E-News from KPMG’s EU Tax Centre

Latest CJEU, EFTA, ECHR

CJEU decides that Swedish withholding tax on foreign public pension institutions is contrary to EU law

On July 29, 2024, the Court of Justice of the European Union (CJEU or the Court) gave its decision in case C-39/23. The case concerns the compatibility with EU law of the Swedish withholding tax levied on dividends paid by Swedish companies to three Finnish public pension funds.

In line with the opinion of the Advocate General (‘AG’), the Court concluded that the Swedish legislation under dispute leads to a different treatment of foreign pension funds in comparison to Swedish resident pension funds, and therefore violates the free movement of capital. The Court further found that the different treatment of foreign pension funds could not be justified by an overriding reason in the public interest.

The CJEU decision is broadly in line with its previous case law on the taxation of dividends paid to foreign pension funds. However, the decision provided new insights on the characteristics of public institutions that can serve as relevant distinguishing criteria for the comparability assessment.

For more information on the case, we kindly refer to a July 2024 report prepared by the KPMG member firm in Sweden and Euro Tax Flash Issue 545.

EU Institutions

KPMG responds to European Commission’s public consultation on public country-by-country reporting forms

On September 2, 2024, KPMG member firms in the EU submitted a response to the European Commission’s  public consultation “Tax paid by multinationals – template and electronic formats for ‘country by country’ reports”.

KPMG welcomes the opportunity to provide feedback on the draft Implementing Regulation laying down the common template and electronic reporting formats for the application of the Directive as regards the information to be presented in reports on income tax information and the related Annexes.

The KPMG submission includes specific considerations regarding the draft Implementing Regulation regarding the applicability of the common template and electronic format to non-EU parented multinational groups and the lack of clarity regarding the reporting forms to be used for financial years starting before January 1, 2025. We also comment on several open questions related to the reporting requirement that are not solved by the current draft Regulation and related Annexes (Labels for data points not mandated by the Directive; Voluntary disclosure of data by multinational groups; Reporting of activities undertaken by the group), on which we would welcome further guidance. Finally, in addition to our comments related to the draft Implementing Regulation, we highlight a number of outstanding points related to (i) the source of data for the reported information and (ii) how non-EU multinational groups should deal with varying approaches taken by Member States when implementing the Directive, which we believe should be clarified, in the interest of legal certainty and a consistent application of the Directive.

For more details on the submission, please refer to Euro Tax Flash Issue 546.

For more information on public country-by-country reporting, please refer to KPMG’s EU Tax Centre dedicated webpage.

OECD and other International Organisations

New transfer pricing guidance for lithium

On August 12, 2024, the Organisation for Economic Cooperation and Development (OECD) and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) released new guidance (PDF 5.1 MB) on the pricing of intragroup transfers of lithium. The guidance follows a previously published practice note, and focuses on how the comparable uncontrolled price method can be applied to intragroup transactions involving lithium brines and lithium minerals.   

UN Ad Hoc Committee adopts Terms of Reference for Framework Convention on International Tax Cooperation

On August 16, 2024, the United Nations Ad Hoc Committee Tax Committee adopted Terms of Reference (ToR) (PDF 390 KB) for a Framework Convention on International Tax Cooperation, with 110 countries voting in favor, eight against and 44 abstentions. The voting results reflected a similar pattern to the First and Second Meetings in which the majority of countries in Africa, Latin America, the Caribbean and Southeast Asia voted in favor, whilst many OECD member countries expressed their opposition or abstained. EU Member States abstained from voting on the ToR. In a joint explanation of the vote, the EU representative expressed concerns that the final draft did not adequately address key issues, particularly the need for broad consensus to ensure inclusivity and effectiveness.

The proposed terms for the framework convention on international tax cooperation include structural elements such as objectives, principles, and substantive and procedural components. The framework convention is expected to cover several key areas:

• fair allocation of taxing rights, including equitable taxation of multinational enterprises;
  
• measures to address tax evasion and avoidance by high-net-worth individuals;
• international tax cooperation approaches that support sustainable development across economic, social, and environmental dimensions;
• effective mutual administrative assistance in tax matters, including transparency and exchange of information for tax purposes;
• addressing tax-related illicit financial flows, tax avoidance, tax evasion, and harmful tax practices; and
• effective prevention and resolution of tax disputes.

The draft also emphasizes the need for provisions to support the participation of all countries, particularly developing ones, in international tax discussions, by building capacity on international tax practices.

Despite objections from some jurisdictions, the draft terms suggest developing two early protocols alongside the framework convention. One protocol will address the taxation of income from cross-border services in a digitalized and global economy, whilst the topic of the second protocol will be determined later from a list of priority areas, including digital economy taxation, illicit financial flows, tax dispute resolution and addressing tax evasion and avoidance by high-net worth individuals. Additional protocols may be considered for future development.

The ToR will be submitted to a formal vote by the UN General Assembly during its 79th session scheduled for September. Assuming the document is approved, an intergovernmental negotiating committee will work on the convention and the early protocols during 2025, 2026 and 2027. The final documents are expected to be voted on by the UN General Assembly in September 2027 and adopted if a two-third majority it is achieved. The convention and protocols will then be opened them for signature and ratified by those members of the United Nations that choose to do so. Whilst measures that can be implemented through domestic law (such as increased withholding taxes on service) are at the latitude of implementing jurisdictions, any provisions resulting from the convention or the related protocols that require changes to existing double tax treaties could only be implemented if both contracting states agree to the change. It therefore remains to be seen to what extent double tax treaties between developing countries (that voted in favor of the ToR) and developed countries (that voted against or abstained) will be impacted in the near term.

Local Law and Regulations

Consultation on a draft Pillar Two bill launched

On August 8, 2024, the Prime Minister and the Ministry of Finance of Bahamas announced (PDF 218 KB) a public consultation on the draft legislation to implement a domestic minimum top-up tax (DMTT), which is envisaged in alignment with the OECD’s Pillar Two Model Rules. Key takeaways include:

• DMTT: the draft bill covers only basic provisions for the introduction of a DMTT applicable for the fiscal years that begin after December 31, 2023, and does not mention the income inclusion rule (IIR) or the undertaxed payments rule (UTPR)). It is noted, however, that the DMTT shall not apply for Fiscal Years beginning before January 1, 2025, unless the group with subject to an IIR or UTPR in another jurisdiction with respect to Constituent Entities in The Bahamas.
• Administration: each Constituent Entity in The Bahamas would be required to file a return within 15 months after the end of the Reporting Fiscal Year, subject to certain exceptions. The obligation to file the return can be transferred to another Constituent Entity, if needed. All amounts of DMTT for a given fiscal year, for which a Constituent Entity is liable, must be paid within the same 15-month period.
• Penalties: penalties for non-compliance with the DMTT bill shall be established by the Minister of Finance.

Public comments on the draft are requested by September 16, 2024. Once adopted, the bill will take effect retroactively, on January 1, 2024.

Draft bill including amendments to the German Pillar Two rules published

On August 21, 2024, the German Ministry of Finance published for consultation a discussion draft on amendments to the German Minimum Tax Act, adopted in December 2023.  The proposed amendments are mainly focused on the implementation of the OECD December Administrative Guidance, in particular, the application of the Country-by-Country (CbC) Reporting Safe Harbour (CbCR Safe Sarbour).

Key takeaways include:

• Source of information: under the draft amendments, the data used to calculate the CbCR Safe Harbors for a tested jurisdiction must be drawn from the same source (such as annual financial statements or reporting packages) for all business units within that jurisdiction.
• Reporting packages: the draft stipulates that reporting packages must comply with the requirements for preparing a CbC report, i.e., aggregated data should be used as the basis for the CbC report,  and not consolidated accounting data (i.e., prior to consolidation adjustments and elimination of interim results).
• Hybrid arrangements: the draft provides specific guidelines on the treatment of hybrid arbitrage arrangements under the CbCR safe harbour.
• Purchase price accounting: the draft allows the use of the acquisition method (purchase price accounting) for capital consolidation in reporting packages and annual financial statements only if it has already been reflected in the CbC reports or the effects from the application of the acquisition method from previous acquisitions have been taken into account. Any later changes to this approach would only be permitted in exceptional cases, such as in response to subsequent legal or regulatory requirements.

The consultation runs until September 6, 2024. For more information, please refer to the report (PDF 989 KB) prepared by KPMG in Germany.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Government draft on Tax Development Act

On July 24, 2024, the Federal Ministry of Finance published (PDF 2.9 MB) the Government draft for an Act on the Further Development of Tax Law and the Adjustment of the income tax rate (Tax Development Act).

Key takeaways include:

• Investment incentives: the draft Tax Development Act includes measures to stimulate investment, including enhancing depreciation methods and extending the existing research allowance. [ER1]
• Domestic tax arrangements notification: the draft Act introduces an obligation to notify certain domestic tax arrangements, closely aligned with the existing cross-border tax arrangement notification rules (DAC6). This includes a reporting requirement for intermediaries, with specific conditions for confidentiality.
• Growth initiative: the draft is a part of the German government’s broader growth initiative, presented in July 2024, although many other tax-related measures are not yet included.

The draft act is expected to evolve during the legislative process, with potential significant changes. The final provisions and their implementation will depend on the outcome of the Parliamentary process.

For more information, please refer to the related report (PDF 989 KB) prepared by KPMG in Germany.

Consultation on amendments to the Minimum Tax Act launched

On August 12, 2024, the Finnish government launched a public consultation on draft legislation including amendments to the Finnish Minimum Tax Act, which entered into force at the beginning of 2024 and provides for the implementation of the EU Minimum Tax Directive.

Key takeaways include:

• Safe Harbours: the introduces the anti-hybrid arbitrage provisions for the application of the Transitional CbCR Safe Harbour as per the December 2023 OECD Administrative Guidance. The document also introduces the UTPR Safe Harbor and Simplified Permanent Safe Harbour calculations for Non-material Constituent Entities (NMCEs) and clarifies the conditions for eligibility for the DMTT Safe Harbour.
• Tax Credits and flow-through tax benefits: the draft includes provisions addressing the treatment of qualified refundable tax credits and marketable transferable tax credits. In addition, the draft outlines the treatment of qualified flow-through benefits (e.g., tax credits, tax deductible losses) with respect to an investor's qualified ownership interest.
• Substance-based income exclusion (SBIE): the draft implements the provisions of the OECD July 2023 Administrative Guidance, allowing a full substance-based carve-out when more than 50 percent of eligible employees’ time or eligible tangible assets are located in the jurisdiction of a corresponding constituent entity. In addition, the draft clarifies the application of the SBIE for permanent establishments, flow-through entities, and cases where an Ultimate Parent Entity (UPE) utilizes a deductible dividend regime.
• Other provisions: the draft introduces rules for calculating the effective tax rate (ETR) in jurisdictions with fiscal unity or tax consolidation groups within an MNE group, and addresses the application of transitional provisions for investment entities, among other measures.

Public comments on the draft were requested by September 6, 2024. If adopted, the law will enter into force by the end of 2024 and will apply retroactively to financial years beginning on or after January 1, 2024.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Guidance on Administration under Pillar Two issued

On August  8, 2024, in eBrief 213/2004, the Irish Revenue issued a new tax and duty manual titled “Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-Scale Domestic Groups in the Union – Administration”, containing guidance on administrative requirements under the GloBE rules as implemented in Irish legislation. The manual provides guidance in relation to:

• the registration procedures to be adhered to where requirements under Pillar Two apply;
• the top-up tax information return;
• the income inclusion rule (IIR) return and self-assessment
• the undertaxed payments rule (UTPR) top-up tax return and self-assessment;
• the UTPR group provisions, including group recovery;
• the qualified domestic top-up tax (QDTT) top-up tax return and self-assessment;
• the QDTT group provisions, including group recovery;
• expressions of doubt in relation to global anti-base erosion rules (“GloBE”) taxes;
• the payment of GloBE tax liabilities;
• the use of currency;
• compliance and enforcement provisions;
• the transitional simplified jurisdictional reporting;
• the elections and some other issues.

For an overview of Pillar Two legislation adopted in Ireland in December 2023, please, refer to a report prepared by KPMG in Ireland.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Israel announces intention to implement Pillar Two

On July 28, 2024, the Minister of Finance of Israel announced the intention to partly implement the Pillar Two global minimum tax rules in Israel, including a qualified domestic minimum top-up tax (QDMTT) on the income of multinational companies resident in Israel. The QDMTT would apply for multinationals with a group turnover of EUR 750 million or more, starting from the beginning of 2026.

This decision to implement the QDMTT was made, among others, to prevent Israeli resident companies from paying tax in foreign countries for income generated in Israel. It is furthermore decided not to implement the income inclusion rule (IIR) and undertaxed payment rule (UTPR) at this stage, though the implementation thereof will be considered after the implementation of the QDMTT.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Tax authorities issue guidance on the tax treatment of qualifying capital gains derived by non-resident entities

On July 29, 2024, the Italian tax authorities published Circular No. 17/E, (PDF 305 KB) which clarifies the tax treatment of qualifying capital gains derived by  non-resident entities, further to the international tax reform in force since January 1, 2024 (please refer to E-News Issue 189 for previous coverage).

An exemption of 95 percent of the total amount will apply to capital gains realized by non-resident entities from the disposal of substantial participations in resident entities, provided that the non-resident entities have their tax residency in a Member State, or an EEA country with an appropriate exchange of information with Italy, and that are subject to corporate income tax therein. The Circular clarifies the qualifying participations, the required conditions by the non-resident entities, as well as the calculation of the relevant capital gains.

Implementation of an IIR and a Domestic top-up tax (“Multinational Corporate Income Tax”) in response to OECD GloBE rules

On August 14, 2024, the Ministry for Treasury and Resources of Jersey lodged two pieces of draft legislation in response to the OECD GloBE rules (Draft Multinational Corporate Income Tax and Draft Multinational Taxation). Publication of the drafts follows a statement released in May announcing plans to introduce an IIR and a Domestic Minimum Tax from 2025 (for previous coverage, please refer to E-news Issue 196).

Key takeaways include:

• Jersey would be implementing a Multinational Corporate Income Tax (MCIT – i.e., a domestic top-up tax) and an IIR, but not a UTPR.
• The rules would apply only to multinational groups with more than EUR 750 million global annual revenue. It has been made clear that all other businesses would remain under Jersey’s existing corporate income tax regime. The comptroller of revenue would be required to take into account the GloBE commentary “in determining a person’s liability to tax or a penalty and exercising other functions under this Law”.
• Both the IIR and the MCIT would be applicable to fiscal years beginning on or after January 1, 2025.
• The Globe Information Return (GIR) would need to be filed within 15 months after the end of the Reporting Fiscal Year (18 months for the transitional year).

The draft legislation is scheduled for debate in Jersey's Parliament on[ER2]  October 1, 2024.

As announced in the May statement, Guernsey and the Isle of Man are expected to release implementing draft legislation as well.  

For further information, please refer to a report prepared by KPMG in the Crown Dependencies.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Guidelines on collection of beneficial ownership data

On August 20, 2024, the Lithuanian tax authorities issued guidelines (PDF 417 KB) with regards to the collection of  beneficial ownership data. The guidelines aligned with the requirements of the Global Forum on Transparency and Exchange of Information for Tax Purposes.

The guidelines clarify that authorized representatives of foreign legal entities operating in Lithuania through permanent establishments, as well as Lithuanian residents acting on behalf of foreign entities under trust or joint venture agreements, are required to collect and store information about beneficial owners. This clarification aims to ensure that such information is collected in all cases where it is significant for preventing cross-border tax evasion through artificial legal and organizational structures, even if it is not explicitly prescribed by local law.

In line with local anti-money laundering regulations, the beneficial ownership information must be stored for five years after the related transaction or activity concludes and must be made available to tax authorities upon request.

Clarification on capital gains exemption of shares and ownership interest for corporate income tax purposes

On July 25, 2024, the Slovakian authorities published administrative guidance (PDF 365 KB) (available in Slovak only) aiming to clarify the application of section 13c of the Income Tax Act, exempting from corporate income tax capital gains arising from the sale of a company's shares, or ownership interest. In order to benefit from the tax exemption, three conditions have to be meet:

• a direct holding of at least 10 percent of the share capital of the company, or of the limited partnership, at the date of the sale of shares or ownership interest;
• a minimum 24-month holding period;
• the taxpayer does not consist of a letter box.

With respect to the last criterion, the tax authorities have clarified that the existence of substantial functions within the Slovakian territory is a requirement. Performing substantial functions has been interpreted as exercising full shareholding, including voting rights, as well as managing and bearing the risks associated with the ownership. Also, the taxpayer has to demonstrate that the entity possesses necessary personnel and equipment to execute substantial functions. Furthermore, the shareholder must remain in charge of such functions, without delegation to a third-party.

Draft amendments to Swedish Top-up Tax Act published

On August 15, 2024, the Swedish Minister of Finance published draft amendments to the Swedish Top-up Tax Act, which was adopted in December 2023 and implements the EU Minimum Tax Directive into local law. The proposed amendments aim to introduce elements of the OECD Administrative Guidance published between February 2023 and June 2024 into the existing legislation. Key takeaways include:

• Tax credits: the draft introduces provisions on the treatment of qualified refundable tax credits, marketable and non-marketable tax credits.
• CbCR Safe Harbour: the draft introduces anti-hybrid arbitrage rules for the application of the  transitional CbCR Safe Harbour, and on the permissibility of purchase price accounting for the purposes of qualifying for the CbCR Safe Harbour.
• Substance-based income exclusion (SBIE): the draft introduces the provisions of the OECD July 2023 Administrative Guidance, allowing a full substance-based carve-out when more than 50 percent of eligible employees’ time or eligible tangible assets are located in the jurisdiction of a corresponding constituent entity.
• DTAs and DTLs: the draft contains provisions clarifying the treatment and inclusion of deferred tax assets and deferred tax liabilities for GloBE purposes, including during the transitional period.
• Other provisions: the draft addresses various issues, including provisions specific to insurance companies (including insurance investment entities) and joint ventures. It also clarifies that foreign DMTT can be offset against CFC taxation and addresses taxation related to foreign permanent establishments. Additional clarifications are provided regarding entity classification for certain types of entities.

Once adopted, the amendments will apply from January 1, 2025. The reporting entity has the option to apply the new provisions to tax years that start after December 31, 2023.

For our previous coverage, please refer to E-news Issue 193.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

Announcement to implement Pillar Two’s Income Inclusion Rule from 2025

On September 4, 2024, the Federal Council of Switzerland decided the introduction of the Income Inclusion Rule (IIR) with effect from January 1, 2025. The IIR top-up tax will complement the Swiss Domestic Minimum Top-up Tax (DMTT), which was introduced in Switzerland  with effect from January 1, 2024. The Federal Council also decided not to introduce the Undertaxed Payments Rule (UTPR) for the time being.

For our previous coverage, please refer to E-news Issue 196.

For a state of play of the implementation of Pillar Two, please refer to KPMG’s dedicated implementation tracker in Digital Gateway.

The CRS Multilateral Competent Authority Agreement enters into force

On June 28, 2024, the Multilateral Competent Authority Agreement‎ on Automatic Exchange of Financial Account Information (2014) entered into force in Ukraine, as confirmed by the Ukrainian Ministry of Foreign Affairs by letter No. 72/14-612-106482, published on August 5, 2024.

The Common Reporting Standard Multilateral Competent Authority Agreement (“CSR MCAA”) establishes an international framework for the automatic exchange of financial account information. The CRS MCAA is based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters, which was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010. The CRS MCAA itself is a multilateral framework agreement. However, the exchange relationships for the CRS information are bilateral in nature. Therefore, bilateral exchanges of financial account information will only take place if both jurisdictions have the domestic framework for CRS exchange in effect, have filed the required notifications under Section 7 and have listed each other as intended exchange partners. Currently, 123 jurisdictions have signed the CRS MCAA and an updated list of the signatories can be found here. (PDF 169 KB)

Ukraine will conduct its first exchange of CRS reports under the CRS MCAA in 2024, with respect to the reporting period from July 2023 to December 2023. Starting from 2025, the reporting period will cover the entire previous calendar year.

Draft legislation on the CbCR safe harbour anti-arbitrage rule (Pillar Two) released

On July 29, 2024, HMRC published for consultation draft legislation to implement the anti-hybrid arbitrage rule under the transitional CbCR Safe Harbour. The draft has been published to ensure that the legislation remains consistent with the OECD December 2023 Administrative Guidance.

The rules would cover arrangements entered into on or after December 16, 2022 (or subsequently amended) and disqualified expense (e.g., interest expense) or duplicate tax expense accrued on or after March 14, 2024. The draft legislation is open for consultation until September 15, 2024, and would apply from March 14, 2024 (with retroactivity, in certain cases), once adopted.

For more information , please refer to a report prepared by the KPMG member firm in the UK.

Guidance on Reporting Rules for Digital Platforms published

On August 1, 2024, HMRC published guidance on the reporting rules for digital platforms. The guidance is largely in line with the OECD Model Reporting Rules for Digital Platforms. Key takeaways include:

• Reports must be submitted to HMRC by January 31 for the preceding reporting year.
• Late submission of reports may incur an initial penalty of up to GBP 5,000 (approximately EUR 5,900) and a continuing penalty of up to GBP 600 (approximately EUR 712) per day until the report is submitted. A penalty of up to GBP 100 (approximately EUR 119) may also be imposed for each inaccurate, incomplete, or unverified seller's record.

The rules will apply to reporting periods starting on or after January 1, 2024.

The guidance also states that HMRC's digital platform reporting service, through which platform operators must submit their reports, is not yet available. HMRC will update the guidance with additional information once the service becomes available.

Further information on the OECD Model Reporting Rules for Digital Platforms can be found here.

Local courts

German Federal Fiscal Court judgement on the refund of dividend withholding tax to foreign investment funds

On August 21, 2024, the German Federal Fiscal Court (BFH) issued its judgement in cases (IR 01/20, IR 02/20) on the refund of dividend withholding tax to foreign investment funds for refund years prior to 2018. The claimants, which were represented by KPMG, obtained the following positive decisions:

• Dividend withholding tax is to be refunded based on the free movement of capital under Art. 63 of the Treaty on the Functioning of the European Union (TFEU): the BFH considered that the German legislation was discriminatory as Section 11 of the German Investment Tax Act (InvStG) exempts German funds from tax on German dividend income for the dividend years 2004 to 2017, while foreign funds had to pay a withholding of at least 15 percent on German source dividends. In addition, the BFH rejected the justification based on the coherence of the tax law, which intended to take investor (fund unit holder) taxation into account, since Section 11 InvStG does not make the tax exemption of German funds dependent on the subsequent taxation of investors.
• Limitation period is four years: the BFH concluded that the general German limitation period of four years after the end of the year in which the dividend was received, or the dividend withholding tax was paid, applies.
• Late interest of 0.5 percent per month is generally payable on the refund amount: the BFH also awarded late interest to the foreign investment funds. German legislation provides that the refund amounts for the entire period in which the dividend withholding tax was not available to the claimant are subject to late interest of 0.5 percent per month on the interest claim under EU law in accordance, with the national German regulations. For refund years prior to 2012, the late interest period is to begin six months after the date on which the refund application was submitted to the competent tax office, and for refund years from 2012 onwards when the dividend was received. The BFH did not need to decide in the present cases whether the interest rate should also be set at 0.5 percent per month (or 0.015 percent due to statutory adjustments) for periods from 2019 onwards.

From a procedural perspective, the BFH overturned the judgement of a lower court (Hessian Tax Court), and the proceedings were referred back to the Hessian Tax Court. The latter would have to clarify whether the claimant was effectively subject to withholding tax (e.g., sufficient proof of withholding tax and dividend vouchers, beneficial ownership of the funds on dividend ex-date) and carry out the calculation of the refund interest based on the BFH decisions. The Hessian Tax Court should carry out the review of the dividend payments and the calculation of interest within the next six to 12 months and thus conclude the proceedings.

For more details please refer to a report prepared by KPMG in Luxembourg.

Italian Supreme Court confirms that loss-making entities can be included in comparability analysis

On July 26, 2024, the Italian Supreme Court ruled (PDF 218 KB) that potentially comparable entities cannot be excluded from a transfer pricing comparability analysis solely based on their lower profit levels or losses in certain years.

In the case at hand, an Italian company (the applicant) applied a 5 percent mark-up for call center services provided to its Dutch subsidiary under a subcontract agreement. The mark-up was determined through a comparability analysis using a database of Italian companies. However, the tax authorities challenged the estimate, increasing it to 7.42 percent after excluding from the comparable population entities that lacked certain accounting data and those that were loss-making in at least two out of the three fiscal years relevant for the comparability analysis.

Further to the appeal of the decision by the applicant and the dismissal by both the Provincial Tax Court of Milan and the Regional Tax Court of Lombardia, the case was brought before the Supreme Court.

The Supreme Court held that potentially comparable entities should not be pre-emptively excluded from the comparability analysis solely because they experienced lower profit levels or losses in certain years. The Court emphasized that it is common for loss-making entities, or those with incomplete accounting data to function in a free market. The Court referenced the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), which state that business strategies pursued by the parties are a key comparability factor. Specifically, the OECD Guidelines permit the inclusion in the comparability analysis of entities engaged in market penetration strategies, where entities may temporarily incur losses or charge lower prices to gain market share.

The Supreme Court further noted that the OECD Guidelines allow for the exclusion of certain entities from the comparability analysis only in special situations, such as start-ups or bankrupt companies, where their circumstances are clearly not appropriate for comparison. Consequently, the Supreme Court referred the case to the Tax Court of Second Instance of Lombardia for reassessment.

New clarifications Dutch Supreme Court on taxation on income from savings and investments (Box 3)

On August 2, 2024, the Dutch Supreme Court decided in five new cases on the taxation on income on savings and investments (Box 3):Case No. 23/04313; No. 24/00643;  No. 23/04181; No. 23/04644 and No. 24/00709). 

In its decisions, the Supreme Court refers to its June 2024 judgements, where the Supreme Court  concluded that the current Box 3 tax is contrary to certain provisions and rights contained in the European Convention for the Protection of Human Rights and Fundamental Freedoms. For more information kindly refer to E-news Issue 199.

Key takeaways of the August 2 decisions include: 

• In case No. 23/04313 the Supreme Court decided that unrealized exchange results (positive or negative) are also part of the actual return. For the determination of the actual return, taxpayers do not have to take into account: inflation, investments costs and losses from other (previous) years. 
• In case No. 24/00643 the Supreme Court concluded that, in case of a fund for common account (“fonds voor gemene rekening”), the actual return of a taxpayer should be determined pro-rata, based on their participation in the fund. The determining factor in the determination of the actual return of the taxpayer is the income from[ER3] [WR4] , and the changes in value of its participation in the assets and liabilities of the fund in the relevant financial year. Whether any participations are sold is irrelevant. 
• In case No. 23/04181, the taxpayer purchased share certificates at fair market value from the parent company of its employer. The Court of Appeal decided that there was no direct connection between the purchase of share certificates by the taxpayer and the employment and that therefore the losses made on the share certificates cannot constitute negative wages in box 1 (income from employment). The Supreme Court agreed with this judgement.
• In case No. 23/04644, the Supreme Court agreed with the Court of Appeal that surplus liquid company assets of a sole proprietorship should be taken into account as Box 3 income. In the event the deemed return is lower than the actual return, the deemed return should be used for the box 3 calculation.
• In case No. 24/00709 the Supreme Court decided that taxpayers are not entitled to interest compensation by the Dutch tax authorities in the event the box 3 assessment is lowered based on the actual return.

KPMG report: Potential effects on businesses of new UN tax treaty

On August 21, 2024, Bloomberg Tax published a report by KPMG in the US on the adoption of the Terms of Reference (ToR) (PDF 390 KB) for a Framework Convention on International Tax Cooperation by the United Nations Ad Hoc Committee Tax Committee. The report analyzes the potential effects on businesses of a new UN treaty. The report reviews the UN’s efforts to create a new tax treaty and explains why businesses need to monitor the UN process and communicate with policymakers in all countries regarding the potential consequences of the different policy choices.