Exchange of Information & Substance
•
2 likes•861 views
Substance as an important element of tax planning and global trends in exchange of information. CONTENT -Information exchange: general facts. -AEOI: brief chronology. -AEOI: general ideas. -AEOI: scheme. -AEOI: specifics. -Practical example: Cyprus. -What is “substance” and where does it come from? -Today`s substance requirements. -Actions and measures, indicating “substance”. -Issues to be considered during the obtainment of Cyprus tax residency certificate. -Questions asked by tax authorities investigating into substance over form.
Recommended
More Related Content
What's hot
What's hot (20)
Viewers also liked
Viewers also liked (20)
Similar to Exchange of Information & Substance
Similar to Exchange of Information & Substance (20)
More from Eurofast
More from Eurofast (14)
Recently uploaded
Recently uploaded (20)
Exchange of Information & Substance
- 1. Substance as an important element of tax planning and global trends in exchange of information 06 October 2016 Alena Malaya and Anna Pushkaryova
- 2. CONTENTCONTENT 1.1.Information exchange: general facts.Information exchange: general facts. 2.2.AEOI: brief chronology.AEOI: brief chronology. 3.3.AEOI: general ideas.AEOI: general ideas. 4.4.AEOI: scheme.AEOI: scheme. 5.5.AEOI: specifics.AEOI: specifics. 6.6.Practical example: Cyprus.Practical example: Cyprus. 7.7.What is “substance” and where does it come from?What is “substance” and where does it come from? 8.8.Today`s substance requirements.Today`s substance requirements. 9.9.Actions and measures, indicating “substance”.Actions and measures, indicating “substance”. 10.10. Issues to be considered during the obtainment of Cyprus tax residencyIssues to be considered during the obtainment of Cyprus tax residency certificate.certificate. 11.11.Questions asked by tax authorities investigating into substance over form.Questions asked by tax authorities investigating into substance over form.
- 3. Exchange of informationExchange of information Information exchange: general facts “Information exchange” between different jurisdictions around the world is not a new term. There is a great number of existing legal instruments, serving as basis for information exchange (e.g. OECD Model Convention on Income and on Capital - “Model Tax Convention”, OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, FATCA (Foreign Account Tax Compliance Act), bilateral treaties, EU Council Directive 2014/107/EU, EU Council Directive 2014/48/EU. Information can be exchanged - upon request, - spontaneously, - automatically.
- 4. Exchange of informationExchange of information Automatic exchange of information (AEOI): brief chronology -2010: FATCA -2010 (as amended): OECD Convention on Mutual Administrative Assistance in Tax Matters -2014: OECD released the Global AEOI Standard: Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard (CRS). As of July 26, 2016, Standard for Automatic Exchange of Financial Account Information has been endorsed by 101 jurisdictions (54 jurisdictions committed to start exchanges from 1 January 2017 and 47 jurisdictions - from 1 January 2018). As of August 19, 2016, CRS MCAA has been endorsed by 83 jurisdictions.
- 5. Exchange of informationExchange of information JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2017 (54) Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom
- 6. Exchange of informationExchange of information JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018 (46) Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu
- 7. Exchange of informationExchange of information AEOI: general ideas New Standard for AEOI requires participating jurisdictions, namely their tax authorities, to collect relevant financial information on reportable accounts (accounts of tax residents of reportable jurisdictions) from their financial institutions and then send it automatically to tax authorities of the reportable jurisdictions on annual basis. Information from individual and entities financial accounts (including trusts and foundations) will be reportable automatically. Information on controlling persons of passive non-financial entities will be also reported. Details will follow…
- 8. Exchange of informationExchange of information AEOI: scheme
- 9. Exchange of information 1 2 3 Cypriot Bank Dutch Holding Co., with Russian UBO Cypriot Tax Authority Dutch Tax Authority Russian Tax Authority By 2018 By 2017
- 10. Exchange of informationExchange of information AEOI: specifics Who will report? The following Financial Institutions (FI) of Participating Jurisdiction: •Custodial institution •Depositary institution •Investment entity •Specified insurance company
- 11. Exchange of informationExchange of information AEOI: specifics To whom the FI will report? When AEOI starts?
- 12. Exchange of informationExchange of information AEOI: specifics Which accounts will be reportable? What are the criteria's for identifying whether NFE is active or passive?
- 13. Exchange of informationExchange of information AEOI: specifics What do the controlling person (natural persons!) means?
- 14. Exchange of informationExchange of information AEOI: specifics Are there any exclusions from the reportable accounts? What information is reportable?
- 15. Exchange of informationExchange of information AEOI: specifics Between which jurisdictions information will be exchanged?
- 16. Exchange of informationExchange of information Practical example: Cyprus On October 29, 2014, the Republic of Cyprus, following a Council of Ministers decision dated October 22, 2014, signed the CRS MCAA, and determined September 2017 as the first date of exchange (i.e. with respect to year 2016 the information will be submitted and exchanged by September 2017). In practise, Cyprus Banks have already started gathering the information for the CRS reporting. In January 2017 Cyprus Banks will start reporting to the local tax authorities. While by September 2017 the first exchange of information between tax authorities will take place. Information will be exchanged on automatic basis only with jurisdictions, with which Cyprus mutually agreed to exchange information due to the relevant bilateral agreements.
- 17. Exchange of informationExchange of information List of jurisdictions with competent authorities of which Cyprus intends to exchange information can be found on the website of the Ministry of Finance through the following link: http://www.mof.gov.cy/mof/taxdep.nsf/All/9BB750E421879BD9C2257FF100314072/$file/CRS
- 18. Exchange of informationExchange of information Examples of lists of Participating Jurisdictions (some extracts)
- 19. SubstanceSubstance SUBSTANCE DETERMINES TAX RESIDENCY Where does the need for substance comes from? Tax authorities challenge the profit - receiving countries on grounds of: • no economic reality • artificiality • absence of business purpose • genuine activity • not at arm’s length transactions • treaty shopping • etc. Substance over form
- 20. What is substance? The level of the genuine economic activity of the corporate structure Lack of substance may result in: Not obtaining the economic benefits of the relevant double tax treaties (through the limitation of benefits provision in the Treaty or through domestic anti-avoidance legislation) ; Tax Authorities challenging the corporate structure of the group; Increase in the effective tax burden of the group ■ Substance is extremely important Is there a threat to tax residency of CyprusIs there a threat to tax residency of Cyprus companies?companies?
- 21. SubstanceSubstance Today`s substance requirements New rules on substance in the new EU Parent/Subsidiaty Directive Rules under EU Commission`s proposed anti-tax avoidance directive What will substance affect? New rules of tax residency in Russia and Greece require substance abroad Substance required for certain types of companies
- 22. SOME ACTIONS AND MEASURES INDICATING SUBSTANCESOME ACTIONS AND MEASURES INDICATING SUBSTANCE ■ Qualified persons as members of the BoD ■ Bank account – at least one signatory should be located in Cyprus ■ Bank account maintenance with the local Cyprus bank ■ Fully fledeged office with local employees ■ Accounting and HR functions in Cyprus ■ Full and accurate Company documentation ■ Company Seal – kept at the registered office and used sensibly ■ Board Meetings – held in the place of registration ■ Issuance of PoA – only for specific transactions ■ Special attention – contract signing, invoicing, operating bank accounts, board resolutions ■ Fully-functioning office SubstanceSubstance
- 23. Determining Tax Residency in Cyprus based onDetermining Tax Residency in Cyprus based on “Management and Control” notion & Economic Substance“Management and Control” notion & Economic Substance Business purpose in Cyprus, nature and operation in Cyprus The country in which the investment is taking place Real physical presence (owned distinct office OR serviced business centre) People working part-time or full-time in the company's offices Dedicated telephone, fax, and internet lines, website and email addresses B/S must show some PPE Min 1 Cyprus bank a/c, and operated by a Cypriot member of the BoD Proper accounting books and records in Cyprus, Timely annual AFS, annual tax returns, no tax amounts due. PoAs, level of capital, execution of contracts, BoD minutes, etc... SubstanceSubstance
- 24. SubstanceSubstance Cyprus No substance requirement as per the legislation but....!!!! •New questionnaire checklist form launched 30 October 2015 •has a clear purpose of supporting the substance parameters •Specific questions about substance •No tax residence certificate possible without the questionnaire
- 25. Investigation Letters Questions (investigating into substance over form in multi – jurisdictional structures) Provide description of the offices as well as the equipment the company is using. Describe the company's business premises and its employed personnel. Provide any other document that might clarify whether or not the company has enough means in the areas of finance, personnel, accommodation and substance to actually pursue its proposed economic objectives. Provide overview of the company's clients and suppliers [including names, addresses, and transactions overviews]. Specify whether the company systematically forwards mail, email, and telephone calls to country X. If so specify names and addresses / e-mail addresses / and telephone numbers and names of recipients in country X. SubstanceSubstance
- 26. A few words about Eurofast Eurofast is a regional business advisory organisation employing over 200 people in South East Europe & East Mediterranean. Our team of professionals is capable of efficiently addressing all client needs in one single meeting, using one single language for all the countries in the Region.
- 27. •International Tax •Mergers & Acquisitions and Transactional Advisory •Transfer pricing •Accounting services •Financial services •Outsourced Payroll and Employment solutions •Corporate services •Citizenship & Residency services •HR administration •Banking and Financial services •Business Restructuring & Insolvency •IT specialized services •Tax Planning & Tax Compliance •Real Estate tax •Shipping Tax •Energy Tax •Intellectual property •Market entry services Our Services
- 28. Single point of Contact, Many Points of View
- 29. What others think about us
Editor's Notes
- Good day all! My name is Alena Malaya, I`m a Tax&Legal Advisor at Eurofast Global. Today together with my colleague, Anna Pushkaryova, Tax&Legal Advisor at Eurofast Global as well, we are going to speak about global trends in information exchange and substance principle. If you have any question during the webinar – please, feel free to write them and we will try to answer at the end.
- Our webinar will be divided in 2 parts: the 1st one – AEOI, the 2nd one – substance concept.
- Different legal basis for exchange of information already exists. OECD Model Tax Convention foresees including provisions about exchange of information in bilateral treaties. OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters foresees possibility to exchange information automatically. And actually this Convention is a perfect legal instrument for swift implementation of the new Global Standard on AEIO. FATCA (The Foreign Account Tax Compliance Act) foresees disclosure of information about American taxpayers by Foreign Financial Institutions to the US Internal Revenue Service (IRS). Special EU Council Directive foresees the AEOI between the Member States for the specific categories of income. In general, information can be exchanged upon request, spontaneously or either automatically.
- Today we speak about AEOI. It came from FATCA, when foreign FI started collecting and sending info on US citizens to US IRS, automatically. 3 years later in 2013 in line with global campaign against profits shifting, offshore tax evasion, the G20 has decided that a global standard for AEOI has to be developed. And in 1 year later, OECD has developed the standard – CRS. The CRS consists of: the Model Competent Authority Agreement (“MCAA”), which serves as a legal instrument for exchanging of the information between countries which endorsed the MCAA The Common Reporting and Due Diligence Standard (CRS), which contains general reporting and due diligence requirements, which must be followed by financial institutions (e.g. due diligence for new individual accounts etc.) As of July 2016 we have 101 jurisdictions which endorsed the Standard. However, there are still some jurisdictions, which have not yet committed. E.g. Algeria, Angola, Armenia, Venezuela, Serbia, Kazakhstan, Ukraine etc.
- Here is a list of jurisdictions, which will exchange information for 2016 by 2017 year.
- Here is a list of jurisdictions, which will exchange information for 2017 by 2018 year. We have to admit that this list is growing. According to the last news, Pakistan, Switzerland and Liechtenstein has ratified OECD Convention on Mutual Administrative Assistance in Tax Matters, thus soon we can expect those countries will join the Global Standard on AEOI.
- Before we explain the details, please, have a look at the general ideas. On annual, automatic basis, information on financial accounts of individuals and non-financial legal entities (including trusts and foundations), tax residents of reportable jurisdictions, will be collected by financial institutions of the participating jurisdictions, then sent to its tax authorities, and then from the tax authorities it will be sent to the tax authorities of the reportable jurisdictions. If non-financial legal entity is passive (more than 50% of its income derived from passive activities) – information about its controlling persons (individuals) also will be disclosed and sent to the tax authorities. Now let`s describe everything in details.
- On this slide you can see the route of information exchange. Reporting financial institution (lets say fin.i. of the jurisdiction A) analyses financial accounts of its clients, figures out reportable accounts, and then reports on an annual basis the relevant information to the tax administration of the jurisdiction A, where such financial institution is registered. After that, jurisdiction A tax administration sends the received information to the tax authority of jurisdiction of the reportable account.
- Here is a practical example. Cyprus bank, holds account for Dutch Holding Co., controlled by Russian UBO. Cyprus and Netherlands agreed to exchange information by 2017, Russia – by 2018. By March 2017 Cyprus Bank will send information on Dutch Holding Co. to the Cypriot Tax Authority. By the end of the same year the Cypriot Tax Authority will send this info to the Dutch Tax Authority. One year later in 2018, the Dutch Tax Authority will receive the same information from the Cypriot Tax Authority. The Russian Tax Authority also will receive the same information as the Dutch, plus information on the Russian UBO.
- Now, let`s focus on each step of the information exchange. The following FI of PJ will report: Custodial institution: custodial banks, brokers, central securities Depositary institution: saving banks, commercial banks Investment entity: investment entities, portfolio managers Specified insurance companies: life insurance companies etc. Governmental entities, international organizations, central banks, certain retirement funds will not report. Participating jurisdictions – all jurisdictions, those only committed to the MCAA, thus committed to provide information. Reportable jurisdictions – all jurisdictions, those not only committed to the MCAA, but those also ratified the Convention on Mutual Administrative Assistance in Tax Matters or other legal instruments, which foresee information exchange.
- The Reporting Financial Institution will report financial account information to the Competent Authority of the reportable jurisdiction. In most cases – this role would be played by the tax authorities. AEOI starts from 2017 and 2018 respectively.
- Individuals and non-financial entities (passive/active) accounts (incl. trusts and foundations) – tax residents of reportable jurisdiction, will be reportable. Controlling persons from the reportable jurisdictions of passive NFE – will be reportable. Here is the explanation on the difference between active and passive NFE. The main criteria to be treated as passive NFE, more than 50% of income should derive from passive activity – then this entity will be defined as passive. Important to note, that according to the CRS all trusts is considered to be an entity. Thus, the UBO of such trust will be reportable person. A few words about tax residency. It should be declared by the reportable person. If the reporting financial institution has grounds to suspect that information on tax residency was wrong – he can ask the reportable person to provide proves of his tax residency. There can not be a situation, when the client does not have a tax residency. In practise, if the client cannot be identified as a tax resident in any country, his tax residency should be defined, according to the place of residence of effective management.
- As far as we mentioned on the previous slide, controlling person of the passive NFE would be reportable. Here is an explanation on who is a controlling person. You see, that this is an individual, who ultimately owns or controls a legal entity through direct or indirect ownership of 10% or 25% of shares for Cyprus.
- Here is the exclusions from the reportable accounts. You can see that there is a threshold for pre-existing entity acc. Namely if aggregate acc. balance of such acc. does not exceed the amount of 250k USD as of Dec 31 2015 and in any subsequent year – the acc. is not reportable. Also, you see that information on public entities, listed on stock exchange are not reportable. Here is a scope of information, which would be reportable.
- Just to prove. Acc. to the Decree of the Ministry of Finance on the Assessment and Collection of Taxes (Exchange of Information) it says that RJ means a jurisdiction: 1) with which an agreement is in place pursuant to which there is an obligation in place for AEIO, 2) which is identified in the Participating Jurisdictions Published List (means a published list which includes all participating and reportable jurisdictions).
- Now, we come to the 2nd part of our webinar, where we will study – what are the components of substance, why it is important, and we will try to give practical recommendations on substance on example of Cyprus. In CY the tax residency of the company is determined by the principles of management and control (it means that the company cannot be treated as a tax resident in Cyprus, if it is managed from Ukraine) – here we spoke about statutory substance. OECD BEPS Action Plan which is in process of implementation by CY also sets out some measures fighting with harmful tax practices, namely when transactions are artificial and only used to get benefits provided by the DTT. And BEPS gives some guidance on measures, which call to check if such operation/establishment have a real substance. And in positive case – the relevant provisions of DTT can be applied. Here we spoke about economic substance.
- Substance can consist of statutory substance (i.e. to prove that the company is a real company, pays taxes etc.), physical substance (is statutory substance including office etc), economic substance (real economic activities, effective management)
- EU Commission adopted a binding general anti-abuse rule to be included in the EU Parent-Subsidiary Directive. Based on the new rule, Member States shall not grant the benefits of the PSD to an arrangement, which is artificial, does not have economic substance, having been put into place for the main purpose of obtaining a tax advantages of the PSD. Proposed EU Council Directive lays down rules against tax avoidance practices in the art. 7 stipulates that non-genuine arrangements carried out for essential purpose of obtaining a tax advantage only shall be ignored for the purposes of calculating the corporate tax liability. The substance will affect the level of profits to be allocated between different jurisdictions rules under various provisions of the OECD`s BEPS Action Plan. Practise of the Supreme Commercial Court in Russia evidence that its decisions were based on principle substance over the form, and not form over substance. Specific substance requirements apply to Financial Service Companies in the Netherlands.
- Amongst other things, the following information will need to be furnished to the Cyprus Tax Office, by the legal person / legal entity applicant: Whether the company is tax resident only in Cyprus; If the company is not only tax resident in Cyprus, documentation from the other jurisdiction where it also has tax residence; Information as to whether the majority of the Board of Directors’ meetings take place in Cyprus and whether their minutes are prepared and kept in Cyprus as well. Additionally, information regarding whether the majority of the members of the Board of Directors are tax residents of Cyprus, as well as whether the shareholders’ meetings take place in Cyprus too; Information as to whether the Board of Directors exercises control and makes key management and commercial decisions necessary for the company’s operations and general policies; Information as to whether the company has issued any general Powers of Attorney, and the terms and conditions of those thereof; Information as to whether the company’s corporate seal and all statutory books and records are maintained in Cyprus, as well as whether filing and reporting functions are performed by representatives located in Cyprus, and whether agreements relating to the company’s business or assets are executed or signed in Cyprus; Updates as to whether all due tax returns have been filed, and all self-assessments for the tax years that are due have been paid.