1. Chapter 8 Anti-Avoidance Measures 反避税方法

2. Overview  Rules and Doctrines for residence shift  Special tax haven provisions  Thin Capitalization Rules  CFC Legislation  Transfer pricing rules  Offshore investment fund rules  Anti-treaty shopping article  Taxation of gains on transfers of property abroad and on expatriation

3. Introduction  Rules and Doctrines for residence shift  If an Italian has moved to a country with lower tax or a tax haven after 1999, he will be still treated as a Italian resident and has unlimited tax liabilities to the country.  If a company is incorporated in UK after March 15, 1988, it will be a British resident forever no matter whether it has a management centre in UK or not.

4. Introduction  Special tax haven provisions  Germany imposes a special tax on persons who move their domicile to a tax haven.  Under French law, a French taxpayer cannot deduct interest and royalty payments or payments for services made to a tax haven entity unless the taxpayer establishes that the transactions are genuine.

5. Introduction  Transfer pricing rules  Most countries has set up Transfer pricing tax system to anti-avoid transfer pricing.  They use Arm’s Length Method to adjust those transfer prices.  APA is also used.

6. Introduction  Offshore investment fund rules  Several countries have adopted offshore or foreign investment fund rules to prevent the deferral of domestic tax by residents investing in foreign mutual funds or unit trusts.

7. Introduction  Anti-treaty Shopping article  In general, the international tax community has been slow to take action to curb treaty shopping.  USA insists on the inclusion of a limitation on benefits article in its tax treaties to prevent treaty shopping.

8. Introduction  The specific provision of the limitation on benefits article contained in US tax treaties vary from treaty to treaty.  In general, a corporation resident in a Contracting State is not denied treaty benefits if the income obtained in the other Contracting State is derived from the active conduct of a trade or business.

9. Introduction  A corporation that fails to meet this active business test must satisfy both of the following conditions to qualify for treaty benefits:  (1) the corporation’s gross income may not be used in substantial part to pay interest, royalties, or other liabilities to persons not entitled to treaty benefits;  Over 50% of the shares of the corporation must be owned, directly or indirectly, by certain qualified persons, typically individuals who are residents of one of the Contracting States.

10. Introduction  Taxation of gains on transfers of property abroad and on expatriation  When appreciated property – property with an accrued gain- is transferred to a related nonresident, some countries deem the property to have been sold for its market value so that the accrued gain is subject to tax.

11. Introduction  Consolidation of Profits and Losses in a Corporate Group  Facts Profitco and Lossco are taxable Canadian corporations. Lossco is a wholly-owned subsidiary of Profitco. Lossco has non-capital losses that would be deductible if Lossco had income. In order to generate income in Lossco from which its non-capital losses may be deducted, Profitco borrows from its bank and uses the monies to subscribe for common shares of Lossco. Lossco lends these monies to Profitco at a commercial rate of interest. Profitco repays the bank.  The amount of share subscription is not in excess of the amount of monies that Lossco could reasonably be expected to be able to borrow for use in its business on the basis solely of its credit from an arm's length lender.

12. Introduction  Interpretation The Explanatory Notes to Draft Legislation and Regulations Relating to Income Tax Reform issued by the Minister of Finance in June 1988 state that the transfer of income between related corporations that is accomplished using transactions that are legally effective would not usually result in a misuse of the provisions of the Act or an abuse of the Act read as a whole.  The transactions between Profitco and Lossco, which are related corporations, would not therefore be considered an abuse of the Act read as a whole.  This interpretation does not address the deductibility of interest payable by Profitco to its bank or to Lossco. Such interest will be deductible pursuant to paragraph 20(1)(c) of the Act provided that Profitco acquires the shares of Lossco for the purpose of earning income from the shares.

13. Introduction  Increase of Cost of Property Acquired on a Winding-Up of a Corporation  Facts Canco operates three businesses, A, B and C, and owns investment property. Purchaseco intends to purchase all the shares of Canco, wind it up and dispose of business A and B.  Prior to this purchase, Canco transfers all of the property used in business A and B to wholly-owned subsidiaries X and Y, respectively, and elects pursuant to subsection 85(1) of the Act in respect of the transfers.  Purchaseco buys all the shares of Canco and winds up Canco and designates an amount, pursuant to paragraph 88(1)(d) of the Act, to increase the adjusted cost base of the shares of the subsidiaries X and Y.  Purchaseco sells the shares of X and Y to different arm's length parties.

14. Introduction  Interpretation The shares of the subsidiaries issued in consideration for the property comprising businesses A and B are deemed by section 54.2 of the Act to be capital property of Canco.  Paragraph 88(1)(d) of the Act provides that the cost to a parent of a capital property owned by a subsidiary may be increased in certain circumstances.  The rules of this paragraph apply to a property of a subsidiary that is deemed to be a capital property as well as one that is in fact a capital property.  Since the transactions described are consistent with the intention of section 54.2 and paragraph 88(1)(d) of the Act, the transfers by Canco of business A to X and business B to Y would not be an abuse of the Act read as a whole.

15. 8-1 Thin Capitalization Rules  Interest is deductible by the payer in computing income unless there are special rules to the contrary.  Dividends paid by a resident corporation generally are not deductible.

16. 8-1 Thin Capitalization Rules  Imputation system: the tax paid by a corporation on its income is imputed to the shareholders and treated as a credit against the tax payable by shareholders on dividends.

17. 8-1 Thin Capitalization Rules DebtEquity Corporate income before Payment of interest or dividends 100 000 Deduction of interest100 000Not applicable Taxable incomeNil100 000 Corporate income (40%)Nil40 000 DividendsNot applicable60 000 Withholding tax (10%,5%)10 0003 000 Total tax10 00043 000

18. 8-1 Thin Capitalization Rules  Thin capitalization rules: under these rules, the deduction for interest by a resident corporation to a nonresident shareholders is denied to the extent that the corporation is financed excessively by debt.  Administrative guidelines or practices  General anti-avoidance rules

19. 8-1 Thin Capitalization Rules  Nonresident lenders  Domestic entities  Determination of excessive interest - OECD approach - USA approach  Computation of a debt - as a fixed ratio - by reference to the average debt

20. 8-1 Thin Capitalization Rules  Case [8-1] An American Co. paid interests of 150, including 20 paid to a tax-free educational institution, 100 to a foreign related co. America withholding tax rate was 34%. The withholding tax rate for the related Co. was only 10% since there was a tax treaty between USA and the above foreign country. interest not-deductible = 100x(34%- 10%)/34%+20=90.59

21. 8-1 Thin Capitalization Rules  Germany  Rules currently applicable (likely until end of 2007):  If a debt-equity ratio of 1.5 to 1 is exceeded, interest on a loan provided by domestic and foreign shareholders and related parties is non-deductible (and reclassified to  dividend) unless the borrower can document that such loans could have been obtained under similar conditions also from third party lenders. This also applies in certain cases of third party loans secured by a substantial shareholder or related parties of the shareholder.

22. 8-1 Thin Capitalization Rules  New “earnings stripping rules” (not yet passed, should take effect as of 2008):  Deductibility of net interest expenses should be limited to 30% of the EBITDA as reported in the tax accounts.  Exemptions should apply to small businesses and companies not part of a consolidated group.  Furthermore, there is also an escape clause available for companies that are part of consolidated groups which is, however, very strict.

23. 8-1 Thin Capitalization Rules  Netherlands  The rules effectively restrict the deductibility of interest paid to related entities if the  company is excessively debt-financed. In general terms, this will be the case where the  total debt/equity ratio of the company exceeds 3:1.  No specific restrictions for other (unrelated party) loans.

24. 8-1 Thin Capitalization Rules  Case Definition of a thin capitalization situation in French The definition of a thin capitalization situation is based on the three following cumulative conditions:  A debt/equity ratio towards related parties which exceeds 1.5/1 (computed at opening/closing of the financial year, at the taxpayer’s discretion);  Interest paid to related parties exceeds 25% ofthe result before interests and depreciation of the borrowing company; and  The amount of the interest pooled with dependent companies exceeding that of the charged interestof these same companies.

25. 8-1 Thin Capitalization Rules  New thin capitalization rules French thin capitalization rules have been deeply modified by the Finance Act 2006 in order to conform with both European law and double tax treaty provision taken into effect as of 1 January 2007.  As regards financing granted between ‘related parties’, the two following limitations should be taken into consideration: > Maximum interest rate > Thin capitalization rules > Maximum tax deductible interest rate

26. 8-1 Thin Capitalization Rules  Safe Haven rules: exception related to the debt equity ratio computed at the group level. In addition, the taxpayer could demonstrate that even if it exceeds the above-mentioned ratios, its level of debt is lower than that of the group to which it belongs.  Actions to be taken in 2006: - Audit of the financing policy of French subsidiaries; -Adaptation of the policy of financing to new Thin Capitalization Measures; - Identification of solutions and of optimization schemes

27. 8-2 Controlled Foreign Corporation Rules  Tax avoidance problems arising from the use of foreign entities are most pronounced with respect to passive investment income because such income can easily be diverted to or accumulated in an offshore entity located in a tax haven.  Many countries have adopted detailed statutory rules to prevent or restrict the use of CFCs to defer or avoid domestic tax.  USA adopted the first CFC rules in 1962, Subpart F rules

28. 8-2 Controlled Foreign Corporation Rules  Definition of CFC  Controlled Foreign Corporations (CFCs), are a legal construction of the tax authorities around the world. A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction. CFC laws were introduced to stop tax evasion through the use of offshore companies in low- tax or no-tax jurisdictions such as tax havens.taxtax evasionoffshore companiestax havens

29. 8-2 Controlled Foreign Corporation Rules  With a few exceptions, countries restrict the scope of what is generally referred to as CFC legislation to income derived by entities(1) that are nonresidents, (2) that are corporations or similar entities taxed separately from their owners, and (3) that are controlled by domestic shareholders or in which domestic shareholders have a substantial inerests.

30. 8-2 Controlled Foreign Corporation Rules  As for “controlled”, generally means the ownership of more than 50% of the outstanding voting shares.  Some countries extend the concept of control to include ownership of shares having a value equal to more than 50% of the total value of the outstanding shares.

31. 8-2 Controlled Foreign Corporation Rules  Control includes indirect control. The CFC rules cannot be avoided by having the shares of a tax haven corporation owned by another CFC.  IF a resident owns 60% of the voting shares of a foreign corporation which in turn owns more than 50% of the voting shares of a second foreign corporation, the second foreign corporation is considered to be a controlled foreign corporation of the resident.

32. 8-2 Controlled Foreign Corporation Rules  Designated Jurisdiction or Global Approach  Most countries have restricted their legislation to CFCs located in countries that are defined and designated to tax havens.  Only Canada and USA apply their rules to certain specified categories of income earned and received by a CFC, no matter whether the corporation is resident in a tax haven or in a high-tax country.

33. 8-2 Controlled Foreign Corporation Rules  Definition and computation of Attributable income  “entity” approach – CFC rules provide an exemption for certain CFCs that are engaged primarily in genuine business activities.  Transactional approach – only certain types of income (tainted income) derived by a CFC are subject to attribution.

34. 8-2 Controlled Foreign Corporation Rules  Nature and Scope of exemptions  Exemption for genuine business activities  Distribution exemption  De minimis exemption  Other exemption

35. 8-2 Controlled Foreign Corporation Rules  Domestic Taxpayer subject to tax  Individual and corporate shareholders  Relief Provisions  Few countries provide relief for capital gains on shares of a CFC that reflect previously taxed income of the CFC.