Monthly Archives: November 2013

EU Parent-Subidiary Directive: New Rule for Hybrid Loan Structures

The EU Parent-Subsidiary Directive (2011/96/EU) was implemented to prevent double taxation of intra-group companies based in different EU Member States.  Many multinational companies took advantage of the tax benefits made available by the Directive, employing hybrid loan instruments to take advantage of the differences between national tax rules thereby avoiding tax in any Member State.

The issue of the use of strategic and aggressive tax planning was first raised in December 2012, when the European Commission set out an action plan to combat such aggressive tax planning and tax evasion.  The amendment to the Parent-Subsidiary Directive was one of the proposals included in the action plan.

The proposal updates the anti-abuse provisions, by requiring Member States to adopt a common anti-abuse rule.  Thus artificial intra-group structures designed solely to avoid taxes can be ignored, and subject to tax on the basis of de facto economic substance.

In addition, hybrid loan instruments will no longer benefit from differing national tax laws.  Currently, intra-group hybrid loans receive an exemption for the dividends received from subsidiaries in other Member States.  In some Member States such dividend payments are deductible as debt repayment.  The result is that the dividend payment/loan is not taxed in any Member State.  Under the proposal, if payment of a hybrid loan benefits from a tax deduction in the distributing Member State then it will be subject to tax where the parent is located.

If the Proposal is approved by the Council of the European Union, Member States will be required to implement it no later than December 31, 2014.

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International Acquisitions: Due Diligence Manufacturing/Industrial

Acquisition of a business or business assets is one way to expand globally.  There are many pitfalls, but the benefits, including pre-existing market share in a foreign market, may overshadow the negatives.   The following due diligence checklist, complements a larger more detailed due diligence checklist because it highlights the types of information needed to make a sound judgment when the acquisition includes a manufacturing or industrial properties where environmental issues may arise.

SUPPLEMENTAL DUE DILIGENCE CHECKLIST

Acquisition of any manufacturing or other industrial properties

 1.         GENERAL INFORMATION / CORPORATE STRUCTURE      

            Meetings

1.1       Inspect minutes of meetings and agenda papers during the last 18 months to determine whether environmental issues were raised:

(a)        Shareholders.

(b)        Directors.

(c)        Directors’ committees.

(d)        Management committees.

            Reports

1.2       Review copies of any reports prepared during the last five (5) years or any other relevant reports on the Seller, for example accountant’s report, environmental report or management letters.

            Consents and permissions

1.3       Details of any governmental and other consents required for the implementation and closing of the transaction.

2.         COMPANY (this information may have been included on your primary due diligence checklist)

(a)        A copy of the Certificate of Incorporation (including certificates issued on change of name).

(b)        A copy of the Memorandum and Articles of Association or its equivalent (incorporating any amendments) together with all resolutions and consents required by law to be annexed.

(c)        Names and addresses of all directors, stating any management job title and any other directorships and business interests held.

(d)        A copy of the last Annual Return filed at the Companies Registry:

(e)        A copy of the resolution of the Seller to:

(i)    undertake;  close this transaction; and

(ii)  enter into the agreements to which they are parties.

3.   COMPLIANCE PROGRAMMES

3.1 Details of any compliance programs run during the last five years. 

4.         TRADING ACTIVITIES

                Licences, consents, etc.

4.1          Copies of all licences, consents, permits, and authorities (public and private) required to carry on the business of the Seller, noting those which are actually held by the Seller.

5.           LAND AND BUILDINGS

(a)                  A list of occupiers of any properties being transferred where any of them are occupied other than by the Seller and full details of the terms of their tenure.

(b)  Copies of the following:

(i)  Title deeds to the properties, details of the location of such title deeds and, if possible, details of the solicitors who acted on the purchase of any property or upon the grant of any lease.

(ii)  (If not available with the title deeds) a plan or plans indicating the extent of the properties.

(iii) All leases, superior leases, sub-leases, tenancy agreements, licenses to assign, underlet and alter together with all amendments to or variations of such documents and all agreements to enter into such documents.

(iv) All covenants, restrictions and consents relating to the properties or full details thereof.

(v)  All agreements as to the making of any alterations or additions to the properties.

(vi) Planning permissions, building regulation consents and any other statutory consents, together with all licenses or outstanding notices granted or served by public or local authorities or adjoining owners.

(vii) All mortgages and charges affecting the properties.

(viii)       Any guarantees relating to the fabric of the buildings and the fixtures and fittings on the properties

(c)    Details of all outgoings on all properties including rents, service charges, rates and water charges

(d)    If access to any of the properties is not over the public highway, full details of any access from the properties onto the nearest public highway.

(e)          Correspondence and details relating to any dispute and any potential dispute involving the properties or its/their use.

(f)     Copies of any contract for the supply to any premises of the company or from which its business is carried on of services (such as electricity, gas, water, etc.) containing any unusual or special terms or any contract for the disposal of trade effluent.       

6.           ENVIRONMENTAL MANAGEMENT

               General

6.1         All information regarding any manufacturing or other processes or extraction of minerals carried out at any time on the properties occupied by the Seller or any current proposals to do so.

6.2         What is the historical use of the properties?  Obtain all information in the possession of the owner as to such use which could have resulted in ground or water contamination.

6.3         Have any properties been required to be cleaned up from contamination?

6.4         Details of any environmental assessments and reports or any environmental management system, environmental policy or audits which are in place or have been carried out in respect of the properties or the Seller. 

               Hazardous substances

6.5        Is any property affected by any substance likely to cause nuisance or pollution of the environment?

6.6         A copy of the list of chemicals (including fuels and lubricants), raw materials and all other substances (including radioactive substances) used or stored at any of the properties.

6.7          Do any of the buildings or equipment located on any of the properties contain either asbestos of any kind or polychlorinated biphenyls or terphenyls (PCBs/PCTs)?

6.8         Are there any premises other than the properties in any country that have been used by the Seller at any time for the manufacture, handling, storage or transport of any substances (including radioactive substances) which are capable of causing pollution of the environment or harm to human health?

6.9  Are there any other substances generally known at the date hereof to be dangerous or deleterious or likely to affect human health?

               Contaminated land

6.10     Have any polluting or harmful substances been spilled, leaked, stored or deposited (whether buried or not) on or in any of the properties or any other premises used or occupied at any time by the Seller?  Obtain the following full details of the accident or incident:

(i)  copies of any repairs, correspondence, court orders, notices or recommendations relating to the accident or incidence;

(ii)    details of any remedial work carried out, including certificates of satisfactory completion.

6.11      Copies of the results of any soil, groundwater or air monitoring surveys that have been conducted at any of the properties, at any other premises used or occupied at any time by the Seller, and (so far as information is available to the Seller) on or in neighboring properties.

       Air

6.12     List and describe any discharges to air made on any of the properties.

               Water

6.13      Is the groundwater in the area used for drinking purposes by people or animals?  Is surface water in the area used for drinking purposes by people or animals?

6.14     Does any drainage from the properties discharge into a watercourse?

6.15      Details of all discharges from any of the properties to sewers or controlled waters and of the applicable discharge consent in each case.  Is there any reason to suppose that there will be any difficulty in complying with such consents or that the cost of complying will significantly increase in the near future?

               Waste

6.16     Is the Seller aware of any ground surface movement, escape of gas or other similar indicator which might indicate earlier disposal of waste?

6.17      Provide a description of all waste materials produced at the properties, indicating which (if any) are or were treated as special waste and the ultimate disposals of the waste materials.  Please provide a copy of any agreement relating to such disposal.

6.18    Confirm that no radioactive material or waste has been dealt with on or from the properties.

                Regulatory or other action

6.19      Details of any notices issued, inspections made or enforcement actions taken by any governmental or other regulatory authority concerning environmental issues or health or safety in respect of the Seller or the Properties.

6.20      Details of any operations by the Seller on any site, and/or on any of the properties or any situations which are (or have been) in breach of any legally enforceable requirements (statutory or otherwise) or in respect of which there is a significant risk of such a breach being found, irrespective of whether litigation has already begun or threatened.

6.21       Are there any actual or potential claims, actions or proceedings or threatened litigation by or against the owner in respect of the contamination of or damage to the property or neighboring property by reason of the release, escape, discharge or emission of any substance from or to neighboring or nearby properties, or any access or other activity on such properties?

6.22      Details of any formal or informal complaints which the Seller has received from or on behalf of any employees or neighbors or from any environmental action group concerning alleged exposure to harmful substances or other environmental, health or safety matters.

               Civil liability

6.23      If the Purchaser’s environmental consultants or experts indicate that there have been breaches of any environmental requirements and that remedial care is required to be taken, please confirm that the Seller will be responsible for the costs of such action including consultant’s fees.

               Insurance

6.24      Please give details of any insurance policy covering the properties or any part relating to environmental impairment and details of any claims (whether settled, refused or outstanding).

Miscellaneous

6.25     Have complaints about noise been made or received in relation to the properties or any neighboring properties.

6.26     Has the Seller ever had cause to make a complaint about or make a claim against the owners of any neighboring property in respect of any environmental matter?

7.     PLANT, EQUIPMENT AND OTHER FIXED ASSETS

                Assets

7.1          Details of a schedule of plant, equipment, machinery, furniture, fittings and other fixed assets (including any design drawings).

7.2          Details of any assets which are subject to any hire, rental, lease, hire purchase, conditional sale, credit sale or similar arrangement.

7.3          Identify any other items not owned by the Seller, for example tanks owned by the Seller but located on third party properties, and the legal agreements relative to such arrangements.

                Material Assets not owned

7.4          Complete copies (or details where unwritten) of any agreements for hire, rental, lease, hire purchase, conditional sale or similar arrangement. 

8.     INTELLECTUAL PROPERTY

8.1          Trade marks

(a)             Details of any trade marks to be used by the Purchaser or its affiliates.

(b)            In respect of all trade marks to be used by the Purchaser or its affiliates:

(i) Copies of all certificates of registration and any license agreements.

(c)                Details of any mortgages or debentures over any trade marks owned by the Purchaser or its affiliates.

9.     BANKING FACILITIES / BORROWING FROM THIRD PARTIES, FINANCIAL GRANTS

9.1          Borrowing

Copies of all mortgages, debentures, debenture trust deeds, instruments by way of security charges, pledges, liens, encumbrances, conditional sale or other title retention or trust arrangements, deeds of postponement, preferential rights or other agreements or arrangements the effect of which is to create a security over the assets or any part thereof of the Seller, together with copies of all extant notices, demands or other communications from the beneficiary of the relevant security to the Seller.

10.    INVESTIGATIONS / LITIGATION / DISPUTES

Disputes

10.1

(a)             Details of any potential or actual litigation, arbitration or other disputes (including industrial tribunal actions) affecting the Seller or any person for whose acts or defaults the Seller may be vicariously liable which, to the Seller’s knowledge  is currently involving the Seller, or is contemplated, or foreseeable.

(b)            In respect of any current litigation or other dispute, copies of:

(i)             Any writ, statements of claim and defense.

(ii)            Any correspondence.

(iii)           Opinions from counsel or other advisers.

(iv)           Settlement levels.

(v)            Estimated costs (including legal costs).

(vi)           Particulars of any terms of settlement negotiated or proposed.

(c)             Any injunction, order or judgment still in force made by any court or governmental agency against the Seller.

(d)            Any undertaking given by the Seller to any court or any third party arising out of any legal proceedings.

               Regulatory action

10.2  Details of any notices issued, inspections made or enforcement actions taken by any governmental or other regulatory authority (other than environmental issues or health or safety) in respect of the Seller.

10.3  Details of any operations by the Seller or any situations which are (or have been) in breach of any legally enforceable requirements (statutory or otherwise) or in respect of which there is a significant risk of such a breach being found, irrespective of whether litigation has already begun or threatened.

10.4 Details of any formal or informal complaints which the Seller has received from or on behalf of any employees or neighbors on any matter.                      

11.          NON-COMPLIANCE WITH AGREEMENTS / CHANGE OF CONTROL

11.1  Details of any non-compliance by either the Seller or the other party in respect of any material agreement (whether written or unwritten) entered into by the Seller.

11.2  Agreements or arrangements which are subject to termination or variation, require prior consent, novation or notification, or are contravened or otherwise affected by the transfer to the Purchaser.

12.          IMPENDING LEGISLATIVE CHANGES

12.1  Are you aware of any impending legislative changes which might affect the Seller?

13.         OTHER MATTERS

In view of the structure whereby substantial assets of the Seller will be vested in a new company, are there likely to be any challenges from creditors?

DISCLAIMER: These materials have been prepared by for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking direct professional legal counsel.  To discuss your business issue contact Wendy Kennedy by e-mail wkennedy@intersticeconsulting.com

 

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Benefits Denied: Misinterpretation of Double Tax Treaty Provisions

Is there a growing unwillingness to respect double tax treaty provisions by revenue agencies and courts around the world?  Or is it simply a matter of incorrect interpretation of treaty provisions that has foreign business owners becoming concerned their treaty benefits are at risk?   Foreign investors need to be able to rely on double tax treaty protection and the benefits it provides.

One provision that adds to this uncertainty is the anti-discrimination provision.  This provision, in brief, is meant to put domestic and foreign companies on the same footing, by prohibiting imposition of tax  or denial of a treaty benefit, on a foreign company that is more burdensome than experienced by the domestic company, in the same circumstances.   In 2011, in a dispute before the Tax Court of Canada looked at anti-discrimination provision in the Canada – UK Double Tax Treaty where a UK company doing business in Canada through a permanent establishment, incurred capital losses of over $7 million.  Another UK company, also doing business in Canada through a permanent establishment, purchased all the outstanding shares and wound up the company.  The purchaser deducted the acquired company’s losses over a three year period.  The Minister of National Revenue denied the deductions, claiming that neither company was a Canadian company and were therefore not entitled to the deduction.  The Canadian court, in making its determination, considered a similar case before the New  Zealand Court of Appeal, and held that discrimination based on residence does not amount to discrimination.

In another case, in Russia this time, the issue was the application of thin-capitalization rules to foreign held companies.  Ordinarily, thin-cap rules disallow interest under group financing or guaranteed third party borrowings unless proven to be at arm’s length.  Unfortunately, thin-cap rules are now being applied regardless of proof that such debt is held at arm’s length and in contravention of the anti-discrimination provision.

In China, the State Tax Administration has been grappling with standardizing interpretation across its many local tax bureaus.  It issued guidelines for determining the beneficial ownership status of an foreign entity.  This qualification allows some foreign companies to reclaim a portion of the dividend tax they pay.  The guidelines have given rise to additional uncertainties in terms of implementation.  A safe harbor was created for listed companies, but uncertainty remains.   Unlisted companies are not covered by the safe harbor, without treaty benefits foreign companies pay a ten percent dividend tax, bring the total effective tax rate to approximately 32.5%.

Saudi Arabia has recently issued guidance, Circular No. 5068/16/1434,  to ease confusion regarding Saudi Arabian entities that file a claim for reduced withholding tax paid to a nonresident company.  The guidance outlines the steps necessary to claim the reduced withholding tax.   This is gives foreign investors the confidence that comes with certainty in application of the law.

Double tax treaties have the effect of limiting the sovereign authority of the state to tax income at the source.  Where the right to tax is reserved under the double tax treaty, but not in the relevant domestic tax code, the treaty should not be applied as an expansion of the domestic tax code to provide for additional taxation on foreign held companies, nor should treaty benefits be stripped.  Regrettably, double tax treaties provisions can be disregarded or misinterpreted.    The key is to be prepared, understand local interpretation, maintain required formalities and keep an eye on changes in enforcement of local tax codes.

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German court rules Google privacy policy violates data protection law

Google has certainly suffered its share of scrutiny from privacy regulators recently.  The company faces financial sanctions in France and Spain for failure to comply with privacy laws.  Now a German court has ruled that as many as 25 provisions in its privacy policy and terms of service violate German data protection law.  The court indicated that the offending provisions were too vaguely formulated, and prevented or restricted consumers from exercising control over their personal data.  13 privacy policy provisions and 12 terms of services provisions were held invalid.

Google, like many other high tech companies, ask consumers to click a box if they agree to its Terms of Service and have read the Privacy Policy.  This approach does not comply with German law, which is much stricter than any of its US counterparts.  German data privacy law requires the consumer to make a more definitive and conscious choice to opt-in to provisions that would allow collection and use of personal data and restrict the consumer’s ability to delete or change its preferences.  The consumer’s consent must be explicit and ongoing.  Google’s vague data privacy and terms of services provisions simply don’t go far enough to satisfy that threshold of continuing control by the consumer.

Google has indicated that it will appeal this decision and a decision from the court of appeal will not likely take place until late 2015.

The Federation of German Consumer Organizations, which brought the case, complained about, among other things, the way Google obtained its right to review and control, change and delete certain types of information, remove applications by directly accessing a device, and adjust functions and features of services completely at will.

Companies collecting personal information should take this as a wake-up call.  Google is not the only company to run afoul of European privacy laws. Both Apple and Samsung have been before the same court and had a number of privacy policy provisions held invalid.   Under proposed EU rules, companies violating the rules, effective as early as June 2014, could face fines of as much as $135 million for violations of the new data protection laws.

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VAT, Sales and Use Tax on Electronically Supplied Services

Supplying services over the internet is not a new business model, although its use has become easier and more prolific with advancements in technology.  The question of whether and where such services are subject to VAT and sales and use tax has yet to be definitively answered. The general rule was that the VAT and sales and use tax were where the services supplier is located.  But subsequent EU Directives, starting in 2002, changed that general rule.  The 2006 EU VAT Directive, Annex 11 defines “electronically supplied services” to include website supply, web-hosting, distance maintenance of programs and equipment, supply of software and updates, supply of images, text and information, and making databases available, supply of music, films and games of all kinds, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching, but, significantly, excludes instances in which the services supplier and its customer communicate be means of email.  Article 7 of Council Implementing Regulation of 15th March 2011.

Therefore, it seems internet communication generally regarding commercial transactions, facilitating trading or other communications that take the place of telephone or fax are not subject to the VAT or sales and use tax rules.  The difficulty arises when the services supplied provide include both electronic communication and other components.

The EU, since 2010 has implemented the VAT Place of Supply of Services rules to more accurately impose VAT and level the playing field for EU businesses.  Where the services are provided to business located in the EU, VAT would be charged at the place where the customer has its business.  If the business customer is located outside the EU, then no VAT charge would be triggered.

If the services are supplied to a consumer within the EU, then VAT is charged in the place where the services supplier is located.  If the consumer is located outside of the EU, then no VAT is charged.  Alternatively, if the services are supplied by a business located outside of the EU and the consumer is located in any EU Member State, then VAT is charged.  This is specifically provided for in Section 34(l) VAT Consolidation Act 2010 transposed from Article 58 of the 2006 VAT Directive. However, there will be a fundamental change, as of January 1, 2015, the place of supply of electronic services will be the place where the customer is established, regardless of where the services supplier is located.

For example, if a US business electronically supplies services to an German consumer the place of supply (and of taxation) is Germany. The US business must then register and remit VAT.  There is program, designed to reduce the registration and complexity, that allows a non-EU business to register in one Member State only.  Then charge and remit VAT for all supplies of services to private consumers made within the EU.

Before making electronic services available over the internet, determine whether that supply of services will be subject to VAT or any other sales and use tax.  If your services will be subject to VAT or other sales and use tax, register and include it in the fee for services.  Remember in the EU, the fee charged to a private consumer must include the VAT charge as an inclusive price.

 

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Cross-Border Licensing

Of course, global business expansion is critical and the myriad of different ways to achieve expansion is dizzying.  Licensing is one of the lower cost more effective methods of gaining a foothold in a foreign market. Generally licensing includes, patent and know-how licensing, copyright licensing, and trademark licensing, but this is certainly not exhaustive.  There are challenges to cross-border licensing, but there may also be significant benefits.  The following Post raises just a few of the many issues that are essential to a successful cross-border license program.

Intellectual Property Protection:  When analyzing whether licensing is the best option, first determine what intellectual property protection is available in the country and/or region being considered.  A Nondisclosure/Confidentiality Agreement is particularly essential when talking with potential foreign licensees.  Make certain there is one in place prior to discussing any specifics with regard to your intellectual property.  Obtaining patent, copyright or trademark protection in the licensee host country is also important.  Although, the license agreement could shift the burden of these expenses to the licensee, the resulting royalty stream would necessarily thereby be reduced, and protection may be difficult to control.  If possible, register your key intellectual property assets in your target markets.  Decide whether any derivatives, improvements or modifications to the intellectual property will be owned by your business or the licensee.   Make certain you include provisions that include assignment of any such derivatives, improvements or modifications.

Tax consequences: One of the benefits of licensing is that no Permanent Establishment is created.  The license agreement should be designed to ensure the activities of the licensee, and the relationship created by the license agreement does not create a Permanent Establishment.  Determine whether there are withholding taxes due on payment of a royalty.  In most cases there will be withholding tax, but often this is mitigated by a double tax treaty which results in a lower or zero withholding tax.  There are a number of different license models, where one model can attract withholding tax another model may be considered delivery of a service.

Compliance with foreign laws:  Review your license business model to determine whether it raises any issues regarding data privacy laws, warranty limitations, or export laws.  Data privacy laws, for example, are rapidly changing and the penalties for noncompliance often stiff.  Review the data privacy laws in the licensee country and develop an in-house data privacy policy.

Hedging for foreign exchange risks: Determine whether your business is willing to take the foreign exchange risk.  For example,  will the licensee in France pay royalties or license fees in US dollars or Euros.  If the licensee pays in Euros, and the business must convert the Euros into US dollars what will the exchange rate be at the time of payment or the time of conversion?  Exchange rates fluctuate and the result may be an increase or decrease in your overall margin, if for example, the Euro weakens against the US dollar.

In conclusion, cross-border licensing transaction can be good for the bottom line, take the time to complete your due diligence and understand the risks are before proceeding to avoid any surprises.

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Holding Companies: Spotlight on Malta

Holding companies are a very important component to a well structured global business.  Holding companies own assets, often in the form of shares in operating and non-operating companies.  The choice jurisdiction of the holding company is crucial to protect assets, mitigate risks, consolidate business divisions, accumulate capital and shareholder value, receive dividends from operating companies and distribute profits to shareholders.  When comparing different jurisdictions, take into account the benefits of a particular country’s Double Tax Conventions (Treaties), this will reduce the incidence of foreign withholding tax.

Optimally, the company should be formed in a jurisdiction that allows receipt of foreign sourced dividends at a low or rates of withholding tax, and ensures those dividends are not highly taxed in the holding company’s country of residence.  Assess whether the country permits distribution of available profits to non-resident shareholders at low or preferably zero rates of withholding tax.  Consider capital gains tax treatment from the disposal of shares in foreign companies held, is there an exemption on realized gains?  Malta has been gaining in popularity as a solid choice for a holding company.  Its tax system, adoption of EU Directives and extensive Treaty network provide a good option when planning your global structure.  The following is a brief summary of what Malta offers:

The Corporate Income Tax rate is 35%, but can be reduced to between 0% and 10%.  A foreign tax credit paid or deemed to have been paid can be credited against local tax due on foreign income.  Dividends are subject to 35% tax, however, if the receiving company qualifies for the participation exemption, the tax drops to zero.  There are a number of ways to qualify for a participation exemption, including, ownership of at least 10% of the equity of the company which allows the same percentage the right to vote, participate in distribution of profits and on liquidation.  To maintain the participation exemption take care not to contravene the anti-abuse provisions (discussed in an earlier Post).  There is no withholding tax on interest or royalties, unless the company has a permanent establishment and conducts business in Malta.  Profits distributed to non-resident shareholders are not subject to withholding taxes, regardless of which jurisdiction the shareholders reside, including to offshore jurisdictions.  Capital gains from the divestiture of shares in foreign companies benefit from a zero tax rate, irrespective of the holding period or shareholder percentage, and there is no capital gains tax on the liquidation of the holding company itself.

Carefully evaluate your business to determine which benefits will create the most efficient outcome.  Examine a number of different jurisdictions and  enquire as to the availability of investment or tax incentives (discussed in an earlier Post).  Then choose the most efficient holding company for your global business.

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Investment and Tax Incentives

When planning to expand internationally, a significant number of countries now offer investment and tax incentives in the form of tax holidays, allowances based on capital expenditure, enhanced tax deductions, grants and other investment incentives to attract new industry or bolster growth industries. Research and development tax incentives, for example, are now offered by more than 43 countries.

Look for tax incentives, grants, subsidies and the availability of any other funds.  When considering national tax incentives, enquire as to restrictions on the type of business activities, how long the incentives will last, is approval required for eligibility, if so how long will approval take? The following is a very small sample of incentives currently available around the world.

Argentina is keen to promote an already quickly growing software industry, by offering a government incentive that provides software exporting companies a tax break of 70% of the employer’s share of payment to fund Argentina’s public benefit system.

Indonesia is preparing to implement a tax incentive to encourage foreign companies from repatriating profits.  The government plans to offer a tax incentive, which was hinted to be in the form of a dividend tax credit for funds reinvested in Indonesia.  This is in addition to the 5 – 10 year tax holiday that has been available since 2011 to companies making significant capital investments.

Malaysia is offering a 100% tax holiday for 5 years to high tech companies.  Manufacturing, food processing, hotel, tourism and other industrial and commercial companies a generous tax holiday of 70% tax exemption on statutory income for five years, and allows tax exemption for dividends paid from tax exempt income.  Your company may also qualify for an investment tax allowance.  And high tech companies may qualify for a 100% five year tax holiday.

South Africa offers a generous grant to attract investment and create employment in South Africa in the business process services sector.  The grant offers up to R112,000 per job created and sustained over a 3 year period, plus a bonus incentive for companies creating more than 400 jobs.  The jobs are a grant designed to attract, among other businesses, call centers.

Panama’s investment and tax incentives, together with its use of the U.S. dollar as its currency makes Panama very conducive to foreign investment.  Manufacturing companies that export more than 60% of their product are exempt from taxes on both raw materials imported and exports, provided they employ a minimum of 5 local workers.  Panama has tax and investment incentive programs for multinational companies that establish their regional headquarters in Panama, for   high-tech companies, research and development companies, and call centers.   Panama also waives withholding taxes on dividends and has a strong double tax treaty network.

When considering whether to take advantage of investment and tax incentives in any country examine a variety of options and countries.  Is the location in close proximity to the market for your goods, is the IT infrastructure sound and sufficient for your use, are there protections for foreign investors, to what extent, if any, is the local government willing to invest in your company, is there a pool of local skilled workers?   You may find an investment and tax incentive program that bolsters your company’s ability to profit quickly from expansion.

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Joint Marketing Agreements

Entering into a Joint Marketing Agreement can expand your business without significant resources. It can increase the visibility of your brand, allow access to new markets, reduce the cost of advertising and may provide local support for your customers.  In a Joint Marketing Agreement two parties separately market products and/or services which are often complementary or for related purposes. Both parties cooperate in marketing each products and/or services through cross-promotion for mutual benefit.

Checklist for Joint Marketing Agreements 

Describe the subject matter of the contract

Provide a brief overview of the nature of the relationship and/or transaction  contemplated.

In addition to marketing rights, is there a grant of license for use of a trademark?

Is the grant exclusive or nonexclusive?

Transferable?

Worldwide or restricted to a territory?

Marketing Considerations.

What are the obligations to market? Will you create joint marketing collateral? Who pays for marketing collateral?

Is there a minimum or maximum quantity of materials that can be ordered?

Are there restrictions on replication of materials?

Who owns the marketing materials, trademarks, any other jointly created materials etc.

Who owns integrated or bundled products or services?

What is the nature of the relationship?

Strictly marketing?

Agent?

Distributor?

Reseller?

Warranties

Any warranties provided?

Disclaimers of the warranties?

Training

Will either party provide any training?  Marketing or sales training?

If so, under what conditions?

Performance Obligations

Are there sales quotas?

Deadlines for performance of services?

Competition

Can either party compete or offer competing products or services?

Can either party develop competing products or services?

Revenues

How are revenues to be earned? Percentages? Commissions? Performance triggers?

How and when are revenues to be paid?

Are discounts to be offered?

What about credits or refunds?

What are the bookkeeping requirements?

Taxes

Who pays any federal, state, or local taxes imposed on the agreement?  (i.e. VAT, sales and/or use tax).

Confidentiality

What is to be kept confidential?

How long does the obligation to keep the information confidential remain after termination of the Agreement?

Limitation of Liability

Is there a limit on the dollar amount of damages for breach of the Agreement?

Is there a limit on the type of damages for breach of the Agreement? (i.e. consequential damages, such as lost profits, or claims by third parties)

Is there a contractual limit on the time in which either party can file a lawsuit against the other?

Indemnification

Are there any limits on indemnification liability?

Are there any conditions for indemnification? (timely notice of claims, cooperation in defense, misconduct or gross negligence)

Default

What are the party’s rights in the event of a breach of the agreement by the other party?

Dispute Resolution

If a dispute arises between the parties, will they be required to submit to arbitration or some other method of alternate dispute resolution instead of going directly to court?

Term and Termination

When can either party terminate?

When is termination effective?

What rights and obligations continue on termination?

Miscellaneous

Governing law.

Notices

Waivers

Severability

Entire Agreement/Merger Clause

Assignment?

 

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Top Five Considerations When Structuring Your International Business.

Moving into foreign markets can be costly, but expansion can be very profitable and necessary. With astute planning your business can avoid pitfalls that will undermine the overall economy brought by the structure.  Be prepared to examine all possibilities.  Think long term, how will the business grow over time, what markets will be the most profitable, then make informed and considered decisions. 

1.  Tax Havens vs. High-Tax Jurisdictions
While it might seem logical that inclusion of corporate entities, in your overall structure, in countries that impose no income tax can achieve the greatest tax economy, it is not necessarily true.  Using high tax jurisdictions with a network of treaties can often achieve better results.  The use of tax-effective structures in, for example, European countries and effective use of tax optimization principles, including correct transfer-pricing, group taxation regimes and hybrid structures, all of which are not deemed as tax avoidance or abuse of treaty rules in their host countries can provide for an overall more efficient structure.  This is true even considering the costs of creating such a structure.

2.  Anti-Avoidance Rules
Avoidance and/or minimization of taxation is of growing importance to many jurisdictions.  To address this concern many countries have enacted anti-avoidance rules, designed to prevent taxpayers from creating business structures with no purpose other than obtaining tax benefits.  Anti-avoidance rules generally deny tax benefits, including expensed deductions, tax credits, exemptions, and lower tax rates, if the transfers are made through a network of companies with no connection to the business activity of the taxpayer.  The underlying transaction being deemed artificial with no commercial goal or purpose.  Carefully consider implementation of a business structure from the standpoint of its connection with the business activity of the taxpayer and the existence of a commercial purpose.

3. Transfer Pricing
The transfer price is the price at which related companies transact business with each other, including the supply of services, supplies, product or labor.  Transfer pricing is a valuable tool for cross-border tax planning. Tax authorities worldwide carefully scrutinize transfer prices between related companies more than any other pricing arrangements.  Many countries allow related companies to set prices for transactions between them in any manner, but to the extent those prices are not equivalent to an amount an unrelated third party would charge for the same or similar services, the tax authorities adjust the transfer price and may impose penalties.

4. VAT
Value-Added Tax (VAT) and any other sales and/or use tax is complex and challenging and can result in significant, and often, unrecoverable costs.  In planning a business structure in addition to the general scope of VAT aspects, take into account VAT treatment of supply of goods and services in both the supplier and customer’s country.  Avoid structures which result in VAT payable both in supplier’s and customer’s country of residence, and whether there is any VAT credit.  The VAT liability for online transactions is still in flux, changes in legislation regarding whether the delivery of services or intangible property delivered over the Internet is VAT-able in countries where the vendor has no Permanent Establishment much be watched closely.

5. Permanent Establishment
Once a business has created a physical presence (“Permanent Establishment”) in a particular jurisdiction it is subject to income tax in that jurisdiction.  A Permanent Establishment will be found where there is a fixed place of business.  A number of countries have determined that a single server owned by a company and located that jurisdiction creates that taxable presence.  Thus, if having a server in that country is desirable, consider leasing a server or using a local service provider.  The risks of recognition of PE have significantly increased since the introduction of new rules regarding agency and service PEs.   Such rules have not yet been tested and create uncertainty.

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