In this edition of the Benelux-China legal update, we discuss relevant developments both in the Benelux and China. In Luxembourg, the tax ruling procedure has been codified to provide additional certainty to investors. In the area of European capital markets, the European Commission has launched a consultation paper on the review of the prospectus directive that may, over time, facilitate access to European capital markets by Chinese investors. And in China, new guidelines on the taxation of indirect transfers of Chinese assets will resonate throughout international deals.
New tax ruling procedure in Luxembourg
An advance tax ruling is an agreement between a taxpayer and national tax authorities, clarifying and confirming the application of domestic tax laws on the taxpayer’s circumstances in a binding agreement.
Advance tax rulings have long been part of Luxembourg’s unique offering as a leading financial centre and popular go-to jurisdiction for holding companies as well as regulated and non-regulated funds vehicles. However, until recently, the Luxembourg tax rulings were mostly based on administrative practice, without a clear legal basis.
This changed with the Grand Ducal Decree of 19 December 2014 “for the Future of Luxembourg” (Zukunftspack), which formalized Luxembourg’s existing advance tax ruling practice and provided it with a clear statutory basis. The same Decree introduced changes to the transfer pricing legislation, an increase of VAT rates, and a temporary 0.5% income tax for individuals. All measures have entered into force on 1 January 2015.
The Decree states, as a general principle, that an advance tax ruling cannot by itself provide for an exemption or moderation of taxes due. It thereby confirms that the purpose of a tax ruling is merely to provide confirmation of the correct application of tax laws, and therefore to provide certainty to (prospective) investors. An advance tax ruling will be valid for a maximum of 5 years and binding on the tax authorities, except in the usual scenario’s (i.e. if the description of the situation or operations with respect to which a ruling demand was introduced are inaccurate or incomplete or have changed, or if domestic, European or international laws have subsequently changed).
A tax ruling request must be introduced in writing with the competent tax inspector and duly motivated. It must identify the applicant, contain a detailed description of the operation or considered operation(s) and of the tax issues arising from such operation(s), motivate the applicant’s tax position on the matter and confirm that the facts and analysis given are true and complete. Requests relating to corporate taxation will be forwarded to a newly created commission des décisions anticipées (tax ruling commission) to ensure consistency and uniform treatment of tax payers.
The advance tax ruling will be published anonymously and in summary form in the annual report of the Luxembourg Revenue.
An administrative fee ranging from EUR 3,000 to EUR 10,000 will be levied on the applicant, depending on the complexity of the request and the amount of work involved. The fee is payable as from the receipt of the request; no ruling will be issued until the fee is paid and the fee is non-refundable in case the request is withdrawn, declined or answered negatively. A grandfathering exemption exists for pending rulings requests that were introduced prior to 1 January 2015.
This new regime for advance tax rulings in Luxembourg enhances Luxembourg’s prime position as a leading financial centre. By further promoting certainty and predictability, Luxembourg continues to be an ideal platform jurisdiction for Chinese enterprises investing overseas using Luxembourg structures.
Consultation paper on EU Prospectus Directive
On 18 February 2014, the European Commission launched a consultation on the Prospectus Directive, seeking the views of market participants to improve the current legislation so as to make it easier for companies to raise capital throughout the EU while ensuring effective investor protection.
Via the consultation, the Commission is seeking views on how to overcome obstacles to efficient functioning of markets. A key focus will be to reduce the administrative hoops through which companies have to jump, as the current rules are often seen as costly and administratively burdensome for issuing companies, in addition to leading to prospectuses that are too detailed and complex for investors to wade through. To that end, the consultation will consider ways to (i) simplify the information included in prospectuses, (ii) examine when a prospectus is necessary and when it is not, and (iii) how to streamline the approval process in each of the member states.
All stakeholders and interested parties are invited to submit their contributions by 13 May 2015. On the basis of the outcome of this consultation, the Commission will identify key actions to unlock funding for businesses and to boost economic growth with the creation of a true single market for capital. Over time, this should contribute in the EU competing even better with the US and other parts of the world with deep capital markets and ample opportunities for funding, also for Asian companies.
SAT issues new rules on indirect transfers of Chinese assets by non-residents
In early February 2015, China’s State Administration of Taxation (SAT) issued a new set of guidelines on the indirect transfer of Chinese assets by non-resident enterprises. The new guidelines (Bulletin 7) supplement and provide additional guidance on two previous sets of administrative guidelines, known as Circular 698 (2009) and Bulletin 24 (2011), pursuant to which the indirect transfer of Chinese assets by non-resident enterprises may be subject to Chinese taxation.
The significance of the rules lies in their potential for Chinese taxation to apply to any international transaction or group restructuring, even those without an obvious Chinese angle (e.g. a transaction in respect of a European target between European entities, where the target holds a direct or indirect interest in Chinese assets or operations)
Pursuant to the new guidelines, an indirect transfer of Chinese assets by a non-resident enterprise through an arrangement that does not have reasonable commercial purposes will be re-characterised as a direct transfer. “Chinese assets” are clarified to include not only (i) equity investment assets of Chinese resident enterprises, but also (ii) properties of branches or establishments within the territory of China and (iii) real property located within the territory of China. An indirect transfer is any transfer equity interests in an offshore enterprise that directly or indirectly holds Chinese assets (safe harbours exist for the trading in listed shares of a non-resident entity holding Chinese assets, and for gains on disposals by non-resident enterprises that would, in case of a direct transfer, not be subject to tax pursuant to applicable double tax treaties)
The guidelines provide guidance (albeit vague) to determine the existence of reasonable commercial purposes in assessing whether an indirect transfer ought to be re-characterised. More usefully, they also set forth (i) criteria which, if met, will result in the transaction to lack reasonable commercial purposes and therefore to attract Chinese taxation, and (ii) a safe harbour for internal group restructurings.
The reporting requirements have been changed from a mandatory reporting obligation on the part of the transferor to a voluntary reporting obligation by any party to the transaction as well as by any person that participated in the planning of a transaction. The payor must withhold the taxes payable; penalties and interests apply (also on the part of the transferor so as to provide an incentive to report the transaction).
The new guidelines are effective immediately, and also apply to transactions that took place before 3 February 2015 in respect of which the China tax treatment was not settled as of that date.