Taxatelier presentation 2017 Lebanon

Excellence in Taxation.
EU Substance.
Beneficial Ownership.
Exchange of information.
BEPS.
International Tax Advice.
Tax Compliance.
Indirect Tax Services.

Agenda
© 2017 Taxatelier Page 2
1 •BEPS and EU Initiatives
2 •EU Substance
3 •Multilateral instrument (MLI) Substance
4 •Beneficial owner (BO)
5 •Automatic exchange of Information (AEOI)

Agenda
2 •EU Substance

BEPS Action Plan
TRANSPARENCY
 Preventing tax treaty
abuse (6)
 Prevent artificial
avoidance of PE status
(7)
 Transfer pricing of
Intangibles (8)
 TP/risk and Capital (9)
 TP/High risk
transactions (10)
SUBSTANCE
 Methodologies and date
analysis (11)
 Disclosure of rulings
(12)
 TP Documentation (13)
 Dispute Resolution (14)
 No hybrid mis-
matches (2)
 Better cfc rules (3)
 Interest deduction
limitation rules (4)
 No harmful tax
practices (5)
Digital Economy 1 Multilateral Instrument 15
COHERENCE

BEPS Action Plan Example

EU changes
Amendment as from 2016 to the EU Parent / Subsidiary
Directive which effectively (subject to certain conditions)
exempts from taxation dividends paid by a company located
in one member state to a company located in another
member state (changes already introduced in Greece).
Adoption of the EU Anti - Tax Avoidance Directive, which
will address transactions between companies located in
different EU member states, including Greece.
Amendment as from 2016 to the EU Parent / Subsidiary Directive
which effectively (subject to certain conditions) exempts from
taxation dividends paid by a company located in one member state to
a company located in another member state (changes already
introduced in Greece).
Adoption of the EU Anti - Tax Avoidance Directive, which will address
transactions between companies located in different EU member
states, including Greece.

EU Parent / Subsidiary Directive: anti-abuse clause
The EU Council amended the EU directive with the aim of preventing
tax avoidance through the use of the so called “hybrid instruments”
and the use of aggressive tax planning by corporate groups.
The anti-abuse clause is aimed at preventing misuses of the directive
and ensuring a greater consistency in its application in different
member states. It requires governments to refrain from granting the
benefits of the parent / subsidiary directive to an arrangement, or a
series of arrangements, that are not "genuine" and have been put in
place to obtain a tax advantage, while not reflecting economic reality.

EU Anti - Tax Avoidance Directive (ATAD) Articles
New Rules
Art. 4: Interest limitation rule (BEPS AP4)
Art. 5: Exit taxation (Not included in BEPS)
Art. 6: General anti-abuse rule (BEPS AP6)
Art. 7-8: Controlled foreign company rule (BEPS AP3)
Art. 9: Hybrid mismatches (BEPS AP2)
Recently ATAD II introduced rules for hybrids with 3rd states

EU Anti - Tax Avoidance Directive
The directive was adopted at a meeting of the EU Economic and
Financial Affairs Council (ECOFIN) in June 2016.
Member states (including Greece) have until 31 December 2018 to
transpose it into their national laws and regulations, except for the
exit taxation rules, for which they will have until 31 December 2019.

Agenda
2 •EU Substance

EU Substance
1. Substance in primary law
2. Substance in Secondary law

Substance in primary law
Treaty of European Union?
Treaty Functioning the European Union?
Direct Taxation is not harmonized?
Schumacker ECJ case 1995
“Although, as Community law stands at present, direct taxation does not as
such fall within the purview of the community, the powers retained by the
MSs must nevertheless be exercised consistently with Community law”

Substance in primary law- Case law
Landmark decision Cadbury-Schweppes case 2006
Case law on Freedom of establishment
“Wholly artificial arrangements”

Substance in EU primary Law
EU Checklist on Substance
1. Foreign Entity is an “establishment”?
Look at incorporation, shareholders meetings, board meetings, management
decisions, e-mail domains, financial records, bank accounts, compliance with
host MS rules
2. “Genuine activities”
 What are the activities performed
Do they fit in the overall business plan of the group?
3.Profit attribution based on economic reality
Is the attribution based on valid economic or commercial reasons?

Substance in EU primary Law
4. Equity of the foreign entity (whether it is adequately capitalized or
not
5. Existence of adequate objective indicators
Staff: Is the staff qualified for the economic activities that are being
performed? Are they permanent and proper basis? Are there managers and
management decisions regarding the life of the company being taken there?
Premises and Equipment: Are they owned or rented? For how long are they
available? What is the legal entitlement for the use of premises?

GENERAL ANTI-AVOIDANCE RULE (GAAR)
GAAR
no benefits of the Directive to an arrangement or a series of arrangements
which, having been put into place for the main purpose or one of the main
purposes of obtaining a tax advantage that defeats the object or purpose
of the Directive, are not genuine having regard to all relevant facts and
circumstances
not genuine means: to the extent that the arrangement(s) lack valid
commercial reasons which reflect economic reality
• GAAR is a minimum rule because the Directive shall not preclude the
application of domestic or agreement-based provisions required for the
prevention of tax evasion, tax fraud or abuse
• Effective 01 January 2016 concerning PSD

Agenda
2 •EU Substance

Measures suggested by OECD
“look through” approaches to identify the “genuine” owners of
profits and income, e.g. the US Limitation on Benefits (LOB) Article;
2014 version OECD Model suggested LOB at para 20 of Commentary
to Art 1;
New LOB article suggested under BEPS AP6 (based on 2006 US
Model);
New PPT (principal purpose test – a GAAR) also suggested;

Why an LOB
Economic substance doctrine
A LOB clause is designed to test the substance of a claimant to the
treaty and it applies to residents of the US as much as residents of the
other contracting state.
Strong connection with residence State in order to be able to claim
the treaty benefit
More effective in countering treaty shopping - the concept of
beneficial ownership is not enough

Lob Main Features

Limitation of Benefits Clause – US 2006 version
Art 22(2) - A resident of a contracting state is entitled to
treaty benefits if the resident is:
(a) an individual; or
(b) a qualifying government body; or
(c) a company (stringent conditions); or
(d) qualifying scientific, religious, etc, organisations and
charities; or
(e) qualifying pension funds; or
(f) a person other than an individual (stringent conditions).

Limitation of Benefits Clause – US 2006 version
Art 22(3)
 If a resident is not entitled to treaty benefits because of above test:
 May qualify if engaged in the active conduct of a trade or business in the residence
state, where that business is substantial compared to the activities conducted in the
source state.
 Making or managing investments does not qualify as an active business activity unless
it relates to banking, insurance, or registered security dealing.
Art 22(4)
 Where the tests above not met:
 Can seek agreement with the competent authority of the state from which benefits are
being sought that a person is a qualifying resident under the terms of the treaty, if the
state is satisfied that the establishment / maintenance of such person did not have as
its principal purpose obtaining the benefits under the treatment.

Principal Purpose Test (PPT)
Notwithstanding the other provisions of this Convention, a benefit
under this Convention shall not be granted in respect of an item of
income or capital if it is reasonable to conclude, having regard to all
relevant facts and circumstances, that obtaining that benefit was one
of the principal purposes of any arrangements or transaction that
resulted directly or indirectly in that benefit, unless it is established
that granting that benefit in these circumstances would be in
accordance with the object and purpose of the relevant provisions of
this Convention.

Agenda
2 •EU Substance

Significance of Beneficial Owner notion
The notion of beneficial owner was introduced in the OECD MTC in 1977
and in the UN model in 1980
Articles 10 Dividends, Article 11 Interest, Article 12 Royalties
Also included in Parent Subsidiary Directive and Interest and Royalties
Directive
Primary goal to establish an anti-abuse provision
Avoid Treaty Shopping

PREVOST CASE

Who is the BO
Commentary Art. 12 …The term beneficial owner is not used in a
narrow technical sense…..
Commentary Art. 12.1 Negative definition. Not a conduit or nominee
or a mere fiduciary or administrator acting on account of the
interested parties
Commentary Art. 12.4 Full right to use and enjoy the payment
unconstrained by a contractual or legal obligation to pass on it to
another person

Anti-Abuse under Tax Treaties
Is the BO notion compatible with domestic law?
Commentary Art. 1 para. 7 ... It is also a purpose of tax conventions to
prevent tax avoidance and evasion.
Commentary Art. 1 para. 9.5 ….. A guiding principle is that the
benefits of a double taxation convention should not be available
where a main purpose for entering into certain transactions or
arrangements was to secure a more favourable tax position and
obtaining that more favorable treatment in these circumstances
would be contrary to the object and purpose of the relevant
provisions.

BO and Substance
BO seems to be more a “pass-on situations” rather a substance/ real
activity test
Substance in the sense of real business activities or motives, seems to
be one of the crucial aspects under more specific SAAR’s (like LOB) or
GAAR’s (like the PPT test)!

Agenda
2 •EU Substance

AEOI: STATUS OF COMMITMENTS (101 JURISDICTIONS)
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
JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018 (47)
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
*The United States has indicated that it is undertaking automatic information exchanges pursuant to FATCA
from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions to do so.

Personal, material and temporal scope of application
Responsible for the reporting are directly or indirectly (by means of a service
providers) certain entities of the financial sector (Financial Institutions-FIs)
The CRS contains the due diligence rules for FIs to follow for collection and
reporting. Failure to comply involves financial penalties under local legislation
Reportable Persons are both individuals (or jointly held) and entities (in a broad
sense partnership, trust etc.), except for entities financially appealing to the
‘public sphere’ or acting in the ‘public interest’
 excluded for the term ‘Reportable Person’ publicly traded companies and their affiliates,
governments and governmental agencies, international and supranational organisations,
central banks and entities qualifying as financial institutions

Personal, material and temporal scope of application (Cont’D)
Reportable Accounts (in a broad sense) are reported directly or on a
‘look-through’ basis, depending on the reportable CRS status of the
holder
01.2016 is the CRS ‘launch date’ and the differentiating criterion
between ‘New’ and ‘Pre-existing’ Accounts; 31.12.2016 and
31.12.2017 the deadlines for completing procedures for ‘Pre-existing’
accounts, as these are further specified

Automatic Exchange of Information and the CRS
This standard covers Financial Institutions (“FI”) resident in the state or a
branch in the state of a foreign resident FI.
These are classified as:
Depository Institution (banks)
Investment Entity
Custodial Institution
Specified Insurance Company
• Non-Reporting Financial Institutions (NRFI). No due diligence or reporting
required

Entities (in the CRS context) and their role (Cont’D)
Non-Financial Entities (NFEs)
An NFE is any entity that is not a FI
Are Reportable but the depth of the reporting obligation differs
depending on the particular qualification of the entity:
Active NFEs the reporting obligation ends at the level of the Active
NFE being the Account Holder
Passive NFEs the controlling person thereof have to be reported
on a look-through basis, if being reportable persons

ENTITY CLASSIFICATION
Accounts held by Financial Institutions are
generally not reportable
Due diligence and reporting obligations only
apply to Reporting Financial Institutions
(RFI)?
Non RFI: No due diligence or reporting
required
Financial
Institution( FI)
Reporting ( FI)
Non
Reporting ( FI)
Non-Financial
Entity (NFE)
 NFEs have no due diligence or reporting obligations
 Accounts held by an active NFE are reportable if the NFE
is considered a reportable person
 Accounts held by the Passive NFE are reportable if either
the NFE or any other of its controlling persons are
considered reportable persons
Active NFE Passive NFE

NFEs: Active NFEs
Active’ in trading or in the way being traded
Neither receiving nor producing primarily (over 50%) ‘passive
income’ (generally it includes dividends, rents, interest)
‘Substantially’ (over 80%) all activities are provided to intra-group
NFEs and not in an investment funds context
‘Intra-group Treasury Centre’: engaging in financing or hedging
transactions with Related Entities

NFEs: Passive NFEs
Negatively defined i.e. not active
‘Look-through’ approach applies, in order to determine whether its
Controlling Person(s) are Reportable Person(s)
In case of more Controlling Persons, it suffices if even one of them is a
Reportable Persons
‘Controlling Person’ to be understood in an AML/KYC context.
Management only exceptionally to be understood as ‘Controlling Person’
(For example the UBOs owning equal or more than 25% in case of
companies or partnerships)

NFEs : Passive NFEs (Cont’D)
‘25% threshold’ only the first and not the last step for identifying
‘Controlling Persons’
All-encompassing formalistic definition of ‘Controlling Persons’ for
trusts being Passive NFEs but ‘suspended’ for beneficiaries
No 25% threshold applying. It is all encompassing, because it catches
settlor(s), trustee(s), beneficiary(ies), protector(s) and any other
natural persons potentially exercising effective control over the trust

Example of CRS reporting
A Cypriot tax resident company (Active NFE) owned by a Greek tax
resident individual has bank accounts with a Cyprus bank with a total
balance at 31.12.2016 of Euro 500.000.
The Cyprus tax authorities will not report the information to anyone
A Cypriot tax resident company (Passive NFE) owned by a Greek tax
resident individual has bank accounts with a Cypriot bank with a
balance at 31.12.2016 of Euro 500.000
The Cypriot tax authorities will report the information to the Greek tax
authorities

Example of CRS reporting (Cont’D)
A German tax resident company (Active NFE) owned by a Greek tax resident
individual has bank accounts with a Cypriot bank with a total balance at 31.12.2016
of Euro 500.000.
The Cypriot tax authorities will report the information to the German tax
authorities only
A German tax resident company (Passive NFE) owned by a Greek tax resident
individual has bank accounts with a Cypriot bank with a balance at 31.12.2016 of
Euro 500.000
The Cypriot tax authorities will report the information both to the German and the
Greek tax authoritiesiuthorities

Thank you
Christos Theophilou
Partner
Delfon Street 10, 5th floor
1101, Nicosia, Cyprus
P.O.Box 27777, 2433 Nicosia,
Cyprus
Tel: + 357 22 875720
Fax: +357 22 875721
E: ctheophilou@taxatelier.com.cy
W: www.taxatelier.com.cy
This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. Do not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness
of the information contained in this publication. Τo the extent permitted by law, Taxatelier Ltd, its members, employees and agents do not accept or assume any liability,
responsibility or duty of care for any consequences of anyone acting, or refraining to act, in reliance on the information contained in this publication or for any decision
based on it.

Taxatelier presentation 2017 Lebanon

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