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ICELAND UNVEILS NEW CONTROLLED FOREIGN COMPANY REGIME |
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Iceland had introduced its first controlled foreign company regime. The government introduced the new rules in a bid to prevent tax evasion at a time when the country’s economy continues to deteriorate.
Under the new legislation, an Icelandic shareholder who owns in excess of 50% of the capital or voting rights of a non-resident company based in a low tax jurisdicition will be taxed on the income of the foreign subsidiary regardless of whether that income is distributed to them.
Furthermore, an Iceland resident who controls a foreign entity resident in a low tax jurisdiction will be taxed in Iceland if they benefit either directly or indirectly from the company.
For the purposes of these provisions, a low tax jurisdiction is one where the company income tax rate is less than two-thirds of Iceland’s 15% rate.
The legislation is not very comprehensive at this stage, however it is possible the government may revise the provisions later in 2009. |
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FLEXIBILITY FOR LABUAN HOLDING COMPANIES TO HAVE PHYSICAL PRESENCE IN KUALA LUMPUR |
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With effect from 1 June 2009, Labuan Holding Companies are able to have a physical presence in Kuala Lumpur. Equally, banking institutions and insurance companies that meet predetermined criteria will also be accorded the flexibility to have a physical presence in the Malaysian capital city from 2010 and 2011 respectively.
Malaysia’s current Prime Minister, Najib Razak who was sworn in on 3 April 2009 announced the move as part of the financial liberalisation package and the flexibility is granted by the Labuan Offshore Financial Services Authority and the Companies Commission of Malaysia (Suruhanjaya Syarikay Malaysia), these bodies will jointly oversee the implementation of the initiative.
Multinationals that meet the specified criteria will be in a position to enhance their competitiveness by establishing their operational and management headquarters onshore and benefit from the developed infrastructure Kuala Lumpur has to offer. |
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STAMP DUTY LEVIED ON STOCK TRADING LIFTED IN THE PHILIPPINES |
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The Philippine Senate approved, on the third and final reading, a landmark bill that will permanently remove documentary stamp tax (DST) on stock trades. The move significantly reduces the cost of investing in the local stock exchange representing a much-needed boost to the Philippines’ stock market.
Stock Trades were exempted from DST under Republic Act No. 9243 from 2004 to 2009 and trading activity increased significantly throughout this period. The exemption, however, expired in March 2009. Had the bill not been passed, a PHP0.75 levy for every PHP200 worth of secondary shares would have applied to stock transactions and the reimposition of this tax could have labelled the Philippines as one of two Asian markets charging two separate taxes on the same transaction, along with Indonesia.
DST previously had represented a second tax on top of the stock transaction tax (STT) which is half of 1% and is imposed on sellers regardless of whether there is a gain or loss. Compared to other exchanges, the Philippine Stock Exchange (PSE) has consistently ranked poorly in terms of competitiveness due to the high cost of investing.
The reform aims to boost activity on the local stock exchange by driving down costs. The President of the PSE, Francis Lim believes the abolition of DST is a “significant leap” and will attract both local and foreign investors improving the Philippines’ investment rating.
This bill represents the latest market-friendly law recently passed in the Philippines along with the Credit Information Act and the Personal and Equity Retirement Account Act. |
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RUSSIAN COURT UPHOLDS POSITION THAT TAXPAYERS CAN CARRY FORWARD LOSSES |
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The Russian High Arbitration court, on consideration of a case involving a Russian company, Investment Bank Trust (IBT), has upheld the position that taxpayers can carry forward tax losses in full, without deducting income derived from other activity and from dividends that are taxed at a rate of 0%.
In 2004, IBT earned interest on state and municipal securities on which they paid the appropriate level of corporate tax. Income was also received in the form of dividends, but the corporate tax due was withheld. The company incurred losses from its principal activity during this period which were carried forward and deducted from its taxable income registered in 2005. In a 2006 audit, the tax authorities alleged that IBT had understated its tax liabilities for 2005 due to a miscalculation of losses incurred in 2004.
IBT, in disagreement with the decision appealed to the Arbitration Court of Moscow, the case made its way through the Russian Courts and upon a final petition to the High Arbitration Court on the grounds that material tax law had been misapplied and misconstrued by the lower courts, the Supreme Arbitration Court ruled in favour of IBT finding no basis in Russian tax law for the tax authority’s position.
The Supreme Arbitration Court found that the Russian tax code comprises clear rules regarding the determination of the corporate tax base and the calculation of profits and expenses. The tax code does not allow double taxation and on this basis the court also ruled that where an entity and not the recipient pays the relevant tax on profits from dividends, the recipient is unable to take the dividends into account when calculating carried forward tax losses. |
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CHINA ISSUES LONG-AWAITED CORPORATE RESTRUCTURING TAX RULES |
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China has released new rules on the tax treatment of corporate restructurings. The legislation was released to the public on 7 May 2009 and fills a gap which has existed since the Corporate Income Tax Law (CIT Law) came into force on 1 January 2008. The rules will operate retrospectively from 1 January 2008 and cover various types of corporate reorganisations such as:
• Equity acquisitions;
• Asset acquisitions;
• Mergers;
• Debt restructurings; and
• Enterprise spin-offs.
The CIT Law and accompanying rules continue to govern any restructuring classified as “ordinary” and any associated gains or losses will be recognised at the time of the transaction. Under the new rules however, gains and losses may be temporarily deferred where a restructuring is classified as “special”. To qualify for this treatment, the following criteria must be satisfied:
• There must be a strong commercial motivation behind the reorganisation;
• Restructured equity or assets must reach a certain ratio (for example, no less than 75% of total equity assets);
• There must be no change to the substantive business in the subsequent 12 months;
• The consideration for the restructuring must comprise at least 85% equity with non-equity consideration not exceeding 15%;
• The equity consideration received by the original shareholder for the restructured assets, must not be transferred within 12 months.
This special tax treatment can also benefit entities involved in cross-border restructuring, albeit in more limited circumstances:
• Where a parent Special Purpose Vehicle (SPV) transfers its equity interest in a resident SPV to a subsidiary SPV (only where the transaction has no effect on capitals gains withholding tax and where the equity of the subsidiary SPV is not transferred for a further three years).
• Where a non-resident enterprise transfers its equity in a resident entity to a 100% resident subsidiary.
• Where a resident entity invests in a non-resident entity in which it holds 100% direct ownership.
The restructuring rules have generally been welcomed by tax professionals as they provide clarity and guidance and offer greater flexibility for complex transactions.
The rules are contained in a notice jointly issued by the Ministry of Finance and the State Administration of Taxation on Certain Issues on Corporate Income Tax Treatment of Corporate Restructuring Transactions (Caishui [2009] No. 59 (Restructure Rules). |
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