Central management and control

India: CBDT publishes a draft notice on special transitional provisions for a foreign company based in India

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The Finance Ministry on 15 June 2017, issued a draft notification of transitional provisions for foreign companies in the first year of becoming resident based on their place of effective management.

The notification has clarified that the tax on foreign companies qualifying as resident firms due to their place of effective management (POEM) will be the same as that for any foreign company and will be imposed at a rate of 40%.

The draft notification by the Central Board of Direct Taxes (CBDT) provides exceptions, modifications and adaptations for computation of total income, treatment of unabsorbed depreciation, set off or carry forward of losses, collection, recovery and special provisions for tax avoidance.

The notification, once finalised, will come into effect from April 1, 2017.

Australia: Draft Taxation Ruling TR 2017/D2 – Central Management and Control test of residency

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The Australian Tax Office has now released a new draft ruling TR 2017/D2 and has withdrawn its preceding ruling TR 2004/15 on the tax residence of foreign incorporated companies.

Following the decision in Bywater Investments Limited & Ors v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 the Commissioner has formed the view that the position expressed in former TR 2004/15 on when a company carries on business in Australia can no longer be sustained. At [57] the majority of the High Court rejected the contention that to be a resident of Australia, a company must have its central management and control in Australia and in addition it must also carry on its business operations in Australia.

Therefore, if a company carries on business and has its central management and control in Australia, it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and its trading operations are conducted outside Australia.

The draft ruling incorporates a number of changes from the standard ATO rulings template with the intent of providing more practical and streamlined advice. The ruling sets out the Commissioner’s view as to the principles relevant to applying the central management and control test of residency.

Norway proposes new corporate residency rules

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The Finance Minister opened a public hearing regarding the corporate tax residency rules under section 2-2 of the Tax Law (Skatteloven) on 16 March 2017. There is no definition of residence is available now in the Norwegian tax legislation for legal entities. Generally the place of residence depends on the location of the central management and control of the company basically where the central business decisions of the company are made. However, a company is normally deemed to be a resident if it is incorporated under Norwegian law.

According to the hearing, section 2-2 of the Tax Law should be amended and the term “residence” would include companies established in Norway and companies having their effective management in Norway. The amendments will be effective from fiscal year 2018.

 

India: Clarification on determination of POEM provision

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The Central Board of Direct Taxes (CBDT) has issued Circular No. 8/2017 of 23 February 2017 clarifying that the existing provisions in place of effective management (POEM) will not apply to a company with a turnover or gross receipts of INR 500 million or less in a financial year.

The concept of POEM in determining the residential status of a company, other than an Indian company, was introduced by the Finance Act, 2015 and will take effect from 1 April 2017. The CBDT previously issued Circular No. 6/2017 of 24 January 2017 providing guiding principles for determining the POEM of a company.

India: CBDT Publishes draft guidelines for determination of the POEM

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The Central Board of Direct Taxes (CBDT) on 24 January 2017, has issued the guiding principles to be followed for determination of the place of effective management of a company (POEM). The concept of PoEM for deciding the residential status of a company was introduced by the Finance Act, 2015. The guideline was effective from 01.04.2016, and accordingly, shall apply from the assessment year 2017-18 onwards.

Taiwan: Finance Minister publishes draft rules on CFC and PEM

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Finance Minister issued draft regulations on a controlled foreign company (CFC) and place of effective management commenced in July 2016 on 9 November 2016. The draft regulations intend to explain CFC income’s timing and amount addition CFC earnings exemptions, and the filing and reporting obligation of the PEM.

A domestic profit-seeking company will be requisite to contain its pro rata share of CFC’s earnings in its taxable income when the company and its related parties hold more than 50% of the shares of a CFC, or less than 50% of the shares but have significant influence on the CFC (i.e. personnel or financial decision power).

CFC’s earnings will be exempt if one of the following two conditions is fulfilled:

(1) The CFC has substance and active trade or business in its local jurisdiction by satisfying both of the following conditions:

  • Business need to have a fixed place and hires employees to conduct business locally.
  • Annual passive income (Dividend, interest, royalty, rent and capital gain) is less than 10% of the combined net operating income and total non-operating gross income though, royalties or capital gains resultant from the CFC’s self-developed intangible assets are disqualified from the passive income calculation.

(2) The CFC’s earnings in cumulative do not exceed the NTD7 million (US$230,000) threshold in a fiscal year.

Place of effective management rule: An enterprise currently is considered a Taiwan resident only if its head office is located in Taiwan. Under the new POEM rule, a foreign company will be deemed to have a PEM in Taiwan and will be subject to tax in Taiwan if all of the following conditions are met: Major decision makers of general management, accounting and finance or human resources, reside in Taiwan, or major business decisions are made in Taiwan; Accounting books and records, or the board or shareholder meeting minutes are prepared or stored in Taiwan; Major business activities are executed in Taiwan

However, a foreign company is not subject to the PEM rule if it conducts the above activities to meet the requirements of the listed company regulations of Taiwan Stock Exchange or over the counter stock trading regulations.

PEM tax reporting requirements: A PEM is treated as a domestic taxable entity and is required to comply with the following: File a corporate income tax return, disclose related party transactions, and pay the income tax, including undistributed earnings tax and provisional tax; Set up an imputation tax account to record the amount of income tax paid at the company level that could be distributed to shareholders in the form of tax credit; File and pay the withholding tax to the tax authority and provide the withholding tax certificate to income recipients; Pay taxes before other creditors’ claims (taxation safeguards principle) A foreign company can voluntarily apply for the PEM status and, once the application is approved, it can proceed with PEM registration. The tax authority may also request a foreign company to become PEM registered. Under both circumstances, a PEM needs to start meeting its tax obligations from the day it is PEM registered. If the foreign company fails to register before the due date, the tax collection authority may appoint the major decision maker as the responsible person of the foreign company who will be liable for noncompliance.

Israel: Tax provisions in proposed budget plan for 2017-2018

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The budget plan proposal for 2017-2018 announces significant changes in accordance with international taxation, and would be appropriate for individuals, multinational corporations operating in Israel and Israeli corporations operating abroad.

The following brief description gives a high-level summary of some of the proposed tax changes and expected consequences:

An amendment to section 1 of the Israeli Tax Ordinance (ITO) would introduce a presumption that the management and control of businesses (i.e., a body of persons) incorporated outside of Israel would be regarded as being located in Israel if: (i) Israeli residents are the controlling persons for tax purposes, the beneficiaries of or are entitled to 50% or more of its income or profits, directly or indirectly; and (ii) The applicable effective tax rate for all of its profits, if not viewed as Israeli resident is 15% or less and the control of business is a resident of a country with which Israel doesn’t have any double tax treaty; or it’s country of residence, if not regarded as a resident of Israel, is a country that does not levy tax on income generated outside of the country.

Additionally, an amendment to section 131 of the ITO has been proposed, with the change creating and imposing a reporting obligation for a body of persons claiming such measures do not apply to it.