, while foreign PE profits 

are generally exempted via the applicable method to avoid 

double taxation. PE losses will have to be recaptured but this 

can be postponed. The 2012 Tax Proposals proposes to 

change this method for avoiding double taxation as follows: 

■ 

■ 

■ 

the income, either positive or negative from an (active) 

foreign PE, is no longer included in the tax base (object 

exemption) of Dutch taxpayers 

a tax credit for foreign low taxed passive PEs (this is 

applicable if the activities of the foreign PE consist 

primarily of passive investing or leasing and the profit 

of the foreign PE is not subject to reasonable taxation, 

i.e. a tax rate generally of at least 10%) 

a measure to deduct liquidation losses from the Dutch 

taxable profit. 

3. Amendment to substantial interest levy 

regime for foreign corporate taxpayers 

Based on current Dutch tax law, non-Dutch resident 

corporate taxpayers which hold a substantial interest 

(generally at least 5%) in a Dutch resident company are 

subject to Dutch corporate income tax with respect to 

income and capital gains, unless the substantial interest 

can be attributed to an enterprise carried on by the foreign 

shareholder. This Dutch tax legislation created tension with 

EU-tax law, as Dutch resident companies that hold a 

substantial interest in a Dutch subsidiary are favoured, due 

to the fact that the income and capital gains are exempted 

based on the Dutch participation exemption. 

As a result, the 2012 Tax Proposals amend the substantial 

interest taxation rule in the following manner: non-Dutch 

residents are only subject to corporate income tax if (i) the 

substantial interest cannot be attributed to an enterprise 

carried on by the foreign shareholder AND (ii) the main 



The Netherlands Update continued 

purpose (or one of the main purposes) of the holding of the 

substantial interest in the Dutch company is held to avoid 

income tax or Dutch withholding tax of another person. 

Furthermore, in case the substantial interest is only held to 

avoid Dutch withholding tax, the substantial interest levy is 

limited to 15% instead of 25%. 

4. Anti-abuse measures for dividend 

distributions by a Cooperative (Coop) 

The Dutch Coop is popular for international tax structuring, 

as under current Dutch tax law income and capital gains 

received by the Coop from its subsidiaries are generally tax 

exempted based on the participation exemption (assuming 

that the relevant conditions are met). In addition, distributions 

made by the Coop to its (foreign) Members are normally not 

subject to Dutch withholding tax. The 2012 Tax Proposals 

contain an anti-abuse measure with respect to structure 

which the Dutch government considers abusive in which 

the Dutch Coop holds shares in a company with the main 

purposes (or one of the main purposes) to avoid Dutch 

withholding tax or foreign tax of another person. 

In such case, distributions to Members will be subject to 

Dutch withholding tax (in principle 15%) if the membership 

interest in the Coop cannot be attributed to an enterprise. 

Also if the membership interest can be attributed to an 

enterprise, distributions of the Coop will be subject to withholding 

tax but only to the extent necessary to preserve a 

Dutch withholding tax claim on profits of a Dutch company 

whose shares are held by the Coop and the claim already 

existed at the time the Coop acquired the shares in the 

Dutch company. 

5. Miscellaneous measures 

The 2012 Dutch Tax Proposals set forth a number of 

miscellaneous measures. These are concisely (not limitative) 

outlined below: 

■ 

Foreign associations, foundations or religious society: 

Currently, non-Dutch resident associations, foundations 

and religious societies are subject to Dutch corporate 

income tax, which is not in line with the tax treatment of 

similar Dutch residents. The 2012 Tax Proposals provide 

that non- Dutch resident entities that are similar to Dutch 

associations, Dutch foundations and Dutch religious 

societies are only subject to Dutch income tax to the 

extent that they carry on a business enterprise. 

R&D deduction: 

The Dutch government considers introducing a R&D 

deduction that reduces the direct costs relating to R&D, 

other than labour costs (these already benefit from a 

R&D wage tax deduction and from the innovation box), 

in order to ensure the attractiveness of the Netherlands 

for R&D activities. The details of the aforementioned are 

expected to be published in Q4 2011. 

Extension of Dutch withholding tax refund for foreign 

companies: 

Based on current Dutch law, Dutch resident entities, EU 

entities and EEA entities which are exempted from Dutch 

corporate income tax (such as pension funds) can 

request for a refund of the Dutch withholding tax that 

was withheld from them. According to the 2012 Tax 

Proposals, the scope of this legislation is to be extended 

to similar non-EU and non-EEA residents if the below 

mentioned conditions are met: 

(i) the Netherlands agreed a bi- or multilateral agreement 

(including an exchange of information provision) with the 

other country 

(ii) the interest relating to the refund is a portfolio 

investment (i.e. no potential control over the withholding 

company) 

(iii) the concerning entities perform another function as 

Dutch Fiscal Investments Institutions and Exempt 

Investment Institutions. 

It seems that this extension makes it more attractive for 

non-EU government exempt entities (such as non-EU 

exempt pension funds and exempt Sovereign Wealth 

Funds) to invest in the Netherlands from qualifying third 

countries. 

Wage Tax 

Amendment of the expat arrangement 

(30% facility) 

Currently, expats (employees who come to work in the 

Netherlands from another country) who have a specific 

expertise in areas that are rare in the Dutch labour market 

benefit from a special expense allowance in the Netherlands, 

as their costs of residence in the Netherlands (extraterritorial 

costs) are either tax-exempted or can be fixed a lump sum 

based on 30% of the wage of the employee (i.e. only 70% 

of the wage is taxable for the wage tax) for a period for 

10 years. The State Secretary of Finance proposed as at 


Issue 8 November 2011 

■ 

■

The Netherlands Update continued 

8 September 2011 the following amendments for the expat 

regime: 

transferred assets. The decision of the EU Court is 

expected in the spring of 2012. 

■ 

■ 

■ 

■ 

the criterion for “specific expertise” is only considered to 

be applicable if the employee obtains a minimum gross 

salary (€ 50.619 in 2011 if the employee is aged 30 

years or older and € 37.121 per year in 2011 if the 

employee is younger than 30 years) 

access to the expat regime for foreign PhD students 

who studied in Dutch universities and thereafter decide 

to start working in the Netherlands, taken into account 

that a lower minimum gross salary standard is applicable 

for them (2011: €26.605) 

the current reference period of 10 years is to be 

extended to 25 years 

employees who live within a radius of 150 kilometres 

from the Dutch border are excluded from access to the 

expat regime. 

Real Estate Transfer Tax 

Dutch Supreme Court upholds exemption from 

real estate transfer tax 

The Netherlands levy 6% Dutch real estate transfer tax 

(DRETT) upon the acquisition of (certain rights to) Dutch real 

estate. This equally applies when a company acquires at 

least one third of the shares in a Dutch real estate company. 

A company qualifies as a real estate company if the entity’s 

assets at the time of the acquisition and during the preceding 

year consist for 50% or more of real estate of which at least 

30% is Dutch real estate (asset test) which real estate is held 

mainly (70% or more) for acquisition, sale or exploitation 

(purpose test). 

International and EU 

Dutch exit taxation violates EU law 

Dutch tax law contains an exit charge in the event that a 

taxpayer ceases to be a Dutch tax resident. National Grid 

Indus Company (NGIC) challenged this exit charge. NGIC 

transferred its place of effective management to the United 

Kingdom. Under Dutch corporate law, NGIC does not lose 

its legal personality because the Netherlands apply the 

“incorporation principle” and not the “seat principle”. 

The assets of NGIC solely consist of receivables 

denominated in GB Pound with unrealised currency gains. 

The transfer of the effective management triggered - 

according to the Dutch tax authorities - taxation on the 

unrealised currency gains. 

The Appeals Court in Amsterdam presented the case to the 

EU Court and, on 8 September, the Advocate General of 

the European Court of Justice issued her opinion. According 

to the Advocate General, the Dutch exit taxation on 

companies that transfer their place of effective management 

to another EU Member State violates EU law. Regarding 

this matter, the Advocate General of the European Court of 

Justice argued that there is no justification, based on the 

freedom of establishment in the EU, to levy exit taxes 

without the possibility of postponing the payment and to 

take into account later losses on the hidden reserves of the 

The sale and purchase of Dutch real estate is exempt from 

Dutch Value Added Tax (VAT), except if (i) it is new real 

estate or (ii) it qualifies as a building premise. If the acquisition 

is subject to VAT, no DRETT is payable except if the (i) new 

real estate is used as a business asset and the purchase is 

within two years of taken into use and (ii) the purchaser is 

entitled to recover the VAT (in whole or in part). 

In a recent court case, the question was whether the DRETT 

exemption was also applicable if shares in a real estate 

company were purchased whose asset was a building 

premises; i.e the exemption would have been applicable if 

the building premises would have been purchased directly 

instead of the shares. On 10 June 2011, the Dutch 

Supreme Court ruled in favour of the taxpayer and decided 

that the DRETT exemption applies regardless of whether 

the real estate property was acquired directly or by the 

acquisition of shares in a Dutch real estate company. 


Jan Roeland 

Partner 

PKF Wallast, the Netherlands 

T: +31 20 653 1812 

M: +31 6 20 414 629 

E: jrd@pkfwallast.nl 



Pakistan Update 

The Federal Government of Pakistan has made significant 

changes through Finance Act, 2011 relating to Income Tax, 

Sales Tax, Federal Excise Duty, Customs and Capital Value 

Tax. The important changes are set out below. 

Income Tax 

1 Tax credit is allowed on investment in new manufacturing 

units established between 1 July 2011 and 30 June 2016. 

Said tax credit will be equal to 100% of the tax liability of 

that unit for the five years from the date of setting up of the 

industrial undertaking or commencement of commercial 

production whichever is later. 

2 Tax credit is allowed to the companies on their 100% 

equity in the purchase and installation of plant and machinery 

for the purposes of balancing, modernization and 

replacement or expansion of the already installed 

manufacturing facility provided such investment is made 

between the 1 July 2011 and 30 June 2016. Said tax credit 

will be allowed equal to the tax payable on the amount of 

investment and it is adjustable against the tax payable by 

the company in the first five years. 

3 Basic exemption limit for individuals has been enhanced 

from Rs. 300,000 to Rs. 350,000. 

4 Tax credit has been allowed on life insurance premiums 

and allows extended relaxations for tax credit on investments 

and premiums, while increasing the minimum holding period 

for shares for the purpose of credit to 36 months as against 

the prevailing period of 12 months. 

5 Tax credit has been enhanced on enlistment from existing 

5% to 15% of tax payable. 

6 Carry-forward period of minimum tax under section 113 

has been enhanced from existing three years to five years. 

7 Persons subscribing to a commercial or industrial 

electricity connection with annual bill of Rs 1 Million and also 

the cases of business individuals having income between 

Rs 300,000 and Rs 350,000 are made liable to file return 

of income. 

8 Enhance the threshold for filing of wealth statements 

from Rs 0.5 Million to Rs 1 Million. The requirement to file 

also to cover members of AOPs if their pre-tax share of 

income is Rs 1 Million or more. 

9 Timeframe for payment of advance tax on capital gain 

is relaxed to non-individual investors from sale of securities 

from 7 to 21 days. 

10 Tax deducted on profit on debt has been made final 

in case of corporate taxpayers, at par with other cases. 

11 6% tax deduction on payment on account of services 

is brought under the ambit of minimum tax for companies 

also. 

12 The non-taxable limit for withdrawal from pension 

funds at or after the retirement age has been enhanced 

from existing 25% to 50%. 

13 6% tax on services will also be brought under the ambit 

of minimum tax for companies. 

14 Filing of withholding statements has been made 

mandatory on monthly basis instead of previous quarterly 

frequencies. 

15 Limit the scope of advance ruling to those cases of 

non-residents which do not have a permanent establishment 

in Pakistan. 

16 Tax deducted on certain types of profit on debt 

received by non-resident persons has been brought under 

the ambit of final tax. 

17 Increase in tax rate on dividend received by a banking 

company from its asset management company from existing 

10% to 20%. 

Sales Tax Act 1990 

1 Rate of Sales Tax has been reduced to 16% from 

existing 17%. 

2 Sales tax exemption has been withdrawn in respect items 

of plant , machinery , equipments and apparatus including 

capital goods viz-a-viz agriculture machinery, CNG related 

machinery, fire fighting vehicles and equipment imported by 

town and municipal authorities, imports by Civil Aviation 

Authority for air traffic services and training, aircraft spares 

and allied items 



Pakistan Update continued 

Federal Excise Duty Act, 2005 

1 Federal Excise Duty has been enhanced on cigarettes 

to 20% ad val from existing rate of Rs1 per filter rod. 

2 Federal Excise Duty on unmanufactured tobacco has 

been increased to Rs10/- kg from existing Rs 5/kg. 

3 Special Excise Duty has been eliminated. 

4 Rate of Federal Excise Duty on aerated beverages has 

been reduced from existing 12% to 6%. 

5 Federal Excise Duty chargeable on services provided by 

property developers and promoters has been withdrawn. 

6 Federal Excise Duty of 10% on motor vehicle, air 

conditioners, deep freezers & other specified goods has 

been withdrawn. 

Customs Act, 1969 

7 Withdrawal of Regulatory Duty Regulatory duty applicable 

in the range of 5% to 35% has been withdrawn in respect 

of various dairy products, fruits (fresh and dried), sausage, 

confectionary, food preparations of flour, fruit/vegetables 

and allied items, sauces, water and beverages, vinegar/ 

perfumes and toilet papers, cosmetics, soap and allied, 

paper and paper board, natural stone and allied, glassware, 

glass beads & allied, padlocks and allied, pumps/ fans/ 

washing machines/ AC / freezers, electric appliances and 

allied, furniture and allied, scents sprays and allied items. 


Malik Haroon Ahmad, FCA 

Partner 

Maqbool Haroon Shahid Safdar & Co 

T: +92 42 35776682-3 

F: + 92 42 35776676 

E: haroon@mhssco.com 



Paraguay Update 

Paraguay is a founder partner of the Mercosur, South 

America's leading trading bloc which is known as the 

Common Market of the South. It has a free and open market 

economy to the international market and its main economic 

activities are agriculture, cattle and services. 

Paraguay’s commercial characteristics are: 

■ A free market based on the economy system 

■ Free movement of capital 

■ Free determination of prices 

■ Free imports and exports 

■ Liberation of taxes to the investments 

■ A prudent program of monetary stabilisation based on 

fiscal adjustments. 

■ 

■ 

■ 

Regime of Maquila that allows a foreign company to 

be settled in the country or to subcontract to other 

companies to process goods or to give services for 

being re-exported with an added value. These 

operations are liable to a tax rate of 1% only. 

Law 60/90 to stimulate investment which promotes the 

import of machinery and high technology equipment for 

the local industry and it is benefited by the application 

of 0% duty and exemption from VAT. 

Duty-free zones are private areas closed and isolated 

inside the national territory that enjoy tax exemptions 

and other benefits specified by the law, in order to 

undertake all kinds of industrial, commercial activities 

and services. 

Investments Warranty 

■ 

■ 

■ 

■ 

■ 

The Agreement subscribed with the “Agencia Multilateral 

de Garantía a inversiones” (MIGA) has been ratified. 

Agreement on the incentive of investments between the 

Paraguayan Government with the USA Government, the 

Overseas Private Investment Corporation (OPIC). 

Protocol of Cologne for the reciprocation, promotion and 

protection of Investments in the Mercosur and the 

resolution of controversies. 

Protocol for the promotion and protection originates from 

the investments of the USA , without knowledge of the 

Mercosur. 

Agreement with the United Nations about the promotion 

of exports and investments. 


Silvia Raquel Aguero R. 

Partner 

PKF Controller Contadores & Auditores 

T: + 595 21 44 28 52 

E: raguero@pkf-controller.com.py 

W: www.pkf-controller.com.py 

Paraguay Tax Benefits 

■ 

■ 

■ 

■ 

■ 

■ 

Lowest VAT rate within the region with a VAT at 5% for 

products of the basic market basket, pharmaceuticals, 

rents and interest. There is a 10% rate for remaining 

activities. 

Low Tax for Managerial Revenue with a rate of 10% and 

15% for remittances of dividends abroad. 

A 10% rate of personal income tax to be in force from 

January 2013. 

Free market Economy, no price controls. 

No duties for exports. 

Low costs for social security. 



Romania Update 

There have been some interesting changes to Romanian 

tax legislation over recent months. The key changes are 

summarised below. 

VAT – reverse charges for cereal and technical 

plant deliveries 

From June 2011, Romania shall apply reverse charge in 

regard to VAT on all cereal and technical plant deliveries. 

This change is meant to complete Art.160 of the Romanian 

Tax Code (RTC) regarding simplification methods relating to 

VAT, by applying reverse charge to all internal deliveries of 

the following cereals and technical plants: wheat, spelled, 

rye, barley, corn, soy beans, rape seeds, sunflower seeds 

and sugar beet. 

From June 2011, provided that both partners are registered 

for VAT purposes, reverse charge in regard to VAT shall be 

applied to: 

■ Delivery of waste and raw materials resulting from the 

use of waste 

■ Wood and wood materials delivery 

■ Cereals and technical plants delivery as per the list 

mentioned above 

■ The transfer of greenhouse effect gas certificates. 

Personal Income tax 

In March 2011, the Government adopted Decision 248 

regarding the procedure applicable for the indirect methods 

of establishing the adjusted taxable base in the case of 

income obtained by audited individuals. The three main 

methods mentioned by the law were: 

■ 

■ 

■ 

The method of the source and expense of the funds 

The cash flow method 

The patrimony method. 

Art.15 of this Decision established that the provisions 

regarding the application procedure of the abovementioned 

indirect methods should be completed with the risk analysis 

procedure. This last procedure implied the possibility of the 

tax auditors to identify and evaluate the risk of undeclared 

income, which would later allow for a selection of the 

individuals, which would be submitted to a preliminary 

documentary audit. 

As per Art.109.1 of the Romanian Tax Procedure Code, 

should the tax auditor notice a significant difference between 

the income declared by the taxpayer (or in some cases by 

the income payer in his name) and the personal tax situation 

on the other hand, the auditor should further investigate the 

personal tax situation of the taxpayer. The difference between 

the declared income and the estimated one is considered 

a significant one if it is more than 10% but not less than 

50,000 lei (approximately 12,000 EURo). This method shall 

allow for a limitation of individual tax audits to those 

individuals which, upon the preliminary documentary audit, 

surpass the 10% acceptable difference. 

The actions required to undertake these new risk analysis 

procedures include: 

The establishment of databases for information 

The collection of data held by third party entities (access 

to databases based on protocols and information 

exchange collaboration agreements, information received 

from judiciary authorities or any other national or 

international authorities holding information in regard to 

the personal tax situation of a taxpayer) 

The definition of those individuals who present a tax 

fraud risk (implies the consideration of issues such as 

the level of income declared by the individual and the 

income payer, the patrimonial increase of that individual, 

personal expenses incurred, cash flows). 

On the basis of the abovementioned procedures, the tax 

authorities shall prepare a list of all those individuals who 

surpass the minimum risk and shall propose a preliminary 

documentary audit. Should the list identify individuals who 

are proved to be related up to a second-degree kinship, 

the preliminary documentary audit proposal shall include 

all of the related individuals. 

“Trust” operations 

From October 2011, a New Civil Code shall be applicable 

in Romania which, amongst others, contains provisions in 

regard to “trust” (fiduciary) operations, whereby one or more 

constitutors transfer a set of real rights, receivables, 

guarantees, other patrimonial rights or a mass of such 

existing or future rights towards one or more trustees 

(fiduciaries) who are obliged to administer them with a 

specific purpose in the interest of one or more beneficiaries 

(which legally are not part of the contract). 



Romanian Update continued 

In order to limit the possibility of money laundering operations, 

the law limits these transactions for those acting as fiduciaries 

to credit institutions, financial investment institutions, 

insurance and re-insurance institutions, as well as lawyers 

and notaries. The law however states no limitations in 

regard to the constitutor or the beneficiary. 

This newly regulated type of operation naturally imposes a 

set of changes to the applicable tax legislation in regard to 

the tax definition of this type of operation as well as to specific 

tax regulation applicable to income resulting from the 

trust/fiduciary operations. In this respect, the Romanian Tax 

Code (RTC) treats the trust as a transfer of the patrimonial 

mass from the constitutor to the trustee which, from the tax 

point of view, is not a taxable operation while the income 

resulting from the transfer of the patrimonial mass from the 

trustee to the beneficiary is considered as income obtained 

in Romania. The expenses generated by the transfer of the 

trust from the constitutor towards the trustee are not 

considered as deductible expenses within the operation. 

The remuneration of the notary public or that of the lawyer 

(taxable as individuals as they have few other forms of 

association provided by the law) acting as a trustee shall be 

cumulated with their other professional income for the 

purpose of the income tax calculation. Any tax obligation 

resulting for the constitutor from such a trust operation shall 

be fulfilled by the fiduciary. 

In regard to income obtained from trust operations by a 

non-resident beneficiary (also acting as a non-resident 

constitutor) from a resident trustee, as a result of the 

patrimonial trust within the trust operation, the new 

regulation specifies that it shall not be treated as a taxable 

income in Romania. 

Annual profit tax starting 2013 

Recent tax legislation changes brought changes to the 

profit tax payment options of Romanian companies. In this 

respect, starting from 1 January 2013, taxpayers may opt 

for an annual declaration and payment of the profit tax by 

means of prepaid quarterly estimated tax. The change to 

this type of tax payment and declaration, however, is restricted 

to companies that registered losses in previous 

years, were temporarily suspended in the prior year or have 

been registered as micro-companies in prior years, as well 

as to agricultural companies and non-profit organisations 

(the last two have a particular regime altogether). 

Up to 2013 however, companies (except for a few specific 

exemptions) will continue to declare and pay taxes quarterly 

based on a real basis calculation system. 


Carmen Mataragiu 

Partner 

PKF Econometrica 

T: +40 256 201 175 

E: Carmen.mataragiu@econometrica.pkf.ro 

W: www.econometrica.pkf.ro 



Slovak Update 

Impact on income tax of the 

amended Investment Act 

The Slovak Republic passed the Investment Aid Act (No.561/ 

2007 Coll.) several years ago to encourage investment and 

create jobs in depressed regions of the Slovak Republic. 

Among other things, it provides for tax relief to recipients of 

investment aid. A company is in compliance with specified 

investment conditions (eligible costs, minimum investment 

and creation of jobs, in particular) can claim tax relief up to 

the amount of tax on pro rata taxable income. 

Pro rata taxable income is calculated so taxable income is 

multiplied by either a variable (V) or a flat-rate coefficient (K) 

that equals 0.8. An investor can choose the more favorable 

value and the selected value is used to calculate pro rata 

taxable income for subsequent tax periods. 

The variable coefficient V is calculated as a fraction, where 

the numerator is eligible costs (acquisition of land, buildings, 

plant and equipment, intangible assets such as licences 

and know-how and labour costs) where investment aid has 

been provided up to the aggregate costs of items under 

fixed assets acquisitions (chart of accounts 04X), once 

written confirmation has been issued that the investment 

project meets conditions for aid and before the end of the 

applicable tax period wherein a claim to tax relief is exercised. 

The denominator is the sum of all eligible costs plus the 

value of the company’s shareholders’ equity recognised in 

the balance sheet for the tax period wherein a written 

confirmation was issued under the Investment Aid Act. 

To summarize, the pro rata values taxpayers can choose are: 

V = eligible costs / eligible costs + shareholders’ equity; or 

K = 0.8 

Tax relief can now be claimed for up to 10 consecutive tax 

periods, where a tax period corresponds to the calendar 

year. It had previously been five years. 

The amendment came into force on 1 August 2011. Any 

claim for tax relief under a flat-rate coefficient may only be 

exercised by a taxpayer whose approval of investment aid 

was issued after 31 July 2011. 

Clarification of tax on emission quotas 

In an amendment to the Income Tax Act (No. 595/2003 

Coll.) passed earlier this year and effective from 1 May 2001, 

definitions related to emission quotas and the tax on such 

quotas were clarified. 

■ Used emission quotas are greenhouse gas quotas and 

units of certified emission reductions that a taxpayer 

submits for the applicable calendar year, i.e. the tax period. 

■ 

■ 

Transferred emission quotas neither include the hedged 

transfer of registered emission quotas by a debtor taxpayer 

nor their retransfer by a creditor taxpayer where 

the transfer is carried out by the same entity in identical 

quantity and units before the date when the emission 

quotas are forwarded to the registry administrator, in the 

Slovak Republic being Dexia Bank Slovakia. 

Unused emission quotas are registered emission quotas 

less consumed emission quotas plus the savings from 



Slovak Update continued 

used emission quotas, calculated according to a special 

regulation that has been issued by the Environment 

Ministry. 

The amendment sets the calculation of estimated tax on 

emission quotas for 2011 at 80% of the amount calculated 

as a multiple of the average market price of emission quotas 

for 2010 and registered emission quotas for 2011, less 

emission quotas actually used in 2010, plus the savings 

from used emission quotas calculated according to the 

Environment Ministry’s regulation. 

One-year grace period for mandatory audits 

As a response to difficult economic conditions, the Slovak 

Parliament passed an amendment last year to the Accounting 

Act (No. 431/2002 Coll.), where the threshold for mandatory 

audit of financial statements for limited liability companies 

and limited partnerships is to be maintained for two 

consecutive years before the company’s financial statements 

must be examined by an auditor. That means that if a 

company’s annual accounts exceed two of the three 

conditions for mandatory audit (total gross assets of EUR 

1,000,000; net turnover of EUR 2,000,000 and average 

number of employees for the year of 20) in 2011, there is 

no mandatory audit for that fiscal year but, if the above 

situation continues in 2012, there will be a mandatory audit 

starting with the 2012 statements. 

Although this is not necessarily a tax issue, it is a consideration 

for investors, especially medium-sized enterprises, who are 

interested in investing in the Slovak Republic. 


Richard Clayton Budd 

PKF Slovensko 

T: +421 2 5828 2711 

E: budd@pkf.sk 

W: www.pkf.sk 



Slovenia Update 

Tax changes in 2011 

Corporate Income Tax 

There are no basic changes to tax incentives which are a 

deduction from the tax base of 30% of the amount invested 

in equipment and intangibles but not exceeding the amount 

of EUR 30,000 and only up to the amount of the taxable base. 

No basic changes have been made to corporate income tax 

generally. 

Personal Income Tax 

The Personal Income Tax Act distinguishes between six 

categories of income: income fromemployment, business 

income, income from basic agriculture and forestry, income 

from rents and royalties, income from capital, and other 

income accruing to persons liable to tax in the Republic of 

Slovenia. 

Tax schedule for the year 2011 (in EUR) 

The tax schedule for the year 2011 is as follows: 

Allowances that reduce the aggregated taxable base 

(deductions) for a resident taxpayer on an annual level 

include (for the year 2011): 

General allowance: 

■ EUR 6,205,68 for residents with active income up to 

EUR 10,342,80; 

■ 

■ 

Taxable income (EUR) 

0 to 7,634,40 

7,634,40 to 15,268,77 

15,268,77 and over 

Tax on lower amount (EUR) 

EUR 4,205,74 for residents with active income between 

EUR 10,342,80 and EUR 11,965,20; 

EUR 3,143,57 for residents with active income more 

than EUR 11,965,20. 

Personal allowances: 

■ Disabled person’s allowance: EUR 16,808,00 if the 

resident is a disabled person 

■ Seniority allowance: EUR ,.352,86 for a resident older 

than 65 years of age 

■ Student allowance: EUR 3,143,57 for income earned by 

pupils or students for temporary work done on the basis 

0 

1,221,50 

3,282,78 

Rate on excess 

16% 

27% 

41% 

of a referral issued by a special organisation dealing with 

job-matching services for pupils and students. 

Family allowances: granted to residents who are supporting 

their family members, as follows: 

■ EUR 2,319,50 for the first dependent child; for each 

subsequent dependent child this amount is increased 

■ EUR 8,404,56 for a dependent child who requires 

special care 

■ EUR 2,319,50 for any other dependent family member. 

Special deduction for voluntary additional pension 

insurance payments: 

■ premiums paid by a resident to the provider of a pension 

plan based in Slovenia or in an EU Member State 

according to a pension plan that is approved and 

entered into a special register, but limited to a sum equal 

to 24% of the compulsory contribution for compulsory 

pension and disability insurance for the taxpayer, or 

5.844% of the taxpayer’s pension, and no more than 

EUR 2.683,26 annually. 

Important VAT deduction change 

There is important change in the Slovenian VAT Act on the 

VAT deduction matter. If the taxpayer identified for the tax 

purposes in Slovenia delays payment to its supplier (late 

payment according to the Act on preventing of late payment*), 

VAT cannot be deducted from an invoice. If the taxpayer 

has already deducted VAT from the invoice and the delay in 

payment appears in the next tax periods, the correction 

must be made in the tax period when delay appears. The 

tax liability must be increased for such tax period. This 

obligation does not concern the tax payer (in this case the 

debtor) which offers such invoices into the system of multilateral 

offset. 

*This Act shall transpose Directive 2011/7/EU of the European Parliament 

and of the Council of 16th February 2011 on combating late payment in 

commercial transactions (OJ L 48 of 23 February 2011, p.1) into the 

legislation of the Republic of Slovenia. 


Tomaž Lajnšček 

Preizkušeni Davčnik/Verified tax expert 

Renoma d.o.o 

T: +386 3 4244210 

F: +386 3 4244181 

E: tomaz.lajnscek@renoma.si 



South Africa Update 

A draft Taxation Laws Amendment Bill (the TLAB) was 

issued in June 2011 which contains significant proposed tax 

amendments. The proposed changes are still in draft form 

and subject to change following public comment thereon. 

It is anticipated that the final TLAB will be issued during the 

course of October 2011. Some of the main features of the 

draft TLAB dealing with cross-border provisions are as follows: 

Dividend withholding tax 

The long anticipated replacement of Secondary Tax on 

Companies (STC) with a dividend withholding tax will be 

effective from 1 April 2012. This will bring South Africa’s 

taxation of dividends regime in line with international norms. 

The withholding tax rate will be 10%, subject to the 

application of applicable double tax treaty provisions. 

Controlled foreign corporation (CFC) provisions 

- overhaul of CFC rules 

The South African CFC regime is in its tenth year anniversary. 

The regime is being overhauled to close remaining loopholes 

and to clarify and simplify calculation. In the main, the 

proposed amendments include: 

■ 

Attribution of income to a foreign business establishment 

(FBE) can only be done once arm’s length transfer 

pricing principles are taken into account. Attribution 

of income to a FBE must account for the functions 

performed, assets used and the various risks of the 

foreign business establishment. Mere connection of 

income to a FBE via legal agreements and similar 

artifices will not be sufficient. 

■ 

■ 

■ 

The diversionary income rules will be simplified to avoid 

legitimate commercial activities falling within its scope 

whilst still retaining meaningful protection of the tax 

base. The diversionary rules associated with South 

African exports to a CFC will be completely removed. 

Under current law, transfer pricing violations involving 

a CFC trigger tainted treatment for all amounts derived 

from the suspect transaction, not just the reallocation 

of misallocated income. This “all-or-nothing” rule is 

misdirected and will accordingly be deleted. 

As a general rule (and consistent with current law), 

mobile income accruing to a CFC will be automatically 

taxable unless specific exemptions relevant to that 

income stream are applicable. As under current law, the 

FBE exemption will per se not apply even though the 

mobile income may be attributable to FBE activities. 

Unlike current law which mixes mobile income into one 

set of rules, the targeted mobile income will be covered 

under four broad but distinct categories - income from 

financial instruments, tangible rentals, intellectual 

property and insurance. 

Closure of “control” avoidance through trust and other 

artifices. The definition of CFC will be extended to 

specifically cover certain foreign companies that are 

under the de facto control of South African residents. 

This additional criterion will apply in the alternative to the 

general CFC requirements. De facto control will exist 

where the parent has the power to govern the financial 

and operating policies of a subsidiary in order to derive 


IIssue 8 November 2011

South Africa Update continued 

■ 

a benefit from its activities. This is a facts and 

circumstances case. Factors such as control over the 

distribution and reinvestment policies, annual business 

plans, corporate strategy, capital expenditure, raising 

finance, winding up of the entity, voting rights or the 

power to appoint or remove the board of directors will 

be taken into account on a case-by-case basis. This 

concept is derived from financial accounting principles. 

The ownership thresholds in respect of the dividend and 

capital gain participation exemptions in relation to foreign 

shares will be reduced from 20% to 10%. This lower 

threshold is consistent with the global economic 

concept of direct foreign investment. 

The proposed amendments will apply to the net income 

of a controlled foreign company relating to the year of 

assessment beginning on or after 1 April 2012. 

CFC restructurings 

In terms of existing law, South African resident companies 

can restructure their affairs through various transactions 

falling within the so-called reorganisation rollover rules. 

In terms of these rules, the transactions themselves are 

from tax but any gain is deferred until a later disposal. 

The rollover rules apply to asset-for-share transactions, 

amalgamations, intra-group transfers, unbundlings and 

liquidations. These relief measures are not currently 

available to the restructuring of foreign operations (except 

in very limited circumstances). 

In respect of offshore restructurings, only a capital gains 

participation exemption currently applies. Under the 

participation exemption, the gain is wholly exempt when 

residents and CFCs dispose of equity shares in a 20% held 

foreign company. However, the exemption only applies if the 

foreign shares are transferred to a totally independent foreign 

resident or to a CFC under the same South African group of 

companies. The restructuring of CFC assets can also qualify 

for tax relief if disposed of within the confines of the foreign 

business establishment exemption or if the disposal occurs 

within a high-taxed country. 

In light of the global economic crisis, many South African 

multinationals are seeking to restructure their offshore 

operations. The current participation exemption applicable 

to offshore restructurings is too narrow resulting in certain 

restructurings being excluded. In view of the above, the 

domestic corporate restructuring rollover rules will be 

extended to fully include the restructuring of offshore 

companies that remain under the control of the same 

South African group of companies. 

As a result of the extended deferral regime, participation 

exemption for transfers to CFCs will accordingly be deleted 

in order to remove the possibility of avoidance. 

These proposed amendments will apply in respect of 

transactions entered into on or after 1 January 2012. 

Offshore cell companies 

Control of a foreign company generally exists if South 

African residents own more than 50% of the participation 

and voting rights of the foreign company. Currently, the CFC 

rules do not apply to foreign statutory cell companies (often 

referred to as “protected cell companies” or “segregated 

account companies”). These companies effectively operate 

as multiple limited liability companies, separated into legally 

distinct cells. These cell companies are often found in the 

jurisdictions of Bermuda, Guernsey, Gibraltar, Isle of Man, 

Jersey, Vermont, Mauritius and Seychelles. 

It is proposed that the CFC rules be adjusted so that each 

cell of a foreign statutory cell company will be treated as a 

separate stand-alone foreign company for all South African 

CFC regime purposes. Therefore, if one or more South 

African residents hold more than 50% of the participation 

rights in an offshore cell, the cell will be deemed to be a 

CFC without regard to ownership in the other cells. CFC 

treatment for the cell will thus trigger indirect tax for the 

participant cell owners to the extent the cell generates 

tainted income. 

The proposed amendment will apply in respect of foreign 

tax years of a CFC ending during years of assessment 

commencing on or after 1 January 2012. 

Unification of source rules 

South African residents are taxed on the basis of their 

world-wide income with foreign sourced income eligible for 

tax rebates (credits) in respect of foreign tax proven to be 

payable. Non-residents are only subject to tax on the basis 

of income derived from sources within (or deemed to be 

within) South Africa. 

The Income Tax Act does not comprehensively define the 

term “source”. The source of income is instead initially 



South Africa Update continued 

determined with reference to the common law, in terms of 

which the determination of source generally involves the 

doctrine of originating cause. The statutory regime relating 

to source is also scattered throughout the Income Tax Act. 

A new uniform system of source is proposed which 

represents an amalgamation of the common law, pre-existing 

statutory law and tax treaty principles. The starting point for 

these uniform source rules will largely reflect tax treaty 

principles (with a few added built-in protections) so that the 

South African system is globally aligned. The common law 

will remain as a residual method for undefined categories 

of income. 

The new uniform set of source rules will eliminate the 

concept of deemed source. South African sources of 

income will be fully defined with items of income falling 

outside these definitions being treated as foreign source 

income. 

Special foreign tax credit for management fees 

South African residents are taxed on their worldwide income. 

However, South African residents are entitled to a tax rebate 

(i.e. credit) against normal South African tax in respect of 

foreign taxes proven to be payable. Amongst other 

requirements, these credits are conditional on the foreign 

taxes being applied to foreign sourced income. In other 

words, no foreign tax credits are available in respect of 

South African sourced income. 

In view of the above, it is proposed that a new limited 

foreign tax credit be introduced. The scope of this foreign 

credit will be limited solely to foreign withholding taxes 

imposed in respect of services rendered in South Africa. 

These tax credits will be limited solely to South African taxes 

otherwise imposed on the same service income after taking 

applicable deductions into account. Foreign withholding 

taxes in excess of the South African tax cannot be carried 

over (i.e. the excess is lost). Given the introduction of this 

new foreign tax credit, the current deduction for noncreditable 

foreign taxes will be withdrawn as ineffective. 

The proposed amendment will come into effect in respect 

of foreign withholding taxes paid in respect of years of 

assessment commencing on or after 1 January 2012. 


Eugene du Plessis 

Director 

PKF Johannesburg 

T: +27 11 384 8116 

E: eugene.duplessis@pkf.co.za 

A number of African jurisdictions impose withholding taxes 

in respect of services (especially management services) 

rendered abroad if funded by payments from their home 

jurisdictions. These withholding taxes are sometimes even 

imposed when tax treaties suggest that the practice should 

be otherwise. African imposition of these withholding taxes 

in respect of South African sourced services is no exception. 

The net result of these African withholding taxes is double 

taxation with little relief. The South African tax system does 

not provide credits in respect of these foreign withholding 

taxes because of these taxes lack of a proper foreign 

source nexus. Only partial relief is afforded through the 

allowance of a deduction in respect of the foreign taxes 

suffered. The practical implication of this position is 

adverse to South Africa’s objective of becoming a regional 

financial centre. 



Spain Update 

There have been several important tax reforms in the 

Spanish legislation in the last few months. 

Wealth Tax 

The Wealth Tax was approved by Law 19/1991 of 6 June 

2011. The Law 4/2008 (September 23) introduced changes 

to the Law 19/1991. It eliminated the obligation to 

contribute TO Wealth Tax without repeal. 

Royal Decree Law 13/2011 effectively restores the obligation 

to satisfy the Wealth Tax for years 2011 and 2012. 

Tax remains in the 31 December 2011 and 2012 and the 

obligation falls on net assets (assets and rights with the 

deduction of charges and taxes). 

Changes introduced by Royal Decree Law 13/2011 are as 

follows: 

■ The minimum exemption for residence increases from 

EUR 150,253.03 to EUR 300,000. 

■ 

■ 

■ 

■ 

■ 

Taxpayers non-resident in Spanish territory are obliged 

to appoint a representative in Spain to the Treasury. The 

responsibility is solidarity. Breaching this obligation is a 

punishable act. 

The basis of tax assessment exemption increases from 

EUE 108,182.18 to EUR 700,000. 

It eliminates 100% bonus share integrated. 

It restores the obligation to self-assess tax liability. 

Forced to filing (once applied tax deductions and credits) 

for taxpayers whose assets exceeds EUR 2,000,000. 

It also will be mandatory to non-residents (real obligation) in 

Spanish territory when their net assets are over EUR 

2,000,000. 

The legislation states that the Autonomous Governments 

may apply to the tax rebates on capital. The Autonomous 

regions have the capacity to regulate some parameters of 

the Wealth Tax so the limits to declare and the amounts to 

pay can vary depend on the Autonomous region where the 

assets are located. 

Corporate Tax 

1. Prepayments tax 

The percentage to calculate the prepayments tax to be undertaken 

by large companies to taxable persons whose 

turnover has exceeded the amount of EUR 6,010,121.04 

during the 12 months prior to the start date of the tax years 

2011, 2012 or 2013 has been raised. 

■ 

■ 

■ 

The result of multiplying by five sevenths the tax rate 

rounded down when in the twelve-month net turnover 

of less than EUR 20 million. 

The result of multiplying by eight tenths the tax rate 

rounded down, whereas in those twelve months, the net 

amount of turnover is at least 20 million but less than 

EUR 60 million. 

The result of multiplying by nine tenths the tax rate 

rounded down, whereas in those 12 months, the net 

amount of turnover is at least EUR 60 million. 

2. Loss tax base 

Where turnover has exceeded EUR 6,010,121.04 in 2010, 

the offset of brought forward losses against the profits of 

2011, 2012 and 2013 is limited to 75% of those profits if 

turnover is between EUR 20 million and EUR 60 million 

and 50% if the turnover exceeds EUR 60 million. The 

maximum period for carrying forward losses is extended 

from 15 to 18 years. 

Deadline extended to compensate for the effects loss tax 

bases for tax periods beginning on or after 1 January 2012 

for all types of entities from 15 to 18 years. 

3. Goodwill 

The losses of the assets with the sole purpose for the tax 

periods that start in the years 2011, 2012 and 2013 amending 

the annual maximum deductible expense of the financial 

goodwill embodied in the acquisition of holdings in equity in 

non-residents from 5% of the amount to 1%. 

Value Added Tax 

The rate of VAT on the supply of new homes is reduced 

from 8% to 4% until the end of 2011. 



Spain Update continued 

Income Tax 

The main change to income tax is to exempt capital gains 

arising on transfer of the shares resulting from private 

investment in projects driven by entrepreneurs, whose value 

does not exceed the acquisition of EUR 25,000 whole per 

year or EUR 75,000 per entity during the period from the 

establishment of the entity to three years. 

In order to apply the exemption, both the entity and the 

purchase must meet certain requirements. 


Aischa Laarbi 

PKF-Audiec, SA 

T: +34 93 414 59 28 

F: +34 93 414 02 48 

E: legaldpt@pkf.es 

W: www.pkf.es 

Obligations of non-residents 

This royal decree is intended primarily to simplify the 

obligations of non-resident investors in fixed income 

financial instruments for the actual perception of their 

performance. 

It clarifies the lack of obligation for non-resident investors to 

obtain a tax identification number for the following operations: 

■ 

to acquire or transfer securities represented by 

certificates or book entries located in Spain 

■ 

to subscribe, purchase, redeem or transfer shares or 

units in Spanish collective investment institutions or 

marketed in Spain. 

The non-resident status may be credited to the appropriate 

entity through a tax residence certificate issued by the tax 

authorities of the country concerned or by a declaration of 

tax residence. 



Uganda Update 

Introduction of Transfer Pricing regulations 

in Uganda 

The Minister for Finance, Planning and Economic Development 

in Uganda finally published the Income Tax (Transfer Pricing) 

Regulations, 2011. These regulations are based on provisions 

of Section 90 and Section 164 of the Ugandan Income Tax 

Act and took effect from 1 July 2011. The Ugandan Revenue 

Authority is joining the global trend towards laying emphasis 

on non-traditional revenue sources and moving towards 

Transfer Pricing and related party transactions. In this regard, 

these regulations are meant to ensure that transactions 

between Ugandan taxpayers and related non-resident 

entities are at arm’s length. 

Who do the regulations apply to? 

The Transfer Pricing regulations apply to a controlled 

transaction where a person who is party to the transactions 

is located and subject to tax in Uganda and the other party 

in the controlled transaction is located in or outside Uganda. 

The regulations define ‘a person’ to include a ‘branch person’ 

and a ‘headquarters person’. 

Distinction between ‘a branch person’ and 

headquarter person’ 

Under the Transfer Pricing regulations: 

(a) ‘a branch’ is deemed to be a separate and distinct 

person (branch person) from the person in respect of whom 

it is a branch ie the ‘headquarters person’ 

(b) a branch person and headquarters person are deemed 

to be associates 

(c) a branch person and a headquarter person are located 

where their activities are located. 

The Arm’s Length Principle 

Entities entering into a transaction or series of controlled 

transactions in Uganda are now required to determine the 

income and expenditure resulting from such transactions, 

in accordance with the Arm’s Length Principle (ALP). Failure 

to do so will mandate the Commissioner to effect necessary 

adjustments so as to ensure adherence with the ALP which 

may be to the detriment of the taxpayer. 

Transfer Pricing methods to be adopted 

The Transfer Pricing methods acceptable under the Transfer 

Pricing regulations are consistent with the globally accepted 

norms under the Organisation for Economic Development 

and Co-operation (OECD) regulations. Entities in Uganda 

can adopt either of the following methods for purposes of 

arriving at their transfer prices: 

(a) the Comparable Uncontrolled Price method 

(b) the Resale Price method 

(c) the Cost Plus method 

(d) the Transaction Net Margin Method 

(e) the Transactional Profit Split method; or 

(f) any other method that may result to an Arm’s Length 

Price in a comparable controlled transaction. 



Uganda Update continued 

In determining whether the results of a transaction are 

consistent with the ALP, a taxpayer may use the most 

appropriate method taking into account: 

(a) the respective strengths and weaknesses of the transfer 

pricing methods available 

(b) the appropriateness of a transfer pricing method and 

nature of the controlled transaction determined 

(c) the availability of reliable information and data; and 

(d) the degree of comparability between controlled and 

uncontrolled transactions, including the reliability of 

adjustments. 

In the event of any inconsistency between the Income Tax Act 

and the OECD regulations, the Income Tax Act shall prevail. 

Transfer Pricing documentation 

The affected taxpayers in Uganda are required to record in 

writing, sufficient information and analysis to verify that the 

controlled transactions are consistent with the ALP. Such 

documentation should be put in place by the taxpayer prior 

to the due date for filing the income tax return for the year in 

question. 

Penalties for non-compliance 

A person who fails to comply with the transfer pricing 

regulations is liable on conviction to imprisonment for a term 

not exceeding six months or to a fine not exceeding 25 

currency points or both. In addition to this, any person who 

fails to maintain a Transfer Pricing policy is liable on conviction 

to imprisonment for a term not exceeding six months or to 

a fine not exceeding 25 currency points or both. 

Advance Pricing agreements also allowed 

The TP regulations provide a reprieve to taxpayers by allowing 

them to enter into Advance Pricing Agreements (APAs) with 

URA. Such an APA would lay down a set of criteria for 

determining whether the taxpayer has complied with the 

ALP for certain future controlled transactions undertaken 

by the taxpayer over a fixed period of time. 

This is however at the Commissioner’s discretion. 

Furthermore, the Commissioner is mandated to make tax 

adjustments on certain transactions as may be necessary, 

to avoid double taxation of income that may already have 

been subjected to tax in another jurisdiction. This is subject 

to there being a Double Tax Treaty between Uganda and 

the country in question and the adjustment being consistent 

with the ALP. 

Implication on taxpayers 

The new regulations having been published, effective 1 July 

2011, mean that Ugandan taxpayers with transactions with 

related non-resident entities are required to prepare and 

maintain relevant Transfer Pricing documentation. Similarly, 

those with resident related entities subject to common 

control will also be required to maintain transfer pricing 

documentation. Such documentation for a year of income 

must be in place prior to the due date for filing of the income 

tax return for that year. 


Albert Beine 

PKF Uganda 

T: +256 414 341523 

F: +256 414 251370 

E: abeine@ug.pkfea.com 



United Kingdom Update 

Changes proposed to remove current 

restrictions on qualifying expenditure 

The UK Government has taken significant measures this 

year to encourage innovation and research & development 

activity in the UK through a series of proposed reforms to 

the corporate tax system. 

R&D tax relief 

The UK has had a special tax relief for R&D expenditure 

since 2000. Broadly speaking, relief is available to small and 

medium-sized companies (SMEs) for 175% (130% for large 

companies) of eligible expenditure (including staff costs, 

computer software and consumable items) on projects that 

seek an advance in science or technology through the 

resolution of uncertainties. Loss-making SMEs are able to 

claim a payable tax credit instead of claiming an enhanced 

tax deduction. 

The rate of relief is increased from 175% to 200% from 

1 April 2011 and to 225% from 1 April 2012. These 

increases are subject to EU state aid approval. Further 

changes, also proposed to apply from 1 April 2012, are 

intended to remove some current restrictions on qualifying 

expenditure and to make the rules easier to apply. The 

changes are expected to be of most benefit to SMEs. 

■ 

The existing requirement for the company to spend at 

■ 

■ 

■ 

■ 

■ 

least £10,000 in the year concerned on qualifying R&D 

expenditure is to be abolished. 

The current cap on the amount of payable tax credit is 

to be removed. At present, the credit cannot exceed the 

income tax and National Insurance payments made by 

the company in respect of all its employees during the 

year concerned. 

The Government is considering how it could implement 

a system whereby the benefit of the tax relief is 

recognised ‘above the tax line’ in the company’s 

accounts. This would probably require the extension 

of the payable tax credit to large companies. 

Changes are proposed to the rules for allowing relief for 

expenditure on sub-contractors and externally provided 

workers. 

There is currently uncertainty as to the amount of eligible 

expenditure where R&D is carried out in the course of 

production activities. Draft guidance has been published 

which will hopefully clarify the boundaries in this area. 

A new upfront clearance procedure has been proposed 

for smaller companies and new start-ups. 

If you have any queries regarding the availability of R&D tax 

relief in the UK, please contact Denise Roberts, PKF (UK) 

LLP’s leading expert in this area (denise.roberts@uk.pkf.com). 



United Kingdom Update continued 

Patent box 

The Government has also proposed that a new patent box 

regime, based on the Dutch model, will be introduced from 

1 April 2013. Although all UK resident companies (and UK 

branches of overseas companies) will be able to apply the 

regime, it is expected to be of most benefit to larger 

companies with significant patent and similar income. 

The regime would apply a reduced rate of tax on income 

from patents granted by the UK’s Intellectual Property 

Office and the European Patent Office. It may also apply to 

patents granted by selected national patent offices of some 

other European countries. 

In addition, the Government proposes to include other 

forms of intellectual property (IP) within the regime that have 

a strong link to R&D and high-tech activity and are subject 

to examination by an independent authority. These include 

regulatory data protection and certain plant variety rights. 

The reduced rate is intended to apply both to the legal 

owner of the IP and anyone holding an exclusive licence to 

exploit it commercially. However, the company concerned 

must have performed significant activity in developing the 

patented invention or its application. In addition, it must 

remain actively involved in the ongoing decision making 

connected with exploitation of the IP. 

The regime would cover worldwide income earned by UK 

businesses from inventions covered by a currently valid 

qualifying patent. This would include both royalties and 

income from the sale of any products incorporating at least 

one of such inventions. 

Companies will be free to opt in and out of the regime at 

any time and some companies may choose to remain 

outside if the prospective tax saving is small and the 

administration cost in identifying that saving is 

comparatively high. 

It is proposed that the rate of tax on eligible income will 

eventually fall to 10% by 2017 but this will be preceded by 

a gradually reducing rate year-on-year from 2013 onwards. 


Jon Hills 

Partner - Tax services 

PKF(UK)LLP Accountants and business advisers 

T: +44 (0) 20 7065 0000 

E: jon.hills@uk.pkf.com 

W: www.pkf.co.uk 



USA Update 

Update on Reporting of Specified 

Foreign Assets 

As a result of 2010 tax legislation, US individuals with 

interests in “specified foreign financial assets” must attach 

a disclosure statement to their personal income tax return 

for any year in which the aggregate value of such assets is 

greater than $50,000 (or higher value as the IRS may 

prescribe). In addition, this disclosure requirement applies 

to any domestic entity formed or availed of for purposes of 

holding, directly or indirectly, those same specified foreign 

financial assets. 

A US individual includes: 

■ A US citizen 

■ 

■ 

A resident alien of the United States for any part of the 

tax year. 

A nonresident alien who makes an election to be treated 

as a resident alien for purposes of filing a joint income 

tax return. 

“Specified foreign financial assets” are: (1) depository or 

custodial accounts at foreign financial institutions, and (2) to 

the extent not held in an account at a financial institution, (a) 

stocks or securities issued by foreign persons, (b) any other 

financial instrument or contract held for investment that is 

issued by or has a counterparty that is not a US person, 

and (c) any interest in a foreign entity. 

The IRS has developed Form 8938, “Statement of Specified 

Foreign Assets” as a mandatory filing to report these assets. 

A draft version of this form was released in June 2011 and 

most recently draft instructions were released at the end of 

September 2011. 

The draft instructions provide for various asset value 

thresholds dependent upon categories such as an individual’s 

filing status and whether or not the person is living in the 

United States. Within each category there is a higher reporting 

threshold dependent upon asset values at any time during 

the year. The first threshold is more than $50,000 for 

financial assets held on the last day of the tax year and 

more than $100,000 for assets held at any time during the 

year by unmarried taxpayers and married taxpayers living 

in the US and filing separate returns. These thresholds 

increase to $100,000 and $200,000 respectively for married 

filing jointly taxpayers if they are living in the US. 

Bona-Fide residents of a foreign country or taxpayers who 



USA Update continued 

are present in a foreign country or countries during at least 

330 full days during any period of 12 consecutive months 

have an increased threshold. Such individuals meet the 

reporting threshold if they are not filing a joint return and the 

value of their specified foreign financial assets is more than 

$200,000 on the last day of the tax year or more than 

$400,000 at any time during the tax year. These thresholds 

increase to 400,000 and $600,000 respectively for married 

filing jointly taxpayers living abroad. 

Observation 

Form 8938 must be filed in addition to the Report of Foreign 

Bank and Financial Accounts (FBARs) – Form TD F 90-22.1 

even though the same accounts may be reported on both 

forms. 

Duplicative reporting 

However, taxpayers do not have to report a specified foreign 

financial asset on Form 8938 if it has already been reported 

on one or more of the following forms that are filed with the 

IRS for the same year. In such cases, Form 8938 should 

be used to identify on which of the following forms the 

taxpayer has met the reporting requirement. 

■ 

■ 

■ 

■ 

■ 

Form 3520, Annual Return to Report Transactions with 

Foreign Trusts and Receipt of Certain Foreign Gifts. 

Form 5471, Information Return of US Persons with 

Respect to Certain Foreign Corporations. 

Form 8621, Return by a Shareholder of a Passive Foreign 

Investment Company or a Qualified Electing Fund. 

Form 8865, Return of US Persons With Respect to 

certain Foreign Partnerships. 

Form 8891, Beneficiaries of Certain Canadian Registered 

Retirement Plans. 

Filing Deadline and Transitional Role 

The draft instructions to Form 8938 state that for tax years 

beginning after 18 March 2010, taxpayers must report their 

interest in the specified assets if the value thresholds have 

been exceeded. However, a transitional rule is in place that 

provides an individual with a deferral until 2012 to satisfy 

a 2011 filing requirement if he or she (1) had a tax year that 

began after 18 March 2010 (2) was required to file Form 

8938 and (3) filed an annual return before Form 8938 was 

released. Thus, if these conditions are met, the prior year 

filing requirement is satisfied by filing Form 8938 for such 

prior year with the current year personal income tax filings. 

For business entities in which these rules apply, the filing 

deadline could be earlier. 

Penalties for Failure to File Form 8938 

The draft instructions explain that if an individual fails to file a 

correct and complete Form 8938, he or she may be subject 

to a penalty of $10,000. If this failure continues for more than 

90 days after the day on which IRS mails a notice of the 

failure to the individual, he or she will be penalized $10,000 

for each 30-day period (or fraction of the 30-day period) 

during which the failure continues after the expiration of the 

90 day period. The penalty imposed for any failure cannot 

exceed $50,000. For married taxpayers filing a joint return, the 

failure-to-file penalty applies as if the taxpayer and his or her 

spouse were a single person. However, the taxpayer’s and 

spouse’s liability for all penalties remains joint and several. 

Statute of Limitations 

For taxpayers who fail to file Form 8938 or fail to report a 

specified foreign financial asset required to be reported, the 

statute of limitations for the tax year may remain open for all 

or a portion of an income tax return until three years after 

the date on which Form 8938 is filed. 

Extended statute of limitations for failure to 

include income 

If any gross income related to one or more specified foreign 

financial assets is not included and the amount omitted is more 

than $5,000, any tax owed for the tax year can be assessed 

at any time within six years after the return has been filed. 

The IRS also notes in the instructions that if it determines 

that a taxpayer has an interest in one or more specified 

financial assets and it asks for information about the value 




of any asset, but the taxpayer fails to provide sufficient 

information for the IRS to determine the value, the taxpayer 

is presumed to own specified foreign assets with a value of 

more than the applicable reporting threshold. 

Draft Form 8938 and instructions can be obtained from the 

following links 

http://www.irs.gov/pub/irs-dft/f8938--dft.pdf 

http://www.irs.gov/pub/irs-dft/i8938--dft.pdf 


Leo Parmegiani, CPA 

Tax Partner in Charge 

PKF LLP 

Certified Public Accountants 

T: +1 (212) 867-8000 x 426 

F: +1 (212) 687-4346 

E: LParmegiani@PKFNY.COM 

W: www.pkfnewyork.com 

IRS Announces 2011 Voluntary 

Compliance Program Focused 

on Employee vs. Independent 

Contractor Exposure 

On 21 September 2011, the Internal Revenue Service (IRS) 

unveiled a Voluntary Compliance Program (VCP) that offers 

relief for businesses which may have misclassified workers 

as independent contractors, rather than employees, and so 

are potentially liable for significant additional taxes, penalties, 

and interest. 

Background 

Prior to announcement of the VCP, the IRS and the 

Department of Labor (DOL)stepped up joint enforcement 

efforts by signing a new memorandum of understanding to 

strengthen information sharing on enforcement actions aimed 

at misclassified workers. Several states are parties to the 

agreement including, inter alia, New York and Connecticut. 

Observation: This enforcement issue has become more urgent 

as both federal and state authorities seek additional tax 

revenues to close large current and projected budget deficits. 

VCP Summary 

The VCP is available for employers which are currently treating 

(perhaps incorrectly) workers or a class of workers as 

independent contractors, but want to prospectively reclassify 

the workers as employees for federal employment tax 

purposes. The IRS retains discretion over whether to accept 

an employer into the VCP. 

VCP Consequences 

Under the VCP, eligible taxpayers will generally be entitled 

to settle their employment tax liability under a single-year 

assessment of employment taxes of 10% of the Internal 

Revenue Code Section 3509 rates applicable to the most 

recently closed tax year. A 10.68% effective rate applies 

under the VCP in 2011, since the most recently closed tax 

year is 2010, and a 10.28% effective rate will apply in 2012. 

A rate of 3.24% also applies to compensation above the 

Social Security wage base in both years. These rates 

include federal income tax withholding and employer/ 

employee social security and medicare tax. 

Observation: Employers in the program will generally pay 

an amount equal to just over 1% of the wages paid to 

reclassified workers for the most recent tax year and will 

eliminate the potential exposure for all prior years. It is 

unclear how states will react to the VCP program. 

VCP Qualifications 

The VCP is open to businesses, including exempt 

organisations, which have treated workers as independent 

contractors in the past, have filed Forms 1099 for the 

previous three years, and are not currently under a worker 

classification audit by the IRS, the DOL, or a state agency. 

An employer previously audited by the IRS or DOL 

concerning worker classification is eligible for this Program 

if it has complied with the results of such an audit. 

Under the Program, an employer does not have to reclassify 

all of its workers who are currently treated as non-employees. 

However, once an employer chooses to reclassify certain of 

its workers as employees, all workers in the same class – 

i.e., workers who perform the same or similar services – 

must be reclassified as employees. 




Employers apply for the program by filing Form 8952, 

Application for Voluntary Classification Settlement Program. 

This form must be filed at least 60 days before the taxpayer 

wants to begin treating the workers as employees. 

Observation: The IRS has indicated that an employer which 

wants to begin treating a class or classes of workers as 

employees for the fourth quarter of 2011 may do so, but 

should file the Form 8952 as soon as possible. 

Additional VCP Consequences and Limitations 

In addition to filing Form 8952, employers which participate 

must sign a closing agreement with the IRS extending the 

statute of limitations from three years to six years for the 

first three calendar years beginning after the agreement is 

signed. The agreement also requires the taxpayer to treat 

the same class of workers as employees in the future. 

It should be noted that this Program only applies to 

employment taxes and does not address the impact of the 

reclassification of workers on the employer’s retirement 

plans and welfare plans (medical, dental, life, etc.). At this 

time, there does not appear to be any special relief for 

retirement and other benefit plans, so employers need to 

review the impact of any filing under the Program on the 

benefit plans they offer. Specifically for retirement plans, 

corrective contributions on behalf of misclassified workers 

and retesting of the plan’s coverage (required by regulation) 

for the years that workers were misclassified may be 

required. Insured benefits also should be discussed with 

an insurance agent. 

Observation for foreign investors: For a foreign business 

which has classified US individuals conducting US activities 

(perhaps incorrectly) as independent contractors, reclassifying 

them as employees may create a substantial risk of the 

foreign business being engaged in a US trade or business 

or having a permanent establishment in the US for US 

income tax purposes, resulting in increased US taxation. 


Brent Lipschultz 

EisnerAmper LLP 

T: +1 212 949 8700 

E: brent.lipschultz@eisneramper.com 

W: www.eisneramper.com 

The problems of US LLCs for 

non-US investors 

United States Limited Liability Companies (LLCs) are treated 

as transparent for US tax purposes unless an election is 

made to treat them as corporations. They have generally 

become the preferred way for US individuals to operate 

business or make investments. Almost all countries (other 

than the US) treat LLCs as corporations. While the US has 

entered some tax treaties that deal with LLCs, many issues 

remain on the foreign tax treatment of LLCs and their 

members and there have been several recent cases in the 

United Kingdom and Canada when non-residents of the 

US invested in US LLCs. 

As a general rule it is not beneficial for non-US individuals to 

hold interest in US LLCs because, if the LLC is treated as a 

corporation in their jurisdiction, they cannot obtain a credit 

for US taxes incurred by the non-US members. 

In many jurisdictions corporations which own interest in US 

LLCs do not have a problem with LLCs but in some such 

as Canada, US LLCs present problems. However, as a 

general rule, Section 894 denies tax treaty benefits to 

certain types of income received by an LLC and distributed 

to a foreign corporation. 

George Anson v HMRC 

A recent UK tax case, George Anson v. HMRC, involves the 

tax treatment of income remitted to the UK from a member 

of a Delaware LLC. The issue was whether the UK member 

of the LLC should be taxed on partnership profits or dividends 

in the UK. 

An LLC formed in the US state of Delaware is taxed 

transparently in the US so that its profits are taxed as the 

income of its members. In the UK, these LLCs are treated 

as companies by HMRC. 

The Upper Tribunal’s decision to support the appeal by 

HMRC of the First-tier Tribunal's decision in this case is a 

victory for HMRC and restores the traditional understanding 

(which had arguably been called into question by the First-tier 

Tribunal's decision) that a Delaware LLC should be regarded 

as opaque for UK tax purposes. 

Although UK individual investors would generally prefer an 




LLC to be transparent, the opposite is generally true of UK 

corporate investors who would be exempt from corporate 

tax on a distribution of profits by an LLC if it were considered 

opaque for UK purposes. However, if the LLC were 

considered transparent for UK purposes, the corporate 

investor would be taxed on its share of underlying profits 

with credit for any US tax paid. Double taxation relief (DTR) 

can be problematic so outright exemption would be better. 

Background 

George Anson, a UK non-domiciled individual, was a 

participant in a Delaware LLC and was subject to US 

federal and state tax on the profits of the LLC on the basis 

that the LLC had not elected to be treated as a corporation 

and was thus treated as transparent for US tax purposes. 

Mr Anson remitted his income from the LLC to the UK and 

HMRC sought to tax him on the basis that the remitted 

income was a dividend. No credit was given for tax paid in 

the US. Mr Anson successfully appealed to the First-tier 

Tribunal which found that the LLC was transparent for UK 

tax purposes and so directed that HMRC should allow a 

credit (under the US-UK double taxation agreement) for the 

US tax paid by Mr Anson on the basis that it was computed 

by reference to the same profits or income which HMRC 

sought to tax in the UK. 

The Decision 

The Upper Tribunal strongly doubted the reasoning of 

the First-tier Tribunal and found that Mr. Anson had no 

proprietary interest in the profits of the LLC. It pointed to 

section 18-701 of Delaware LLC Act, which states that 

members of the LLC have no interest in specific LLC 

property, and said that there was “nothing in the findings, 

or in the evidence” which could have justified the 

conclusions of the First-tier Tribunal. 

The Upper Tribunal regarded the absence of a proprietary 

interest as “fatal” to Mr Anson’s contention that the LLC 

was transparent for UK tax purposes. The Upper Tribunal 

explained that there cannot be any ownership of profits in 

the absence of a proprietary interest in the underlying 

assets, since the profits are “not something which one 

can own as an asset. The profits of an enterprise are an 

abstract notion arrived at after a calculation”. 

Instead, the Upper Tribunal found that Mr Anson merely had 

a contractual entitlement to receive amounts credited to his 

capital account. As such, those amounts when distributed 

to Mr Anson were clearly not the same amounts which had 

been subject to US tax and, accordingly, he lost on appeal. 

Comment 

HMRC has not yet commented on the decision which is 

consistent with its long-standing position that a Delaware 

LLC should generally be treated as being a corporation for 

UK tax purposes. The approach of the Upper Tribunal is 

also useful in confirming the traditional approach of applying 

the criteria laid down by the Court of Appeal in Memec plc v 

IRC [1998] STC 754 alongside an analysis of the local law 

and the drafting of the governing/constitutional 

documentation of the vehicle in question when considering 

the matter of entity classification. 

Bayfine v HMRC 

This is another interesting case on the interpretation of the 

UK/US treaty, which has potential ramifications for the tax 

treatment of US LLCs. 

Two UK subsidiaries of a US parent (BDE) entered into 

complex forward contract arrangements with a counterparty 

structured to be ‘self-cancelling’ - i.e. one UK subsidiary 

produced a loss and the other UK subsidiary an equal and 

opposite profit (BUK). The UK subsidiaries were each UK 

incorporated limited companies while BDE was US 

incorporated and resident and an ultimate subsidiary of 

Morgan Stanley. BUK and its sister company were ‘check 

the box’ entities for US tax purposes, meaning that the US 

treated them as transparent entities and taxed the profit 

produced by BUK as profits of BDE (as far as HMRC is 

concerned ‘checking the box’ has no impact on an entity’s 

UK tax treatment). On appeal from the Special 

Commissioners, the High Court had to determine whether 

DTR was applicable in the UK to the profits of BUK as a 

result of the tax paid by BDE in the US. 

HMRC had argued that, as BUK was a UK resident, the UK 

had primary taxing rights. The Special Commissioners had 

agreed and also decided that the profits subject to tax had 

a UK source on a ‘common sense’ approach. HMRC had 

also argued that, even if there was DTR on the profits, the 

extent of the relief should be limited as the taxpayers had not 

taken all reasonable steps to reduce the foreign tax burden. 

If there was no DTR, then the taxpayers argued that they 




should be entitled to unilateral relief for the US tax already 

paid. The issue was whether this relief was available given 

that the tax in question had actually been paid by BDE and 

not the UK subsidiaries. 

The Decision 

In allowing the appeal, the High Court was critical of the 

‘common sense’ approach followed by the Special 

Commissioners on the basis that there was no principle 

allowing them to follow such an approach. The judge did 

not see how a ‘common sense’ view could allow the 

interpretation they had arrived at. The High Court was 

of the view that, following National Bank of Greece, the 

source of income was more material than the residency 

of the company. 

In determining this source, it took into account the locations 

of the operations giving rise to the profits and the other 

party to the arrangements, the law which they were 

expressed to be governed by, and the lex situs of the 

underlying assets. On this basis, the profits of BUK were 

held to be US in origin and this gave the US primary 

taxing rights. 

The High Court felt that, given that either state was entitled 

to tax the profits, had the UK taxed BUK before the US had 

taxed BDE (the opposite order of events on the facts) then 

the US would have had to give credit rather than the other 

way around. 

TSD Securities (USA) LLC v The Queen 

The Canadian Tax Court in the case of TSD Securities (USA) 

LLC v The Queen recently decided against the longstanding 

position of the Canada Revenue Agency that US LLCs are 

not entitled to protection of the Canada-UK tax treaty. The 

basis of this decision appears to have been that, although 

the LLC was not liable for tax in the US (which was 

necessary for residence on a strict interpretation of the text 

of the treaty); its members were subject to tax there. This 

case has significant ramifications for US LLCs with Canadian 

income which has previously been subject to withholding 

taxes and which may now be entitled to a refund. 

operation of this rule. Accordingly, taxpayers with LLCs 

in their existing Canada-US structures should carefully 

consider the implications of this case as it applies to those 

current arrangements and the manner in which the fifth 

protocol may apply. 

Treatment of LLCs in other Jurisdictions 

Some countries have announced that US residents who 

invest in their countries through US LLCs may derive tax 

treaty benefits. For example, on 31 March 2004 the 

Mexican Tax Administration Service published a rule 

allowing benefits of the Mexico-US Tax Treaty to US 

members of US LLCs. The rule does not extend to 

Mexican residents investing in a US LLC. 

On 29 March 2004, the German tax authorities published 

a letter memorandum on classification of US LLCs. In 

essence, the classification approach of German tax 

authorities is very much like the US entity classification rules 

before their revision in 2006 (elect-the-box regulations). 


Harold Adrion 

EisnerAmperLLP 

T: +1 212 891 4082 

E: Harold.Adrion@eisneramper.com 

Or 

Jon Hills 

Partner - Tax services 

PKF(UK)LLP Accountants and business advisers 

T: +44 (0) 20 7065 0000 

E: jon.hills@uk.pkf.com 

W: www.pkf.co.uk 

While the fifth protocol to the treaty includes a provision that 

is intended to allow treaty benefits to be claimed on income 

earned by a US resident through an LLC, significant 

uncertainties remain regarding the interpretation and 



IMPORTANT DISCLAIMER: This publication has been distributed on the 

express terms and understanding that the authors are not responsible for the 

results of any actions which are undertaken on the basis of the information 

which is contained within this publication, nor for any error in, or omission from, 

this publication. 

The publishers and the authors expressly disclaim all and any liability and 

responsibility to any person, entity or corporation who acts or fails to act as a 

consequence of any reliance upon the whole or any part of the contents of this 

publication. 

Accordingly no person, entity or corporation should act or rely upon any matter 

or information as contained or implied within this publication without first obtaining 

advice from an appropriately qualified professional person or firm of advisors, and 

ensuring that such advice specifically relates to their particular circumstances. 

PKF International is a network of legally independent member firms administered 

by PKF International Limited (PKFI). Neither PKFI nor the member firms of the 

network generally accept any responsibility or liability for the actions or inactions 

on the part of any individual member firm or firms 

PKF International Ltd 

Farringdon Place 

20 Farringdon Road 

London EC1M 3AP 

Tel: 020 7065 0104 

Fax: 020 7065 0194 

www.pkf.com 

November 2011

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