L.4607/2019: Thin Cap rules, Anti-Tax Avoidance Rules, Levy of L.128/1975
Law 4607/2019 has been published in the Government Gazette (FEK Α' 65/24-04-2019) which amends several tax provisions.
The most important provisions introduced by Law 4607/2019 are the following:
1. Transposition of anti-tax avoidance rules into the Greek tax legislation in compliance with the Directive 2016/1164
- By virtue of Law 4607/2019 (Government Gazette Α' 65/24-04-2019) certain provisions of the Council Directive 2016/1164/EU of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD I) have been embedded in the Greek legislation.
- In particular, the new law amended the provisions regarding thin capitalization and Controlled Foreign Companies as well as the general anti-tax avoidance rule. On the contrary such law did not embed the provisions of ATAD I regarding hybrid mismatches and exit taxation.
(i) Thin capitalization
- The new provisions maintain the general regime of the thin capitalization rules. In particular, the maximum threshold up to which exceeding borrowing costs are deducted (30% of EBITDA), the threshold up to which exceeding borrowing costs are fully deductible (3.000.0000€) as well as the ability to carry forward without any time limitation exceeding borrowing costs, that cannot be deducted in the current tax year, are still in force.
- It is noted though that the maximum threshold up to which exceeding borrowing costs are deducted does not apply to exceeding borrowing costs incurred on loans used to fund a long-term public infrastructure project, in cases where the project operator, borrowing costs, assets and income are all in the EU.
- Pursuant to the new provisions, EBITDA (earnings before interest, tax, depreciation and amortization) is the sum of taxable income, tax-adjusted amounts for exceeding borrowing costs as well as tax-adjusted amounts for depreciation and amortization, while tax exempt income is not taken into account for such calculation.
- For the purposes of applying the above, exceeding borrowing costs are defined as the difference between a taxpayer’s taxable interest revenues and other economically equivalent taxable revenues and the deductible borrowing costs of such taxpayer, while the term “borrowing costs” includes interest expenses on all forms of debt as well as expenses incurred in connection with the raising of finance.
- It is stressed that the new interest limitation rule expressly excludes from its scope several types of financial undertakings (e.g. credit institutions, insurance companies, alternative investment funds, UCITS etc.).
(ii) Controlled Foreign Companies (CFC)
- The CFC provisions have been significantly amended and, therefore, the review of all relevant structures of Greek groups is highly recommended, in order to ensure that each structure is compliant with the new CFC rules.
- More specifically, pursuant to the new provisions a foreign legal entity or a foreign permanent establishment is considered as a CFC insofar the following conditions are cumulatively met:
- The taxpayer’s participation (either by itself or together which any associated entities) to the voting rights or the capital or the profits of the entity under examination, as the case may be, exceeds 50%. This criterion applies only to the extent that the entity under examination is a legal entity. In order for a corporation to be considered as an associated entity on the basis of the above a participation percentage of 25% is required instead of the normally applicable 33% (as per art.2 of the Greek Income Tax Code).
- The actual corporate tax paid abroad by the entity under examination (legal entity or permanent establishment) on its profits is lower than the difference between the tax that would be due by such person in Greece and the actual corporate tax paid on its profits.
- More than 30% of the net income before taxes realized by the entity under examination falls within one or more of the categories of income mentioned in the Law 4607/2019. Such categories include passive income (dividends, interest, royalties), income from the disposal of shares, income from financial leasing, income from insurance, banking and other financial activities as well as, under conditions, income from invoicing entities, while income from moveable assets and from real estate property are not any more included in these categories.
- As opposed to the previous regime, the factor whether the shares of the entity under examination are traded in a regulated market is not any more a criterion for the application or the exemption from the CFC rules.
- As long as the abovementioned requirements are met, the non-distributed income of the CFC under examination is included in the taxpayer’s taxable income and is taxed according to the Greek corporate tax rate (if the taxpayer is a Greek legal entity) or according to the relevant schedular tax rates for individuals (plus special solidarity tax, if the taxpayer is a Greek individual tax resident). Any foreign corporate tax paid by the CFC is credited against the Greek tax (up to the maximum of the Greek tax assessed).
- In case where a CFC distributes profits or the taxpayer disposes of its participation in such a CFC entity, the tax due by the taxpayer on the basis of the above is calculated after deducting from the tax base amounts that have already been taxed.
- The new provisions shall not apply to CFCs established in the EEA, as long as such entities perform substantial economic activity, supported by employees, equipment, assets and premises, as evidenced by relevant facts and circumstances.
(iii) General anti-tax avoidance rule
- The new provisions introduced the term “principal purpose” of an arrangement (principal purpose test) as a determining factor on whether such an arrangement will be considered as genuine and, consequently, will be taken into account by the tax authorities. Should an arrangement be considered as non-genuine, the relevant tax liability is calculated on the basis of the provisions that would have been applicable in case such arrangement was not in place.
- In particular, for the purposes of tax determination the Tax Administration ignores 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 applicable tax law, are not genuine.
- For the purposes of determining whether such arrangements are genuine or not all relevant data and circumstances of each case are considered, while the extent as to which the arrangement in question is being implemented for valid commercial reasons that reflect the economic reality, is used as a criterion for this determination. In this context, the Tax Administration examines whether each arrangement falls within certain circumstances (e.g. the arrangement is applied in a manner which is not consisted with usual business conduct, or it leads to a significant tax advantage, which though is not reflected to the business risk assumed by the taxpayer etc.).
- The aforementioned provisions of Law 4607/2019 are applicable to income received and expenses occurred on tax years commencing as of 1.1.2019 onwards.
2. Amendment of provisions regarding prevention of money laundering
- Law 4607/2019 amended certain provisions of Law 4557/2018 regarding prevention and repression of money laundering and terrorist financing.
- The main amendments are the following:
- The term “Beneficial Owner” does not include not only entities listed in a regulated market but also entities listed in a Multilateral Trading Facility, to the extent that the latter are subject to disclosure requirements equivalent with those of entities listed in a regulated market
- Entities that are obliged to gather and maintain at a special register information regarding their beneficial owners include not only entities having their registered seat in Greece but also entities performing taxable business activities in Greece
- Entities listed in a regulated market or a Multilateral Trading Facility maintain instead of the special register mentioned above a record of notifications of Law 3556/2007, which shall be updated each time where an event reportable to the Capital Market Commission takes place, without being obliged to register such record to the Central Register of Beneficial Owners.
3. Imposition of levy of Law 128/1975 to credits granted by financial institutions
- According to Law 4607/2019 the levy of Law 128/1975 is imposed not only on loans and credits granted by credit institutions but also on credits granted by financial institutions operating in Greece or abroad.
- Especially with regards to foreign financial institutions, the new provisions expressly provide that the levy of Law 128/1975 burdens the individuals or legal entities that are obliged to submit a tax return.
- The provisions regarding imposition of levy of Law 128/1975 to credits granted by financial institutions are in force as of 01.05.2019.
This document contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
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