Association of European Businesses in the Russian FederationAEB TAX COMMITTEE OPEN EVENT Katerina Hotel, Celsius Hall, Shliuzovaya nab. 6/1 January 31, 2007: Association of European Businesses in the Russian Federation AEB TAX COMMITTEE OPEN EVENT Katerina Hotel, Celsius Hall, Shliuzovaya nab. 6/1 January 31, 2007 “Foreign Tax Planning Experience: Prospects for Russia” Chaired by Alina Lavrentieva, AEB Tax Committee Deputy Chairwoman, Director, PricewaterhouseCoopers


EU Parent-Subsidiary Directive 90/435/CEEFrench example Evelyne BagdassarianSenior Tax Lawyer: EU Parent-Subsidiary Directive 90/435/CEE French example Evelyne Bagdassarian Senior Tax Lawyer January 31, 2007 Open Session organised by the Taxation Committee of the Association of European Businesses in the Russian Federation


Slide3: OUTLINE Introduction Topic 1 : EU Parent-Subsidiary Directive 90/435/CEE, July 23, 1990 Topic 2 : French example Topic 3 : Recent developments of ECJ case law Topic 4 : "Participation exemption" regimes in the European Union


Slide4: Purpose of the Directive Double taxation relief: the State of the parent company and the State of its permanent establishment ("PE") shall either refrain from taxing profits received or tax such profits while authorising the parent company and the PE to deduct a tax credit equal to the corporate income tax ("CIT") paid by the subsidiary and any lower-tier subsidiary, up to the limit of the amount of the corresponding tax due. Each Member State has the option of providing that any charges relating to the holding and any losses resulting from the distribution of the profits of the subsidiary may not be deducted from the taxable profits of the parent company. Where such costs are fixed as a flat rate, it may not exceed 5 % of the profits distributed by the subsidiary. Elimination of withholding tax ("WHT") on dividends on qualifying shareholdings within the EU: profits which a subsidiary distributes to its parent company shall be exempt from WHT and the Member State of a parent company may not charge WHT on the profits which such a company receives from a subsidiary. 1. EU Parent-Subsidiary Directive 90/435/CEE Topic 1


Slide5: Scope of the Directive Each Member State shall apply this Directive to distributions of profits received by companies of that State which come from their subsidiaries of other Member States, to distributions of profits by companies of that State to companies of other Member States of which they are subsidiaries, to distributions of profits received by PEs situated in that State of companies of other Member States which come from their subsidiaries of a Member State other than that where the PE is situated, to distributions of profits by companies of that State to PEs situated in another Member State of companies of the same Member State of which they are subsidiaries. The Directive "shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse". 1. EU Parent-Subsidiary Directive 90/435/CEE Topic 1


Slide6: Scope of the Directive Companies (i) having one of the legal forms listed in the Annex to the Directive (ii) are EU resident and are not considered to be resident for tax purposes outside EU (ii) are subject to CIT without the possibility of option or of being exempt; Only where (i) a company of a Member State has a minimum holding of 15% in the capital of a company of another Member State or (ii) a company of a Member State which has a minimum holding of 15 % in the capital of a company of the same Member State, held in whole or in part by a permanent establishment of the former company situated in another Member State. From 1 January 2009 the minimum holding percentage shall be 10 %. By way of derogation, Member States shall have the option of: replacing, by means of a bilateral agreement, the criterion of a holding in the capital by that of a holding of voting rights, not applying this Directive to companies of that Member State which do not maintain for an uninterrupted period of at least two years holdings qualifying them as parent companies or to those of their companies in which a company of another Member State does not maintain such a holding for an uninterrupted period of at least two years. 1. EU Parent-Subsidiary Directive 90/435/CEE Topic 1


Slide7: Dividends received by French parent are exempt from CIT Optional regime: 95% of dividends (and other income from participation assimilated to dividends) received from subsidiaries are exempt from CIT. The remaining 5% or actual expenses if lower - deemed to correspond to the expenses incurred on the participation - is subject to CIT at standard rate (34.43%). Dividends received from certain types of companies are excluded (SICAV etc.) Conditions The Parent company must be subject to CIT in France at the standard rate; The subsidiary may be a French or a foreign (EU or non-EU) entity subject to CIT or to an equivalent tax; The Parent company must hold a direct participation of at least 5% in the share capital of the subsidiary (a global holding of 5% of dividends and voting rights); The shares in the subsidiary must be registered or deposited with an establishment approved by the French administration; The Parent company must retain the shares for at least 2 years. The exemption applies without the need for the expiry of the minimum holding period. However, the breach of the obligation to retain the shares for at least 2 years results in the retroactive taxation of unduly exempted amounts and the payment of late interest (0.4% per month). French example - Participation exemption (Régime des sociétés mères) Topic 2


Slide8: Dividends paid by a French subsidiary to a qualifying EU parent or its French or EU PE are exempt from WHT on following conditions : The subsidiary must be subject to CIT in France at the standard rate (not exempt); The Parent company must show that it is the beneficial owner of the dividends and that it satisfies the following conditions: It has one of the legal forms listed in the Annex to the Directive; It has its place of effective management in the EU and is not deemed to be resident in a non-EU country for the purposes of tax treaties; It is subject to CIT without being exempt; It has held, directly and continuously for at least 2 years, 15% or more of the share capital (rights to dividend and voting rights) of the French subsidiary (10% for dividends distributed as from 1 January 2009 onwards). If the 2-year holding period has not yet expired at the time of the distribution, provisional relief from WHT applies on the condition that the Parent undertakes to respect the minimum holding period and appoints a fiscal representative in France who is held liable for the WHT if the 2-year holding requirement is not observed. French example - Withholding tax exemption (article 119 ter of the FTC) Topic 2


Slide9: Anti-abuse provisions The exemption is not applicable when the beneficiary of the French source dividends is a legal entity, which is directly or indirectly controlled by non-EU residents, unless such legal entity proves upon request from the French tax authorities that such chain of ownership is not solely - or mainly - aimed at benefiting from the WHT exemption. French tax authorities indicated that the control may be direct or indirect, legal or factual, and defined the control as “the holding by a company of the majority of the voting rights in the other company directly or through contractual agreements entered into with other shareholders. Also, a company controls the other company if it determines actually the decisions in the other company through its voting rights”. As a practical rule, anti-abuse provisions do not apply if the total sum of the withholding taxes triggered by the distribution of French source income up to the non-EU company, is at least equal to the withholding taxes which would have been levied in France (pursuant to French domestic tax law or to applicable tax treaties) upon the direct distribution of the dividends to the non-EU shareholders. French example - Withholding tax exemption (article 119 ter of the FTC) Topic 2


Slide10: Denkavit II (ECJ December 14, 2006 C-170/05) Is WHT applicable on outbound dividends? Cadbury Schweppes (ECJ September 12, 2006, C. A-196/04) Substance requirements for Holding companies in EU What is required to fully exercise freedom of establishment and benefit from tax treaties? 3. Recent Developments of ECJ Case law Topic 3


Slide11: Topic 3 Luxembourg Shareholder Russian Shareholder French Subsidiary 3. Recent Developments of ECJ Case law French Shareholder Luxembourg Russia Dividend : 100 less WHT WHT : 5% (if K€ 76 and exempted) or 10% (if one of the conditions only) or 15% France 5 x 34.43 % = 1,7 100 - 1,7 = 98,3 5 % 15 % Dividend : 98,3 No WHT Dividend : 98,3 less WHT WHT : 10% (if 30% holding and K€75) or 15% Dividend : 100 No WHT


Slide12: 4. Participation exemption in the EU Topic 4


Slide13: Association d'avocats 26, cours Albert 1er 75008 Paris - France Tél. +33 (0)1 40 75 60 00 Fax +33 (0)1 43 59 37 79 E-mail : info@gide.com www.gide.com Contact (s) : Evelyne Bagdassarian bagdassarian@gide.com Algiers Beijing Belgrade Brussels Bucharest Budapest Casablanca Hanoi Istanbul London Moscow New York Paris Prague Riyadh Shanghai Tunis Warsaw


Association of European Businesses in the Russian FederationAEB TAX COMMITTEE OPEN EVENT Katerina Hotel, Celsius Hall, Shliuzovaya nab. 6/1 January 31, 2007: Association of European Businesses in the Russian Federation AEB TAX COMMITTEE OPEN EVENT Katerina Hotel, Celsius Hall, Shliuzovaya nab. 6/1 January 31, 2007 “Foreign Tax Planning Experience: Prospects for Russia” Chaired by Alina Lavrentieva, AEB Tax Committee Deputy Chairwoman, Director, PricewaterhouseCoopers