NB. The views expressed in this article are those of the author and do not necessarily reflect the views of any other person or institution. The author can be contacted at I.Zammit@SheltonsGroup.com.
Allow me to share with you some tax considerations on the current situation having an impact on the international setup of both individuals and companies; based on the most common questions received from our clients in these past few days:
1. Forced to face the risk of death, many individuals may need to reconsider their existing structures from an inheritance law and tax perspective but also from a corporate practical viewpoint.
As a consequence, for example, one aspect which could become critical is the practical implication of a transfer of assets causa mortis; more often than not, transfers of shares would require heirs to be registered as shareholders in a foreign country. Without the necessary arrangements in place, this process may take several months and could have a significant negative impact on the running of a business. This would especially be so if the owner of the business is also acting as director and needs to be replaced urgently.
Planning is therefore not only an inheritance and tax question, but also a practical, commercial and corporate one.
2. With the current ban on travelling, many expats who normally have several residences and tavel across various countries for the most part of the year could now happen to be stuck in a particular country, not necessarily by choice; or simply lose track of the number of days they spend somewhere other than their country of residence.
Consequently, for example, this unexpected physical presence could have important implications on the nexus de facto created by such individual with that third country.
Different countries have different rules in terms of what constitutes enough nexus to become a resident. Many countries have a minimum number of days rule (e.g. 30 days in UK in some cases), other countries will also factor in some other conditions and evaluate overall the ties a person has with that country (e.g. Italy’s domicile concept, i.e. main centre of interest).
One may wonder if spending time in a hospital in that country could constitute a strong enough tie to that country and combined with other factors, this may easily tip the scale to an unfavourable situation.
Often, structures are planned around the place of residence of the owner. If the owner unwillingly becomes a resident of another country, it will undoubtedly jeopardise the balance of the structure. Moreover, as from this year, consultants need to report on a pan-European platform under the DAC6 reporting whenever a client becomes a non-resident anywhere, and possibly even if the client becomes a dual resident. Such reporting may trigger unwanted investigations and would preferably be avoided.
3. Due to the current pandemic, employment is negatively affected everywhere also in ways which could surprisingly have unexpected tax consequences.
An employee may be stuck in a foreign country and luckily is able to work remotely. Unfortunately, though, many countries have very strict tax rules that apply in these situations.
For instance, Danish employment tax rules only allow foreign workers to work remotely from Denmark for a maximum of 10 days before becoming subject to tax on their employment income in Denmark and possibly even creating a taxable presence of their employer in Denmark (i.e. permanent establishment rules through so-called home-office).
Even if tax may well not be significant, the administrative burden of employing a person in another country or registering a permanent establishment can sometimes cost a small fortune, and this is especially true for smaller companies.
Besides, it may also be the case that employees working on a project across border are no longer able to carry out their work.
It is normally the case that a company would be obliged to provide benefits to these employees in line with the employment law of the country where the work is taking place. Although differences are typically small between EU member states, there are situations where the benefits are significant and may result in significant additional costs for the employer.
In the case of construction or installation projects for example, tax treaties between countries determine that the country where the work is performed is typically only able to tax the profit of that project if works exceeds several months as determined by the tax treaty.
For instance, the treaty between Malta and Italy determines that Malta can only tax a construction project when carried out by an Italian company if that project exceeds 12 months: an Italian company carrying out a project expected to take 10 months, may now have to consider whether the project will exceed the 12 month threshold and as such would need to register a permanent establishment in Malta and pay the 35% tax in Malta on the profit from that contract.
As a result of the creation of a permanent establishment, employees may have to pay tax in Malta on their income (which is very often ultimately borne by the company). This coupled with the increase in the tax payable by the company may well result in an unexpected loss for the Italian company on that project.
4. International group tax policies are being negatively affected too. Many of these policies are planned with a positive economic situation in mind and rarely cater for loss making scenarios.
Many structures are set up in a way to place specific risks, including the risk of an economic downturn in a different company than the operating company: this is typically visible through the group’s transfer pricing policies resulting in higher profits being allocated to the risk bearing entity.
It should be expected as a result of the downturn, that losses within the group will be higher in high risks bearing entities than low risk entities. It may even be the case that low risk entities still register a profit despite the downturn, in which case, the group may well still need to pay significant amounts of tax despite a loss at group level.
5. Due to the newly introduced lockdown rules, many countries are passing emergency legislations and economic incentives measures.
Businesses are expecting governments to step in even more by offering comprehensive economic packages to compensate all businesses for their losses and kick-start the economy.
Whatever European governments come up with will clearly need to remain within the workings of the EU State Aid rules. These rules limit government grants to private companies only in certain specific situations.
Earlier this week, it was announced that member states will be allowed to take whatever measures necessary to handle this crisis, as long as such aid program is notified to the commission and is within certain limitations. One of these limitations the EUR 800,000 over a three year period of total aid a company may receive.
Considering many have already received EUR 200,000 (current de minimis rules), the remaining balance of aid is not particularly high.
An important feature of the state aid rules is that whenever a company is considered to have received illegal state aid, the commission can force the member state concerned to request that the aid received be returned, plus interest. Interestingly, aid received directly from European funds are excluded automatically from the State Aid rules.
Although we assume the governments would not grant aid which may be considered illegal, it is ultimately the companies receiving the aid that may well end up suffering the consequences.