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Investment and Tax Treaty

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Investment and Tax Treaty

  1. 1. Prof. dr Hans van den Hurk
  2. 2. Who are we? www.hhp.law Our contact details: hans@hhp.law nikos@hhp.law
  3. 3. Agenda § The Unshell directive (ATAD3) § Bilateral Investment Treaties (BITs) § Questions
  4. 4. The Unshell Directive
  5. 5. Current status § Proposed on December 22, 2021 § To be transposed into domestic law by June 30, 2023 § Proposed to take effect from January 1, 2024 § Two-year claw-back rule: January 1, 2022, could be relevant to the application of ATAD 3 § Czech Republic wants to have this Directive accepted before the end of 2022
  6. 6. The gateways (Art. 6)... § A company is classified as a risk company, if § in the two preceding years (starting point: 2022): § > 75% income is passive (e.g., dividends, interest and royalties); § at least 60% of the income is from cross-border activity; § Management and administrative services are being outsourced. § Is this retro-active effect acceptable?
  7. 7. Exemptions § Listed companies on a regulated market; § Regulated financial undertakings; § Companies with the same UBO member state; § Companies with the same shareholder member state; § ‘Five employee’ carve-out. § Art. 6, 2,e Directive
  8. 8. Reporting obligations (Art. 7) § If regarded as a risk company, a company must report the indicators of minimum substance in the annual tax return: § The entity has its own premises; § The company has at least one active bank account in the EU; and § The entity meets one of the following two: § At least one director is resident of the jurisdiction of the entity, who is qualified and authorized to make relevant decisions and not an employee or director of another unrelated entity; or § The majority of employees are resident or live close by to the jurisdiction. § What about free movement of persons? § Non-compliance: penalties up to 5% of the annual revenue.
  9. 9. Rebuttal § Not meeting one of the substance indicators presumes no minimum substance and implies tax consequences for the undertaking. § The undertaking is allowed to rebut this presumption by providing the following: § The rationale behind the establishment of the undertaking; § Information regarding the employees; § Concrete evidence that the decision-making concerning the relevant income takes place in the Member State of the undertaking. § An exemption might apply if there is a lack of tax motives. § An undertaking can prove this by comparing the tax liability of the structure of the group it is part of with and without the interposition of the undertaking. § If successfully rebutted, no adverse tax consequences.
  10. 10. If the substance criteria have not been met § in the Member State of the undertaking: § Denied application of double taxation treaties § Denied application of Parent-Subsidiary and Interest and Royalties directives § in other Member States: § Interlocking taxation rules in accordance with national law of the relevant Member State. § Shareholder-State-Rule § Source-State-Rule
  11. 11. Last but not least... § A Member State can request another Member State to audit a tax resident if there is a suspicion of minimal substance.
  12. 12. Bilateral Investment Treaties (BITs)
  13. 13. What are BITs? § BITs are international agreements between States granting substantive investment protection rights to foreign investors and access to arbitration. § BITs reduce the risk of exposure for investors who invest in high-risk countries. § There are more than 3,000 BITs worldwide. § The Netherlands has about 70 BITs, such as with Russia, China, Kazakhstan, Uzbekistan, Pakistan. § Dutch BITs are considered the “gold standard”.
  14. 14. What do BITs offer? BITs offer: Substantive investment protection standards Access to international arbitration
  15. 15. Substantive investment protection standards § BITs grant the following substantive investment protection standards: ü Fair and Equitable Treatment (FET) ü Most Favoured Nation Treatment (MFN) compared to other third country investors ü National Treatment (NT) compared to domestic investors ü Free transfer of capital ü Monetary compensation against (in)direct expropriation
  16. 16. Substantial business activities § In 2019 the Netherlands adopted a new model BIT text, which imposes new requirements regarding the definition of investor. § “investor” means with regard to either Contracting Party: (ii) any legal person constituted under the law of that Contracting Party and having substantial business activities in the territory of that Contracting Party;
  17. 17. Substantial business activities Indications of having ‘substantial business activities’ in a Contracting Party may include: (i) the undertaking’s registered office and/or administration is established in that Contracting Party; (ii) the undertaking’s headquarters and/or management is established in that Contracting Party; (iii) the number of employees and their qualifications based in that Contracting Party; (iv) the turnover generated in that Contracting Party; and (v) an office, production facility and/or research laboratory is established in that Contracting Party; These indications should be assessed in each specific case, taking into account the total number of employees and turnover of the undertaking concerned, and take account of the nature and maturity of the activities carried out by the undertaking in the Contracting Party in which it is established.
  18. 18. Interaction between BITs and taxes new BITs DTAs BEPS Substantial business activities = substance Common aim is to ensure anti-tax avoidance regarding shell entities EU law = Unshell Proposal
  19. 19. EU law trumps all international treaties § International treaties § (BITs, DTAs, ICSID, NY Conventions) EU law
  20. 20. Unshell proposal = substance indicators § Article 7 Indicators of minimum substance for tax purposes Undertakings referred to in paragraph 1 shall accompany their tax return declaration with documentary evidence. The documentary evidence shall include the following information: (a) address and type of premises; (b) amount of gross revenue and type thereof; (c) amount of business expenses and type thereof; (d) type of business activities performed to generate the relevant income; (e) the number of directors, their qualifications, authorisations and place of residence for tax purposes or the number of full-time equivalent employees performing the business activities that generate the relevant income and their qualifications, their place of residence for tax purposes; (f) outsourced business activities; (g) bank account number, any mandates granted to access the bank account and to use or issue payment instructions and evidence of the account’s activity.
  21. 21. Unshell proposal takes away rights of investors based on BITs and DTAs § (13) To ensure effectiveness of the proposed framework, it is necessary to establish appropriate tax consequences for undertakings that do not have minimal substance for tax purposes. § Undertakings that have crossed the gateway criterion and are presumed to be lacking substance for tax purposes while, additionally, have not provided evidence to the contrary or evidence that they do not serve the objective of obtaining a tax advantage, should not be allowed to benefit from the provisions of agreements and conventions that provide for the elimination of double taxation of income, and where applicable, capital, to which the Member State of their tax residence is a party and from any other agreements, including provisions in international agreements for the promotion and protection of investments (BITs), with equivalent purpose or effect. Such undertakings should not be allowed to benefit from Council Directive 2011/96/EU.
  22. 22. Unshell proposal = impact on BITs § Article 12 Tax consequences of not having minimum substance for tax purposes in the Member State of the undertaking § Where an undertaking does not have minimum substance for tax purposes in the Member State where it is resident for tax purposes, that Member State shall take any of the following decisions: (a) deny a request for a certificate of tax residence to the undertaking for use outside the jurisdiction of this Member State; (b) grant a certificate of tax residence which prescribes that the undertaking is not entitled to the benefits of agreements and conventions that provide for the elimination of double taxation of income, and where applicable, capital, and of international agreements with a similar purpose or effect and of Articles 4, 5 and 6 of Directive 2011/96/EU and Article 1 of Directive 2003/49/EC.
  23. 23. Comments § Since newer BITs increasingly require substantial business activities, there are overlaps between BITs and DTAs regarding three clauses: NT, MFN, and dispute settlement mechanism. § So, it is not difficult to argue that there are some similarities between DTAs and BITs and thus make the UP Directive applicable to BITs too.
  24. 24. Comments § As mentioned by Hans, the UP proposal shall apply from 1 January 2024 but Art. 6 effectively introduces a retroactive effect as of 1 January 2022. § This retroactive effect could violate the Fair and Equitable Treatment (FET) standard of most BITs, which could be a solid basis for a BIT arbitration dispute.
  25. 25. Main conclusions § The aim of the UP is clear, namely, to take away as many rights as possible from companies that do not meet the substantial business activities requirements. § The way the UP proposal is now formulated makes it easy to interpret and apply the UP proposal in such a manner that it excludes such shell entities from any BIT protection.” § Clearly, it is unacceptable under international law to take away existing BITs rights through the backdoor of EU secondary legislation.
  26. 26. Questions?
  27. 27. Get in touch..... www.hhp.law

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